You don’t need to be a genius to see that we are in a period of great economic uncertainty. For startups, however, a key predictor of future results is the direction of IT spending, something that we can track. When companies are spending money on tech, the reasoning goes, both established and younger companies should benefit. If they’re not, both should suffer.
The good news is that, for the most part, signs point to an increase in IT spend in 2023, and that’s true whether you talk to CIOs, enterprise companies or analysts. It bodes well for the entire technology industry.
Consider what Broadcom CEO Hock Tan said during last week’s earnings call: “We have been talking to multiple CIOs from among our largest enterprise customers we have out there. We have not seen them talk about a reduction in their IT spending,” he said. While some mentioned flat spending, few were talking about cuts, and that’s an encouraging trend heading into the new year.
That perspective fits with what IDC analyst Rick Villars is seeing. “Spending on core IT infrastructure, business software, professional services to implement and operate the systems — even if the economy stays flat, we expect to see continued healthy growth in the 5% to 6% range in aggregate for those spaces. It would take a more severe economic downturn from what we’re seeing for that to change,” Villars told TechCrunch.
That’s right where Gartner’s prediction comes in as well: an increase of 5.1% in global IT spend in 2023. That’s up from 0.8% growth in 2022 but well down from the 10.2% increase the previous year.
Where are they spending?
A Gartner survey of 2,000 CIOs found that 66% of the respondents said they would put money into cybersecurity — hardly a surprise — while 55% said they’d invest in data analytics and business intelligence and 50% planned to focus on cloud spending.
We spoke to three CIOs to get their view on spending, and what they told us correlates with what others have been saying: They are facing budgetary pressures like everyone else and will look for ways to cut costs where it makes sense, but they still plan to increase budgets next year. For startups, it’s great news.
Tech has become essential
Companies will definitely feel compelled to reduce IT costs in 2023 with valuations down, inflation up and a lot of other uncertainty in the world, but Villars said that’s not easy, which is why we won’t see many across-the-board cuts.
That’s due in large part to some costs becoming fixed or essential around cloud computing. Infrastructure, platform and SaaS costs have become difficult to reel in because they’ve become a core part of the business.
What’s more, technology can be an enabler in terms of helping companies cope with the negative impact of a downturn.
“The main thing we’re hearing from CIOs is that technology is part of solving the business challenges that a recession brings. And if the focus is on just cutting technology investments, they’re not actually helping the company get through the recession or through these disruptions,” Villars explained.
Josh Goode, CIO at Scan Health Plan, a fast-growing Medicare health insurer, said that in spite of his company’s rapid growth, he’s still looking for ways to save without negatively impacting the business, adding that his budget is growing in line with IDC and Gartner estimates.
“The [economic climate] has definitely put pressure on us. Even though we are in what we’re calling ‘hypergrowth,’ where we’re really growing a lot, we’re still having to manage our costs,” Goode said. But as Villars pointed out, some of his technology investments are long-term bets to help grow the company and generate more return over a longer time horizon, and he doesn’t want to jeopardize future cash flows for short-term savings.
Sharon Mandell, CIO at Juniper Networks, a networking technology company, is in a similar position; she said her company has been doing well, but like Goode, she wants to be smart with her spending while eliminating waste whenever possible.
“Juniper is doing well, and we’re trying to take advantage of this window of time. And so for me, I have to figure out how to carve out more to continue to allow the business to focus on those transformational initiatives, and it’s really for me about eliminating the noise,” she said.
Cutting where you can
So what can you cut and how do you do it without damaging your core business? It’s not an easy question to answer, and it’s getting harder all the time, IDC’s Villars said.
“And from what we’ve seen in IT, what CIO leaders are saying is that as a business, we’ve transitioned now 40% to 50% of our technology budget [to] as a service. That’s not the thing where you can just turn it off or you can delay it for six months or nine months,” he said.
But there are things you can do, like negotiating the terms of licensing agreements to suit your needs. You can try consolidating similar services into a single service with better terms or put off the upsell portions of the deal until you feel more comfortable. The savings you can achieve from these cuts vary by company and your savings goals.
Keith Schlosser, CIO at Axis Capital, a specialty insurance company with over $6 billion in revenue, said one of the first things he did when he took the job four years ago was review SaaS spending. Over time, he standardized on one product across the board, regardless of the type of software.
“When I came to the company in 2019. I referred to us as Baskin-Robbins. Whatever flavor [of software] you wanted is what you got. We didn’t care about the cost. No one was ever told, ‘No, you can’t have that, you’ve got to use this one over here.’ We’ve since standardized on a single tool across all of those software services [categories],” he said.
That not only simplified everything from a management perspective, but it also helped cut costs in a pretty dramatic way, allowing him to put resources toward modernizing his tech stack, something he has been working on since. That also means he was well prepared for a downturn.
Mandell has a similar philosophy: Cutting back on duplication saves money. “There’s a whole bunch of hidden costs in multiple vendors, even if the per-seat charges would be exactly the same for the people using the tool,” she said.
Making these kinds of assessments before you need to can make it easier to manage your company’s technology budget through a downturn. “So when you get into [this kind of economic] environment, where you might see some constriction, you want to be able to do things more efficiently. And if you have to get hard on costs, you don’t want it to be in the growth areas of your business,” Mandell said.
Even companies in growth phases have to pay attention to their IT budgets amid rough economic cycles. While all signs point to IT budget increases next year, that doesn’t necessarily mean it’s going to be hunky-dory for everyone, especially startups.
In part two of our look at 2023 IT spending, we’ll explore more deeply the impact of the economic turbulence on startups, and what you can expect for next year.
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