In announcing second-quarter earnings on July 18, IBM Corp. Chief Executive Arvind Krishna commented that his business is not only not showing any signs of suffering from recessionary pressures but may actually be benefiting from them.

“We see technology as deflationary,” he said. “It acts as a counterbalance to all of the inflation and labor demographics people are facing all over the globe.”

If current trends are any indication, Krishna is onto something. Amid growing fears of an economic downturn, enterprises are mostly staying the course with overall information technology spending and even increasing investments in digital transformation-related areas such as cloud migration and software as a service.

That’s a break from the past. IT budgets have historically tracked business cycles because the principal use of IT systems was to process transactions. When the volume of business fell, so did technology budgets.

But analysts who track spending patterns say this year is different. The move to cloud platforms and remote work that was accelerated by the COVID-19 pandemic demonstrated such a strong return on investment that organizations are holding the line on tech spending with expectations that further efficiencies can be gained.

Post-‘as-a-service’ recession

“This is the first post-‘as-a-service’ recession,” said Philip Carter, a group vice president at International Data Corp. “IT has moved from being capital to an operating expense. The [traditional spending] lumpiness isn’t completely removed but it’s much less of a factor.”

Fears of a recession are growing amid higher inflation, supply chain problems and disruptions triggered by Russia’s invasion of Ukraine. TD Securities USA LLC recently said there is a better than 50% chance of a U.S. recession within the next 18 months. Economists polled by Reuters rated the likelihood at 40% over the next year.

A recent IDC quick poll of chief information officers found that 80% expect a recession to arrive within the next 12 months and most believe it will last about a year, Carter said. The good news is that nearly three-quarters believe the downturn will be moderate.

Business as usual

IT budgets typically ebb and flow with the economy, but something is different this time. “It’s business as usual from a CIO spending and tech vendor revenue perspective,” said John-David Lovelock, research vice president at Gartner Inc.

Gartner’s latest forecast sees 3% growth in IT spending in 2022, down only slightly from the 4% forecast at the beginning of this year. And some line items are actually growing. The research firm sees spending on data center systems growing 11.1% this year, up from 6.4% growth last year. Software expenditures are expected to rise 9.6% and next year by 12% more.

What drags down the total is an anticipated 5% drop in spending on personal computers, printers and other consumer devices. Businesses “did a massive refresh in 2020 for work-from-home, so this year when inflation started to bite, they stuck their hands back in the pocket and paused,” Lovelock said.

Other forecasters have recently published similar figures. Forrester Research Inc. expects technology budgets at U.S. companies to grow 6.7% this year, virtually unchanged from its expectations more than a year ago.

“We see the recession as an opportunity for firms to go on the offensive rather than the defensive with their technology investments,” said Christopher P. Gilchrist, a Forrester principal analyst. “This means refocusing strategy to where value can be extended and expanded, not where costs can be limited.”

IDC expects overall IT spending to “modestly exceed GDP growth,” but notes that strong growth in enterprise systems and software is masked by a slowdown in spending on end-user computing devices. “Exclusive of devices, growth will be nearly three times GDP growth,” Carter said.

Enterprise Technology Research expects total IT spending to grow 6.6% the year, down from the 8.3% rate it forecast at the end of last year but more optimistic than most.

Out of the back office

Analysts attribute the resilience of IT budgets to three factors, of which the most significant is that organizations are now looking at technology as a source of competitive advantage rather than a back-office function.

“IT is no longer considered a cost center,” said Gartner’s Lovelock. “It is crucial to operations and customer relationships. Digital business transformation is the number one thing happening in IT right now and you can’t cut your way to it.”

A survey of more than 2,900 IT decision-makers by colocation vendor Equinix Inc. provides clues about where the dollars are going. Despite the economic uncertainty, 72% of executives said their companies are planning to expand into new geographies, supported by digital technologies.

Asked about the priorities for their technology investments, five of the top seven respondents cited tech that relates to transformative areas such as future-proofing the business, improving customer experience, accelerating innovation, improving the employee experience and digitizing the business.

More than 70% said they’re moving more functions to the cloud and 52% agreed that “our IT strategy has become more aggressive and ambitious as a result of the COVID-19 pandemic,” compared with 28% who disagreed.

“Discretionary spending such as proof-of-concept tests…could get pushed back, but businesses see more value than ever in tech that will enhance the customer experience and give them an edge in an increasingly tight market,” The Wall Street Journal reported last month.

Forrester’s Gilchrist suggested the experience of previous recessions may have finally convinced executives that downturns are the best time to ramp up investments that can separate companies from their competitors. “Even when organizational budgets began to contract during the pandemic, IT spending expanded in the aggregate,” he said. “This phenomenon was a materialization of how IT cost structures have evolved over the past decade.”

That’s the case at Detroit-based Rocket Mortgage LLC.  “The message I hear from most of my business partners is look, this is going to be a rough year but recessions are the time to lean in,” CIO Brian Woodring told The Wall Street Journal.

At age 24, Iddo Gino has never managed a business through a recession, but the CEO of RapidAPI, which is the business name of R Software Inc., said he learned something from temporary recession caused by COVID in 2020. “It served as a cautionary tale against overreacting,” he said. “We froze hiring and marketing spend for six months. That was followed by two of the best years we’ve ever had.”

Democratized spending

The second factor is that IT spending is harder to pinpoint and manage than it was just a few years ago. A recent Gartner report asserted that line-of-business leaders in the average enterprise now spend more on transformative IT projects than the IT organization. As department heads have shouldered responsibility for the cloud software they now rely upon, budget mandates have become harder to enforce.

“Customer experience is coming from marketing and the ‘internet of things’ from the factory,” Carter said. “Digital transformation is much less of an IT budget discussion than a C-suite budget discussion.”

The third factor is that IT budgets are simply becoming harder to cut. The costs of maintaining and administering data centers and enterprise software constitute as much as 80% of the IT budget at large organizations, and shifting operations to the cloud has been shown to yield only modest savings.

“IT is so efficient and so necessary that there’s no fat left to cut,” said Gartner’s Lovelock.

A worsening skills shortage has driven up salaries and spending just to keep basic services in operation. “We have 200 open positions in the IT department globally and we can’t fill them,” the CIO at a multinational consumer packaged goods manufacturer told IDC.

The degree to which IT spending continues to hold up has become more evident this week as bellwether companies such as Microsoft Corp. and Alphabet Inc. report quarterly earnings that somewhat exceeded expectations, particularly thanks to continued high spending on cloud computing. IBM’s Krishna described the company’s pipeline as “pretty healthy,” and SAP SE attributed the better-than-expected results it reported recently to strength in its cloud business.

Although there’s a reason for optimism, the full extent of any potential recession is still unclear and plans could change. “When revenue falls and the wealth of executives evaporates as stock prices follow, how many of those surveyed will still talk a good digital game about the next best thing?” asked InfoWorld columnist David Linthicum earlier this month. “I hope priorities don’t change when everyone finds out what a hard slog digital transformation will be.”

Image: Mediamodifier/Pixabay