Thursday, August 11, 2011

IT Budgets vs. Tech Industry Spending: What's the Difference?

According to our research at Computer Economics, we reported that 2010 IT budgets showed no growth at the median. At the same time, IDC reported the global IT market grew by 8%.

So which is it?

Over the years, I see a lot of confusion between these two metrics, so let's start with some basic definitions.
  • IT Budgets: This is the view from within an IT organization, of all IT-related spending.

  • Tech Industry Spending: This is the view of the technology industry and the investor community, of the total market for technology-related products and services.
As you can see, these are related but entirely different measures. Unfortunately, many industry observers refer to both of these metrics as "IT spending."

So, What's the Difference?

Even though much tech industry spending comes from corporate IT budgets, tech vendors have a lot of revenue that comes from outside IT budgets. Furthermore, corporate IT budgets contain quite a bit of spending that does not go to tech vendors. Here are the big three differences.
  1. Consumer tech spending. Not all tech industry revenues come from corporate IT buyers. For example, Apple just surpassed Exxon as the world's largest corporation, by market cap. How much of Apple's revenues are derived from consumer tech spending vs. business IT spending? Surely, the majority. Microsoft has a much stronger business focus, but still a large percentage of Microsoft's revenues are consumer-related.

  2. Corporate IT spending outside the IT budget. Not all corporate IT spending is in the corporate IT budget. The percentage varies by organization, but typically 20-50% of what could be considered "information technology" spending can take place under departmental budget authority. Some of this is "rogue spending," for example, when a sales group buys a few seats of, without approval or oversight from the IT department. But a lot of it is by design. For example, in most manufacturing companies, spending on computerized machine tools is entirely within the manufacturing operations budget. Such machinery has an enormous amount of computing power and there is typically an entire group within manufacturing devoted to programming these machines. But the machines themselves and the staff members that program them are typically outside the IT budget.

    Similarly, as my friend Vinnie likes to point out, products in nearly every industry today are becoming "smart products," with embedded computing power--not just automobiles, but even washers, driers, and refrigerators have IT capabilities. Do you think the technology spending that goes into designing and building products is under the manufacturer's IT budget? My observation is, almost never. Such spending accrues to the benefit of Intel, Cisco, and other tech vendors, but it is outside the corporate IT budget.

  3. IT budgetary lines that are not tech industry spending. Finally, not everything in the corporate IT budget goes to technology vendors. The biggest item, of course, is personnel costs. Typically 40-50% of the corporate IT budget goes toward salaries of internal support staff, such as programmers, data center personnel, network personnel, and managers. Microsoft, Intel, and Cisco never see that money. So, right off the top, half of the IT budget does not show up in tech vendor revenues.
In addition, there are other corporate IT budget line items, such as facilities, power and utilities, and supplies that are typically not technology-related. Therefore, these show up in IT budget trends, but not in tech vendor market statistics.

When to Use Each Metric

Each of these measures is useful, but for different purposes. If you are a corporate CIO, you are interested in how your organization's IT spending compares against other, peer, organizations. You would like to know how your IT spending and staffing levels and their mix compares against industry standards. Therefore, you are really focused on IT budget metrics. Though they may make interesting reading, reports of tech industry revenues are not your primary focus.

On the other hand, if you are a technology vendor or an investor in the technology sector, you are really interested in how tech industry spending is expanding or contracting. You would like to know about overall tech industry revenues, and you would really like to know specifically about spending forecasts in the market you compete in. You are not interested in the typical corporate IT budget, unless your products or services are highly focused on that market.

What about consultants? If you are a consultant to IT organizations, your interest should be on IT budgetary metrics. Conversely, if you are a consultant to IT product/service providers, you probably want to focus on tech industry spending metrics.

So, when you read reports about IT spending trends, understand the context. Is the report referring to the IT budgets within user organizations, or the revenues of technology vendors? Those are two different things.

Related Links

The IT Spending Recovery and Implications for Enterprise Software
IT Spending and Staffing Benchmarks 2011/2012
Computer Economics IT Spending and Staffing Custom Benchmarking


Martijn Linssen said...

Thanks Frank, insightful posts

Of course point of view / reference matters, but it's still a black & white world out there. "Yay! Spending is up!" and other useless cheers and hollow phrases only seem to please stock markets

TBH, IT spending should go down 25-30% because it takes less time to try a new solution, with less people, against lower rates. That's from an enterprise PoV. Froma consumer one: if you buy an iPhone or iMac, how much of that is tech? Almost all of it is hardware if you look at the R&D pricetag, but would you classify it as such? Apple software is ridiculously low-priced compared to MSFT, but they sell software without the hardware (poor old Wintel)

So, what's in a name? Very little

Feel free to quote me on this: enterprise IT spend should drop by 5% every year for the coming decade. Consumers? Make that 20% (including cable, internet and such at the home)

Frank Scavo said...

Martijn, my friend. You have two different thoughts in here. One is overall tech spending and the other is the unit price for certain technology products.

Over the past decades, the long term trend is for overall tech spending to increase, both due to the technology content of products, and technology being a part of our lives, as well as organic population growth.

On the other hand the price/performance (often, but not always reflected in unit prices) is improving. My first PC in 198x was something like $3000. Today, I get a laptop 100s of times more powerful for less than $1000 USD. You know this better than I do.

Finally, as for enterprise IT spending, you may think IT spending should decline year over year, but historically it has not. I don't see why the next 10 years should be different from the last 22 (for which we have our survey data).

I can't comment on the consumer side, as I don't have that data.

Stuart Lynn said...

Martijn I disagree with your 20-30% comment, as it is far to generic and it only serves to confuse many people.

Business are actually happy to increase IT spend if it drives competitive advantage... So what you do with the spend is much more important than the amount you spend.