Since the economy turned two years ago, businesses with suddenly tighter budgets seeking to start up, remain profitable and grow have grappled with how to approach IT spending.

Invest in equipment and IT infrastructure now to save money over the long haul? Focus on IT spending that will streamline overhead and operating costs? Cap all IT projects?

As 2010 draws to a close and executives plan for next year in these marginally improved business conditions, CIOs will pursue scalable technologies that leverage tools such as automation, social media and mobility while limiting capital investment, making workforces more agile while shrinking footprints, experts tell InfoTech Spotlight.

According to Greg Buoncontri, CIO of hardware, software and services provider Pitney Bowes, cloud computing and managed services stand to gain investors in 2011 for many of those reasons.

Despite security concerns, cloud computing has become an IT buzzword because the technology “avoids large capital investment and offers a subscription-based model,” Buoncontri tells InfoTech Spotlight. “Companies also can bring it online quickly. It’s extending into a whole lot of areas. Security is a concern, but version two or three will help eliminate that. The technology is very right for this (economy).”

Of course, “this economy” is a relative term, depending on the size of the business under discussion.

For Buoncontri, small- and medium-sized businesses that are worried about regulations are feeling the effects of the downturn more keenly than enterprises – a factor that he expects to impact IT spending.

“Effectively, it hinders them a lot more – they don’t have the cash or the larger scale of a Fortune 500 or Fortune 100 company,” he said. “Investment is going to get a lot of scrutiny, and there’s going to be a lot of decision-making before a clearer path is laid.”

Yet new data from market research firm Gartner indicates that larger firms are managing their IT budgets – especially IT operating expenses – more tightly than their smaller counterparts. Smaller firms are reporting far stronger IT budget growth than large ones, according to a new survey from the Stamford, Conn.-based researchers.

The survey of more than 500 CIOs also shows that during the first half of 2010, IT spending followed executive projections made in late 2009, with a growth rate of about 1.1 percent.

New CIO priorities in spending include infrastructure upgrades through monies borrowed from IT operating budgets, Gartner says.

Dan Ransdell, general manager of IBM (News - Alert) Global Financing North America – a $34 billion lending and leasing segment of IBM – says that despite all the dire forecasts over the last two years, what’s remained the same is that business customers remain prudent in their budgets.

“Budgets remain tight, but at the same time most companies are forward-thinking as they try to improve products and profits, and ways to do that include implementing smarter technologies to improve efficiencies of the organization,” Ransdell says. “Companies will continue to be prudent in spending, but also those staying competitive will continue to look at ways to use automation and technology.”

Anecdotally, Ransdell says he’s seen two types of approaches to IT spending since the financial markets turned two years ago: investing in IT versus waiting out the storm.

“What we’ve seen in the last two years is customers who kind of hunkered down and focused on not spending anything, and others that saw it as a market opportunity to continue to make investments and better position themselves strategically so that when the economy did recover, they’d have a competitive advantage,” he says. “I would say those that continued to make prudent investments to retain and attract customers are in a better position than the others, who are now two years behind.”

One bright spot from the Gartner survey includes an improved view on the future from CIOs, as more than 40 percent see some kind of economic recovery – though most agree that challenges remain.

For CIOs, one looming challenge is how to sell new projects for next year with widespread caps on IT investments.

Buoncontri says what’s needed is alignment among senior management team members.

“You have to be flexible and make sure you vet the cases very well,” he says. “You need a fair, open, transparent process.”

When putting a cap on IT investments some of the greatest challenges for CIOs in selling new projects for next year involve those that have an indirect impact on generating revenue, according to George Kilguss, CFO of Internap (News - Alert), a provider of end-to-end Internet business solutions.

“The biggest challenge is trying to execute on or support projects that are not directly related to either revenue generation or near-term cost savings. If the projects are not P&L impacting or the ROI cannot be quickly realized, they will most likely be prioritized lower and subjected to delay,” said Kilguss.

CIOS are now becoming responsible for providing ways to generate revenue, as opposed to simply being a cost center for the company, according to VBrick’s CEO Doug Howard.

“With this goal in mind, they are constantly looking for expedient IT solutions that service many departments, can seamlessly integrate with their current infrastructure, and provide superior service and reliability,” says Howard. “It’s a tall order, but one that sets the foundation for the IT system to evolve to meet the demands of the business.”

CIOs Need to Sharpen Approach

Another hurdle facing CIOs this budget season is that business managers are nervous about the economy, according to Steve Minton, an analyst with market research firm International Data Corporation (IDC (News - Alert)).

“[CIOs] need to do a good job of explaining how critical it is to adopt new technologies before their competitors do, because there are still very real benefits to be derived in terms of productivity, improving customer relationships and accelerating new product /service innovation,” Minton says. “It’s a tough Environment for CIOs because while business managers ‘get’ technology much better than a few years ago, they’re reading all the stories about double-dip recessions and holding onto their wallets a little more tightly. Plus, many companies aren’t hiring yet – and that means CIOs have less staff to implement new technologies.”

