• March 31, 2016

IT Spend Slowdown Puts the Squeeze on Innovation

Global IT investments are stagnating and even beginning to show declines. These anemic investment levels could be devastating for many organizations, particularly when it comes to innovating ahead of the competition.

The Stats

According to International Monetary Fund estimates, global GDP hit $74.6 trillion in 2015. Over this same period, global IT spending clocked in at $3.52 trillion, or roughly 4.6 percent of GDP. In 2014 this figure stood at $3.74 trillion, or roughly 4.8 percent of global GDP at $77.8 trillion, according to the World Bank. This represents the largest drop in IT spending since research firm Gartner began tracking the figure.

Though Gartner projects a slight uptick of 0.6 percent (or $3.54 trillion) for 2016, global IT spending isn’t expected to surpass 2014 levels until 2019.

Will the Innovation Drive Stall?

While IT spending slumps, the pace of business and digital change is increasing exponentially. Yet far too many organizations are mired in IT infrastructures that are 20 years old or more. And the tech needs of 1996 poorly align with this age of mobile apps, digital analytics, and the Internet of Things.

Roughly 80 percent of IT spend is dedicated to legacy system maintenance plus security and compliance costs. That means needed innovation and creative IT project investment is being squeezed. This IT model is wholly unsustainable in light of the enormity of digital threats.

Established enterprises face risks from competitors that leverage cost structures, data, and algorithms to disrupt a range of industries. And its consumers often capture much of the value from this transformative change, often paying little or nothing for digital services. For example, Skype saved more than $37 billion in international phone charges for users in 2013.

Digital Jiujitsu

In the digital age, numerous small enterprises can compete with established organizations by piggybacking on the services of e-commerce platforms such as Amazon and Airbnb and raising funds through online crowdfunding platforms such as Kickstarter.

Traditional enterprise intermediaries, such as bankrupted book and music chain Borders Group Inc., are often the casualties in this torrent of digital disruption. They prove unable to compete with the lower costs, nearly seamless distribution, flexibility, greater choice, and information available in the digital realm.

The Achilles’ heel of many established enterprises is their tendency to focus internally instead of naming ways that their core business can be attacked from the outside. Organizations must cultivate a willingness to attack their business before someone else does. That means overcoming strategic inertia and fears that a new channel or business process will cannibalize an existing business or asset.

But the decline in IT investments isn’t necessarily a bad thing. The drivers—cheaper technologies, automation, mobility, and the shift from on-premise applications and processes to the cloud—result in efficiency gains. And generate enterprise value.

Like this story? Read more about solutions to shrinking IT resources here.