Network operators obviously buy a lot of network gear, but so do enterprises. In my past blogs I’ve tended to focus on the operator side, largely because my own practice involves more operators and their vendors than it does enterprises. To get good enterprise data, I have to survey explicitly, which is too time-consuming to do regularly. I did a survey this fall, though, and so I want to present the results, and contrast them with what I’ve gotten on the operators this year.
Enterprises have a shorter capital cycle than operators, typically three years rather than five, and they experience faster shifts in revenue than operators usually do. As a result, their IT spending is more variable. They also traditionally divide IT spending into two categories—“budget” spending that sustains current IT commitments, and “project” spending that advances the use of IT where a favorable business case can be made.
The biggest question that I’ve tried to answer with respect to enterprise IT has always been where that balance of budget/project spending can be found. In “boom” periods, like the ‘90s, I found that project spending lead budget spending by almost 2:1. Where IT spending was under pressure, the ratio shifted back to 1:1, then below, and that’s what has happened since 2008 in particular. In 2006, which was my last pre-recession survey of enterprises, Project spending was 55% of total IT spending. It slipped to its lowest level of the recession in 2009, where it was 43%, gained up to 2015, and then began to slip again.
This year, project spending was 49% of total IT spending, and enterprises suggest that it could fall as low as 39% in 2018, which if true would be the lowest level since I surveyed first in 1982. It could also rise to as much as 54%, which would be good, and this is obviously a fairly broad range of possibilities. Interestingly, some Wall Street research is showing the same thing, though they don’t express their results in exactly the same terms. The point one Street report makes is that IT was once seen as an “investment area” and is now seen as a “cost area”, noting that the former state was generated because it was believed that IT investment could improve productivity.
CIOs and CFOs in my survey agreed that 2018 would see more IT spending, but they disagreed on the project/budget balance, with CIOs thinking there would be more project spending to take advantage of new productivity opportunities, and CIOs thinking that they’d simply advance the regular modernization of infrastructure. It’s this difference in perspective that I think accounts for the wider range of project/budget balance projections for next year.
Where this aligns with network operator thinking is fairly obvious. I noted that operators had a lot of good technology plans and difficulty getting them budgeted as recommended. That seems to be true for enterprises too. CIOs think that there’s more that IT could do, but CFOs aren’t yet convinced that these new applications can prove out in business terms.
That’s the heart of the problem with the enterprise, a problem that in a sense they share with the operators. Absent a benefit, a business case, you can’t get approval for new tech projects in either sector. In the enterprise, it’s productivity gains that have to be proved, and with operators it’s new revenue. In both sectors, we have a mature market where the low apples have been picked, the high-return opportunities. What’s left either has to have unproven technology or benefits less easily quantifiable. In either case, approvals are harder now. That won’t change until a new paradigm emerges.
Tech isn’t a paradigm, it’s the mechanization of one. You can improve software, software architecture, data mining, or whatever you like, and what you have done is valuable only if you can use that change to make a business case, to improve productivity or revenues. We’re good at proposing technology changes, less good at validating the benefits of the changes. Till that improves, we’ll probably under-realize on our key technology trends.
Except, perhaps, in one area. Technology that reduces cost is always credible, and enterprises tell me that an astounding nine out of ten cost-saving technology projects proposed this year are budgeted for 2018. This includes augmented cloud computing, some hyperconvergence projects, and in networking the application of SD-WAN. In productivity-driven projects, only three in ten were approved.
It’s interesting to see how vendor influence interacts with project priority, and here there are some differences between operators and enterprises. Operators have always tended to be influenced most by the vendors who are the most incumbent, the most represented in their current infrastructure and recent purchases. Enterprises have tended to shift their vendor focus depending on the balance of future versus past, and the project/budget balance is an indicator there too. This year, the vendors who gained influence in the enterprise were the ones that the enterprise associated with the cloud—Microsoft, Cisco, and (trailing) IBM. There’s a different motivation behind each of the three.
Microsoft has been, for some time, the dominant cloud computing influence among enterprises, not Amazon. I’ve noted in the past that a very large chunk of public cloud revenues come from social media and content companies, not from enterprises. Microsoft’s symbiotic cloud positioning, leveraging data center and public cloud hybridization, has been very favorably received. Twice as many enterprises say that Microsoft is a trusted strategic partner in the cloud than name Amazon.
Microsoft has some clear assets here. First, they have a data center presence and a cloud presence. Vendors who rely totally on Linux servers have the disadvantage of sharing Linux with virtually every other server vendor, where Microsoft has its own software technology on prem. They also have, as a result of that, a clear and long-standing hybrid cloud vision. Finally, they can exploit their hybrid model to use the cloud as a tactical partner for apps that need more elastic resources, faster deployment, more agility. It’s winning for Microsoft, so far.
Cisco as a leading influence frankly surprised me, but when I looked at the reason behind the choice it makes sense. To a CIO, the transformation to a hybrid cloud is a given. That is seen as being first and foremost about the network accommodation of more complex and diverse hosting options, which implicates the corporate VPN, which usually means Cisco. Cisco is also the only prime network vendor seen as having direct cloud computing credentials.
Cisco doesn’t have the clear public-cloud link that Microsoft has, which means that they can’t reap the full benefit of hybridization in hosting. Some enterprises think that it makes Cisco pull back from opportunities that need developed at the cloud service level, confining them more to the network than they might. Others note that Cisco is getting better at cloud advocacy. Their recent purchase of cloud-management provider Cmpute.io may be a sign of that; it could give them entrée into hybridization deals.
Third-place IBM didn’t surprise me, in large part because IBM has always had very strong strategic account control among enterprises. IBM did slip in terms of influence, though. Its major competitors, HPE and Dell, slipped less and thus gained a bit of ground. Still, both companies have only started to recover from a fairly long slide in terms of enterprise strategic influence. There’s at least some indication that either or both could displace IBM by the end of the year.
IBM’s assets, besides account control, lie in its software resources, but it’s still struggling to exploit them in a cloud sense. Having divested themselves of a lot of hardware products, they have the skin-in-the-game problem Cisco has, and unlike Microsoft their own cloud services haven’t exactly blown competition out of the market. Among the largest enterprises, IBM is still a power. Elsewhere is another story.
Enterprises will spend more on tech in 2018, largely because they tend to budget more directly in relationship to revenue expectations than operators do. Their biggest focus will be the modernization of what they had, and that’s what will drive them to things like higher-density servers, and container software to improve hosting efficiency is second. The cloud is third, and that’s where some potential for productivity enhancement and some focus on cost management collide. If that collision generates good results in 2018, we can expect a decisive shift to productivity-directed measures, a shift toward the cloud.