The budget process itself also appears to be changing, according to the Gartner survey. In the past, IT budgets are planned and viewed as administrative expenses. But the process budgeting for IT expenditures is becoming more fluid. About half of CIOs say they’re finalizing IT budgets in the last quarter of the fiscal year, according to the survey. Another quarter of CIOs waited until the first quarter of 2010 to finalize their IT budgets, while 11 percent reported not finalizing their budgets at all.

Buoncontri says that C-level executives will be looking at a number of factors as they set budgets for next year.

“CEO leadership teams are looking to the CIO group to really sharpen their approach,” he says. “They’re looking for more flexibility and insight into how to make the investments more appealing and optimal. There’s a value-added component that comes into that.”

Forrester Research (News - Alert) analyst Robert Whitley said that nearly half of the IT operating and capital budget is being set aside for new IT initiatives and increasing capacity to support business expansion, which supports Buoncontri’s forecast that more dollars are going to be allocated to cloud-based services.

“For I&O, this means prioritizing budgets: It’s no longer sufficient to set aside half your budget for incremental data center improvements and the other half for incremental desktop and device improvements,” he writes in Forrester’s “Focus Your I&O Budget On Three Key Initiatives” report. “However, these aren’t the wrong categories; it’s just a matter of focusing your budget on new capabilities. To maximize your budget efforts, you should start by transforming your desktop, continue by retooling your data center to support a path to cloud, and round out your efforts by industrializing your IT operations.”

The impact of a double-dip recession would likely result in almost flat IT spending growth (less than 1 percent) in 2011, according to the IDC. This compares to the IDC’s baseline forecast of 6 percent growth in 2011, and therefore creates a wider-than-usual range for the firm’s forecast in the context of this double-dip recession scenario.

“If there is a double-dip, it will inevitably impact IT spending quite severely. As in all recessions, the biggest impact would be on capital spending – especially PCs, servers, storage and networks,” says Minton. “Our baseline forecast assumes no double-dip, but it’s wise to have contingency plans in place.”

Minton adds that the best way for CIOs to get the most value from IT is to consider all purchasing models for each solution, including cloud computing, software-as-a-service (SaaS (News - Alert)), and virtualization. “There are lots of ways to get things done for less long-term costs, by investing in the new technologies and platforms which have been developed in the past two to three years,” he says.

In fact, IDC predicts of the $383 billion customers will spend this year within the five major IT segments, $16.2 billion – or a mere 4 percent – will be consumed as cloud services. By 2012 – based on a conservative forecasting approach – customer spending on IT cloud services will grow almost threefold, to $42 billion, accounting for 9 percent of customer spending.

Pitney Bowes’ Buoncontri advises CIOs to place their emphasis on the best ROI with a focus on looking for investments that provide scalability.

“Cloud computing is the rage for a number of reasons,” he says, adding that it avoids large capital investment, is a subscription based model and can be extended into a number of areas.

“CIOs around the country are taken by it, but there are definitely concerns around security. Version 2 or 3 will help meliorate those things. That technology is very right for this kind of economic environment,” says Buoncontri.

Pitney Bowes uses sales automation tools in the cloud, e-mail in the cloud and infrastructure in the cloud and plans to deploy cloud computing in other areas as well, he adds.

Lessons Learned

Because of the experiences of 2008-2009, most businesses are in a much better position today to cope with revenue pressures as well as have better control over expenses than they were coming from before the initial downfall, according to VBrick’s Howard.

“In struggling economies, organizations must still find creative ways to grow revenues and obtain funding. In today’s environment, organizations that have successfully learned to leverage IT as a competitive advantage are the same organizations that have been held in high esteem as highly successful companies that have thrived even in the recession,” says Howard. “Leveraging creative ways to gain market share and attract customers, such as social media, user groups and rich media applications such as video are key examples of cost-effective tools.”

Gartner’s survey found that those industries hit hardest by the global financial crisis in 2008-2009 showed signs of rebounding in the first half of 2010, which could be a continuing trend into 2011 if the economy remains stable. According to Gartner, consumer/retail, financial services and manufacturing CIOs responding to the survey indicated modest growth in IT budgets during the first half of the year. Industries such as utilities and healthcare are going through deep structural change and continue to invest in IT regardless of economic outlook. Government and education industry CIOs reported budget declines in the face of tight economic conditions.

Internap’s Kilguss said that for those companies that have the available capital, spending will likely increase in 2011.

“We have been in a down economic cycle for over 18 months now and companies need to invest to be able to take advantage of the recovery when it comes,” says Kilguss. “Regardless of size, companies need to invest to maintain or improve their competitive positions. Business innovation does not stand still, independent of economic factors.” IT