Editor's note: This article is part of the CIO Dive 2021 Outlook series, which explores trends that will impact industries in 2021. For business trends affecting other industries, see the Dive 2021 Outlook.

What can a $1.4 billion IT budget do?

It's not just about maintaining daily operations—this money is enough to buy 1.4 million high-end laptops, pay the annual salaries of about 460 Fortune 500 CIOs (according to related reports), or purchase more than 2,500 years of cloud services, depending on enterprise size and vendor.

Such a massive budget is a reality for many federal agencies. The U.S. Department of the Interior (DOI), as a relatively standard small-to-medium agency, spent $1.4 billion on IT in fiscal year 2020, accounting for only about 6% of its total budget of over $24 billion.

In comparison, according to Deloitte's 2020 Global CIO Survey, enterprises spent 4.2% to 4.8% of their revenue on technology spending in 2020.

Understanding stakeholder needs and agency missions helps government departments manage huge spending responsibilities, but the core lesson for enterprises is simple: strategy is crucial. Just as the public demands government accountability for every dollar, finance departments will make the same demands on enterprise IT budgets.

Enterprises face IT spending challenges—such as collaborating with finance departments to create budgets, or balancing traditional investments with modernization needs—which can be avoided through comprehensive, thoughtful budget planning similar to the budget commitments agencies make each year.

"IT leaders really struggle to get a full view of their spending because their environments are becoming more complex and hybrid," Cyndi Tackett, vice president of product marketing at Flexera, told CIO Dive.

As budgets shift in 2021, strategic spending focused on the entire IT enterprise will lead to incremental progress, thereby delivering tangible results.

"IT leaders really struggle to get a full view of their spending because their environments are becoming more complex and hybrid."

—Cyndi Tackett, Vice President of Product Marketing at Flexera

Although IT departments handle large projects, from cloud migration to automation, according to Brook Colangelo, CIO of Waters Corporation and former White House CIO, in an interview with CIO Dive in October 2020, an agile spending mindset focused on incremental actions can drive enterprise-wide progress.

"First, understand what's in the budget, then develop a strategic plan to align those items with resources to drive the changes you want to achieve during your tenure," Colangelo said, a key lesson drawn from government experience applicable to the private sector.

In other words, regardless of budget size, IT departments can focus on the impact of current IT spending to create value as quickly as possible.

Federal IT budgets vs. enterprise

According to the Government Accountability Office, the federal government spent $90 billion on IT overall in fiscal year 2019. Although this is only a small portion of the government's total budget, the figure remains a massive investment.

To better understand how the government spends IT funds, a closer look at the DOI provides an understandable but limited perspective.

In fiscal year 2020, the DOI allocated 62% of its $1.4 billion IT budget to so-called standard IT infrastructure projects, which maintain daily operations. Only 20% of total spending went to major projects, and 17% to non-major projects.

Most of DOI's IT budget goes to standard infrastructure

(Chart: DOI IT spending by investment type for fiscal year 2020)

Major projects include work of special importance to the agency's mission or functions. For example, the DOI spent $58.5 million to upgrade its financial and business management system, adopting an enterprise solution to reduce burden. These projects typically involve significant enhancements, transformations, or upgrades of agency assets.

In fiscal year 2021, the DOI's budget is expected to be roughly the same as last year; its total IT budget again reaches $1.4 billion. According to its Fiscal Year 2021 Budget Brief, the agency is seeking more shared services opportunities and taking an "aggressive enterprise-wide approach to support IT modernization." The DOI declined to comment on its IT spending for this article.

While specific amounts vary by enterprise, the private sector has a larger proportion of budget available for IT.

But IT budgets are changing. Although Gartner analysis predicts IT services budgets will grow 4% in 2021 (after a 5.4% decline in 2020), Forrester conversely predicts U.S. technology investment will decline 1.5% in 2021 after years of acceleration.

