CIOs' Dilemma: Innovate More, Spend Less

Gartner survey shows IT chiefs under pressure to accelerate innovation but restrain spending

Stamford, CT — March 18, 2003 — Chief information officers are feeling severe pressure to accelerate innovation, but at the same time, they're being forced to do so under tighter budget constraints, according to a survey of leading CIOs conducted by technology consultancy Gartner.

Meanwhile, Gartner's Dataquest unit predicted that worldwide software spending would stabilize in 2003 and return to growth this year despite continued economic uncertainty and low business confidence.

The survey of 620 CIOs, conducted through Gartner's Executive Programs (EXP) unit from September through December 2002, revealed that for the third consecutive year, cost pressures are the No. 1 business driver for the information chiefs. The combination of security and risk management concerns, along with faster innovation, is making for a very challenging scenario.

"Being more cost-effective, reducing business risk and innovating faster are extremely difficult to achieve concurrently," said Ellen Kitzis, group vice president for Gartner EXP. "Together, they risk breaking the budget. For CIOs it means adding redundancy to address business risks, which increases their costs."

The survey showed that "must-do initiatives" such as business continuity, data security, privacy and keeping pace with the business, have taken precedence over the "want-to-do's," such as satisfying stakeholders, customer relationship management (CRM), knowledge management and e-enablement.

CIO's Role Changing

Gartner argued that these new pressures are changing the role of the CIO, and those that fail to adapt to the new environment will find themselves at a dead end. Intense cost pressures amid increasing business demands will suit those CIOs that are able to build bridges to the rest of the business, show leadership and demonstrate the business value of what they do, according to the consultancy. CIOs know they have to work with their C-level colleagues to inform and manage their expectations, so that these executives understand the trade-off choices and take joint responsibility.

"IT governance is about ensuring the right people are making the right decisions for the business and being held accountable," Kitzis said. "CIOs have to be multilingual and act as the pivot point: achieving business goals through informed decision making, implementation and accountability."

In comparing business and IT budgets, the CIOs surveyed said business operating budgets are growing faster than IT budgets. Gartner analysts said there are two ways to look at the trend. One is that there is business skepticism around how effective IT investments have been. The other angle is that many enterprises have genuinely been able to reduce costs without reducing their business impact.

From a management perspective, CIOs now rank "providing guidance for the board and executives" as the No. 1 management priority in 2003. In 2002, this was ranked as the No. 6 priority. "CIOs are providing guidance to these key executives, while continuing to demonstrate the business value of [information systems] and IT," Kitzis said. "They are also spending time on a new focus area this year: IT governance. As enterprises become more complex and IT a big budget item, the role of IT governance is becoming critical."

CIOs see their top technology priorities as securing systems from internal and external threats to better integrate applications and provide greater data availability to all stakeholders of the enterprise.

Applications integration, middleware and messaging climbed to the No. 2 technology priority as cost-effective means to leverage legacy systems to be more agile and support, or at least not constrain, business innovation. Enterprise portal deployment is another cost-effective approach to making data more easily available to employees, business partners and customers, according to Gartner.

Software Spending to Stabilize in 2003

Meanwhile, Gartner's Dataquest unit this week predicted that the worldwide software industry would return to positive, stabilized growth in 2003, forecasting that worldwide end-user spending on software would reach $76.1 billion this year, a 3.5 percent increase from 2002 spending.

The software industry is experiencing the combined effects of economic uncertainty and lower business confidence in software investments, which is severely constraining corporate spending, according to Dataquest. In 2002, worldwide software revenue declined 0.7 percent, with revenue of $73.5 billion.

"Renewed IT software spending will only occur in many organizations after a prudent review of the supplier options and the business priorities," said Joanne Correia, vice president for Gartner Dataquest's Software Industry Research group "Despite the backlog of pent-up demand, suppliers will continue to deal with a new extended sales cycle, resulting in more pressure on margins."

"Uncertainty is riding high with a very restrained economic outlook, so it can only be sensible to advise continued caution for the near future," said Thomas Topolinski, vice president for Gartner Dataquest's Software Industry Research group. "While some sectors are seeing increased demand, other sectors are losing their share. The most prudent planning assumption is that, at least for the next 12 months, overall global demand for software licenses will remain as static as it is today."

Top-tier Vendors to Benefit

While the continued tightening of budgets hinders short-term software license revenue, Gartner Dataquest analysts said that this is good news for the top-tier software suppliers who will continue to take market share from the pure-play suppliers.

Gartner Dataquest analysts refer to these top-tier suppliers as titans (suppliers that have achieved dominant market share in more than one software market segment by offering a diversified and often integrated line of software products). Pure-play suppliers derive most of their software revenue from the sale of products within one market. The realities of the weak economy continue to shift the competitive advantage from pure-plays to titans.

Gartner believes that through 2003 and 2004 enterprises will continue to invest primarily in technologies that drive business process cost efficiencies from their existing investments. The business value of IT has become a major factor in decision-making, the analysts said, and for enterprises to make new software investments, it will be critical for simultaneous investment in new technologies (hardware, wireless and Web services) that will help achieve short and long term return on investment (ROI).