Global tech spend grew 30% from $4.0 trillion in 2020 to $5.2 trillion in 2025. Yet data from Information Services Group, Inc. (ISG) indicates that spend per user was flat. In fact, the global spend per user benchmark from ISG fluctuated between $15,000 and $16,000 each year from 2020 and 2025. This suggests to CIOs that technologies like cloud and AI are more like squeezing a balloon when it comes to cost than adding to a pile – they reshape costs rather than inherently leading to IT spending increases.

The trend in direct costs for XaaS is misleading

New technologies create new categories of spend in place of old ones; cloud can replace on-prem storage and compute, AI can automate work embedded in traditional applications or previously handled by employees, etc. And the pricing models for these next-generation technologies tend to be heavily variable compared with more fixed cost models of servers, equipment, perpetual licenses, etc.

At first glance, new technologies appear to put upward pressure on CIOs’ budgets. For example, ISG data shows that Hosting spend grew from 44% of total tech spend in 2020 to 50% in 2025. Meanwhile, actual total tech spend grew over the same time period, meaning that cloud added cost to the CIO’s budget. However, the cost structure of cloud and other XaaS technologies results in other costs being extracted during the transformation. For example, while Hosting spend increased six points between 2020 and 2025, spend in Service Desk and End User declined from 27% to 19% combined. This makes sense – cloud-hosted solutions aren’t just one-for-one trades of application spend. Rather, they incorporate support, upgrades, patching etc. in one price as opposed to legacy models where software, help desk and security are separate. CIOs should treat every transformation as a cost-reallocation exercise rather than a cost-addition exercise.

OK, so why am I spending more now than before?

If migrating to next generation technology is leading to an increase in total spend, you’re encountering three potential problems:

  • You’re paying for two environments at once: Two-for-one is great for vendors but it’s not so great for your IT budget. Not fully retiring legacy environments will lead to spiraling tech debt if you leave it unaddressed. In fact, tech debt remediation spend averages 30% of the total technology budget.
  • You’re managing variable costs like fixed costs: the dynamics of consumption-based services required new cost management disciplines. This is the reason spend management models like TBM, FinOps and, most recently, Tokenomics, exist. If you’re migrating to the cloud and don’t have a FinOps practice, or if you’re rolling out GenAI and don’t have a total cost model like TBM or a practice like Tokenomics for managing token consumption, it’s like giving your teenager your credit card and waiting for the bill – the costs will drive your tech budget up, but you won’t know until it’s too late.
  • Your governance hasn’t matured with your tech stack: the maturity of your cost management practice needs to match the depth of your investment in the technology. If your investment lags your practice, you’re wasting money on a capability you don’t need. If your practice lags your investment, you’re at risk of an unexpected overage in cloud or token spend.

How to make XaaS transformations cost-neutral

Here’s a four-step process to assess if your transformation is cost neutral or if it’s adding costs that need to be rationalized. As AI investments accelerate, these capabilities become increasingly non-negotiable:

  1. Develop total cost of ownership transparency: whether it’s the TCO of solutions, services, products, etc., understand the total costs across all categories that go into supporting the capabilities that you’re transforming. Otherwise you’ll be comparing apples to oranges. Start by adopting a taxonomy like TBM to guide your cost attribution model and define spend consistent with industry standards.
  2. Benchmark your IT spend: level-set your IT spend against peer benchmarks to understand what your post-transformation cost structure should look like. This includes an annual benchmarking review leveraging ISG data that all Forrester Leader seat holders have access to.
  3. Mature your spend optimization practice: During transformations, leaders often overlook practices that manage real-time cost fluctuations like FinOps and tokenomics. In these cases, TCO will certainly go up. And organizations with existing practices should ensure the maturity of those practices matches both the sophistication of the technology and the scale of the investment. Forrester’s assessments for cloud maturity and AI cost management are good places to start.
  4. Aggressively decommission and reallocate: Establish explicit decommissioning targets as part of every migration, track retirement milestones, and redirect realized savings into future transformation initiatives.

Want to talk further about benchmarking, launching a total cost model, or managing shifts in your cost structure? Set up a guidance session or contact us directly. For North American clients, contact me. For EMEA clients, contact Dario Maisto and for APAC clients, contact Fred Giron.

 

 

 

 

 

 

 

 

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