In short, IT spending varies by industry's response to the pandemic, Tackett said. Industries hit hard by the pandemic may cut IT spending to maintain employee salaries. Other companies, such as the tech sector which performed relatively well in 2020, may be more motivated to enhance their presence in the digital age and increase IT budgets.

"For some companies, returning to normal is more important than innovating," Tackett said.

The balance lies in what is most beneficial for business recovery—and deciding what to upgrade, and which legacy technologies can wait.

For example, in Flexera's survey of 474 IT executives and senior managers, 62% of respondents plan to reduce data center usage within the next 24 months. But frequent migration out of data centers requires modernization investment. Cloud spending accounts for 30% of total IT spending, barely exceeding on-premises software spending (at 24%).

In this sense, planning ahead depends on deciding which spending will benefit the enterprise's bottom line, but first, IT departments are still adapting to pandemic-era shifts.

Pandemic IT spending changes are not over

Across industries, organizations have driven modernization and digital transformation by gradually increasing IT budgets during the shift to remote-everything.

Overall, IT budget decisions in 2021 will reflect pragmatism. Government agencies know the importance of practicality because millions of voters rely on reliable services—not flashy gadgets—to access services.

IT spending in 2021 will focus more on hardware and software supporting a distributed workforce, cloud-based digital transformation, and managed services, said Ryan Denehy, CEO of Electric.

"With the increased need to do more with less in 2021, I think most people will focus budgets on more pragmatic, foundational ways to cover basic needs," Denehy said.

For example, federal agencies received small budget increases in 2020 to overcome pandemic obstacles. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), passed in March 2020, directly allocated $756 million to DOI programs to mitigate pandemic impacts.

Relief funds supported the DOI's rapid shift to remote work, with teleworking employees tripling. Of the new funds, $522 million went to the DOI's Bureau of Indian Affairs and Bureau of Indian Education, specifically to address COVID-19, such as improving remote work and IT facilities.

The DOI migrated to Microsoft Office 365 and increased virtual private network licenses to adapt to changes, using pandemic relief funds to meet immediate remote work needs, the CIO office reported to the Inspector General.

"Enterprises are no longer focusing on emerging technologies, but rather ensuring a strong IT foundation to support productivity and business continuity."

—Ryan Denehy, CEO of Electric

Instead, enterprises often had to realign existing resources to support IT during the pandemic.

"You can't talk about IT spending trends without first recognizing how the pandemic has affected the nature of work," Denehy said. "Enterprises are no longer focusing on emerging technologies, but rather ensuring a strong IT foundation to support productivity and business continuity."

Adjusting priorities to meet digital business and remote work demands, "the COVID-19 crisis prompted many organizations to make unplanned spending in the first half of 2020 to meet remote support needs," according to SWZD's 2021 State of IT report.

Among 1,073 IT buyers from North American and European organizations surveyed by SWZD, 44% have or plan to accelerate digital transformation, and 36% plan to improve IT operations and system performance in 2021.

Digital transformation is the top IT priority for enterprises

(Chart: Percentage of respondents indicating actions planned due to COVID-19)

According to the Flexera report, digital transformation, cybersecurity, and cloud remain top priorities for enterprise IT from 2020 to 2021, indicating the pandemic hindered progress, Tackett said.

"These priorities haven't changed because there may have been little progress on these goals," Tackett said. However, what has changed is a renewed focus on cost savings. In 2020, 9% of respondents in Flexera's survey listed it as a priority, but in 2021 that figure jumped to 27%.

This year, 49% of respondents in Flexera's survey plan to increase IT spending, while 32% plan to decrease. The proportion increasing or at least keeping spending flat aligns with analyst predictions, as companies recognize the value of IT in a changing digital landscape.

"We are far from out of the woods, and 2021 is likely to bring more uncertainty, which will drive business and budget decisions," Denehy said. "However, what we know is that IT plays an undeniable role in supporting a remote workforce and cannot be ignored."