As part of Forrester’s tech insights and econometric research (TIER) series, we monitor market trends and analyze how these trends may affect IT budget strategy. Over the past few weeks, we looked into capex/opex trends leading up to, through, and out of the pandemic. For technology executives, it’s clear what question must remain front of mind: How elastic will the shift from capex to opex be over the long term?
Budget behavior during internal and external shocks tends to reflect the cash position of the organization. Those with more in reserve remain resilient longer than those that have less. This might seem obvious, but organizations that are able to carry value consistently through turbulent times tend to have the cash to do so. However, this becomes much more nuanced when analyzing IT budgets. Even through the pandemic, when organizational budgets began to contract, IT spending expanded in the aggregate. This phenomenon was a recognition that technology was being used to help solve challenges presented by the pandemic, including new ways of engaging customers and employees. The increase in budgets was then rooted in how IT cost structures have evolved over the past decade.
As IT budgets adapt to more agile and innovative operating practices, it’s critical for IT investments and allocations to support and sustain such practices. This requires greater transparency and specificity to how budgets are allocated and to what horizon they are managed to. Over the past decade, organizations have been looking to find a more productive balance between efficiency and effectiveness. Technology, being inextricability linked to value generation, has taken the lead in pursuing that balance. One should only look to the rise in “as-a-service” capability and cloud-first transitions to see these pursuits influencing IT cost structures.
The composition of IT budgets had to change during the pandemic. More than 60% of organizations began accelerating the shift in IT spend from capex to opex to generate greater capacity to scale capabilities. The pandemic, an external shock, simply acted as an accelerant to those capex-to-opex developments in IT spending that had been progressing for years leading up to it. Post-pandemic, the question should be: How elastic is the current shift from capex to opex? The financial reality and how organizations reevaluated their costs during the pandemic is one thing, but the operating reality coming out of the pandemic is another.
Operating arrangements have been upended with the dramatic increase in remote workforces, virtual workplaces, and digital environments. The identity of “how work gets done” has changed: This pandemic-driven shift should not be challenged but embraced. How organizations respond to these new arrangements will determine if the acceleration we have seen toward opex will rebound, persist, or gain further momentum. And this organizational response can be correlated to its IT maturity and capability utilization.
- Traditional organizations, in the sense of cost-preserving IT budgets, will swing the pendulum back to pre-pandemic IT budget behavior, but not fully. These are the organizations that remained in a defensive posture during the past few years, waiting to get back to normal. Here we will see a slight draw back to capex from opex.
- Modern organizations, in the sense of productivity-optimizing IT budgets, will maintain pandemic IT budget behavior, just not at a sustained accelerated pace. These are the organizations that will embrace these new operating arrangements coming out of the pandemic as the new normal.
- Advanced organizations, in the sense of outcome-based IT budgets, will continue the momentum of pandemic IT budget behavior. These are the organizations that will utilize the new normal out of the pandemic as a point of lift.
Regardless of maturity, technology executives will look to translate operational agility into financial agility. In terms of elasticity, the speed from capex to opex will be regulated by how a budget prioritizes between efficiency and effectiveness. Traditional organizations will favor cost-reducing investments, forcing less elasticity long term, while more advanced organizations will favor outcome-enhancing investments, generating more elasticity long term.
In the meantime, look for our upcoming 2022 tech capital and investment report this quarter for further market- and industry-level trends influencing technology spend and planning. Contact myself or the tech exec team with any questions you may have.
This falls under Forrester’s TIER series.