Enterprise Spending on Application Development and Maintenance Increases, Driven by Interest in AI
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Insights
The ISG study's findings that planned enterprise spending on application development will increase by nearly five percent signal a trend towards greater investment in technology to drive business efficiency and innovation. This uptick in spending is particularly noteworthy as it reflects a strategic shift where companies are looking to leverage AI technologies to gain a competitive edge. The rise in application development investment suggests a positive outlook for the IT service industry, which could see an increase in demand for services related to AI implementation and integration.
For stakeholders, this could indicate an opportunity for growth in sectors that provide these technological services. However, it's essential to consider the potential challenges of integrating AI into existing systems, including the need for skilled personnel, data governance and cybersecurity measures. As companies invest more in AI, the demand for talent in these areas could drive up labor costs, potentially impacting profit margins.
From a financial perspective, the projected increase in spending on application development, particularly in IT service management and ERP applications, could have implications for the stock performance of companies within the tech sector. This trend could result in higher revenues for IT service providers and software developers, especially those with a strong AI offering. Investors might look for companies that are well-positioned to capitalize on this shift, as they could stand to benefit from increased enterprise spending.
However, it's also important to monitor how effectively companies manage these investments. Those that can successfully integrate AI technologies and realize cost optimizations could see improved financial metrics, such as operating margins and return on investment, while companies that struggle with implementation may face increased costs and delayed benefits.
With the ISG study highlighting the importance of IT service management and ERP applications as key areas for cost optimization, there is an implication that businesses are seeking not just to expand their technological capabilities but to do so in a cost-effective manner. This suggests a growing market for solutions that can streamline operations and reduce overhead through automation and improved process efficiency. As businesses increasingly rely on complex software systems, the role of IT service management becomes critical in ensuring these systems are maintained effectively and can adapt to changing business needs.
ERP applications, in particular, are central to many businesses as they integrate various functions and provide a comprehensive view of operations. Enhancements in ERP systems through AI could lead to more predictive analytics and better decision-making tools, thus offering a strategic advantage. Companies providing these enhanced services may experience growth, but they must also navigate the complexities of AI integration, including ensuring data accuracy and system compatibility.
ISG study finds IT service management and ERP applications key areas for cost optimization
The ISG Application Development and Maintenance (ADM) Study, conducted globally last month, asked 200 executives with decision-making responsibility for application development, maintenance, management and operations about their priorities, budgets, performance and challenges, their use of managed services and their next-generation approach.
Despite ongoing cost optimization efforts, the ISG study found ADM spending continues to increase, driven in part by interest in AI. Planned development spending is accelerating faster than maintenance spending, rising at 4.6 percent, compared to 1.6 percent for maintenance.
“Enterprise priorities for ADM center on developing and deploying AI, improving use of data and supporting customer experience,” said Alex Bakker, ISG Distinguished Analyst and co-author of the ISG study. “However, AI interest is not universal within organizations. Our survey found business line decision-makers prioritize customer experience and use of data, while enterprise executives are more focused on developing AI capabilities. This suggests that different audiences may be prioritizing different time horizons in their ADM contracts.”
Fifty-five percent of respondents said developing and rolling out AI capabilities is one of their top five focus areas for their enterprise application portfolios between now and year-end 2024. Other top priorities for 2024 are improving data usage and access (a top priority for 50 percent of respondents); supporting an improved customer experience (49 percent); application portfolio cost reduction (46 percent) and migrating applications to the cloud (45 percent).
Organizations rated ERP, customer relationship management (CRM), and IT service management (ITSM) applications as meeting their needs most often, with around 60 percent indicating they were meeting most or all business needs. However, of these three application categories, ERP and ITSM were also identified as top targets for cost optimization, with 39 percent and 31 percent of respondents targeting them, respectively.
In contrast, only 25 percent of respondents say their business expectations are being met by their AI and data products development applications, and these applications were expected to get the greatest level of investment, with greater than 60 percent of enterprises expecting to prioritize investment in them over the next two years.
“With relatively fewer enterprises reporting their business expectations are being met at least in part by their AI and data products applications, it is no surprise that they, along with broader BI, ML and analytics applications, are the top enterprise application priorities for the next two years,” said Michael Dornan, principal analyst and co-author of the study. “Enterprises will typically embed AI capabilities into their current application portfolio rather than rebuild from scratch, which will cause spending on application development to increase.”
Sixty-five percent of respondents said BI, analytics, ML and AI will be an application development priority over the next two years, and 60 percent cited AI and data products development.
Legacy applications are still a significant cost burden, with a third of respondents (33 percent) reporting their organization continues to support 100 or more "end of life" applications due to legacy data in those applications (reported by 54 percent of respondents), the cost of transitioning users to a new application (44 percent) or employee resistance to the transition (38 percent).
ISG Buyer Behavior Research combines the results of surveys of senior-level global executives with expert ISG research and analysis on market trends and strategic business initiatives. Recent studies explored cost optimization, cybersecurity, global capability centers, network modernization, banking and the future workplace.
Contact ISG for more information on ISG Buyer Behavior Research.
About ISG
ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 900 clients, including more than 75 of the world’s top 100 enterprises, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in
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Press:
Will Thoretz, ISG
+1 203 517 3119
will.thoretz@isg-one.com
Julianna Sheridan, Matter Communications for ISG
+1 978 518 4520
isg@matternow.com
Source: Information Services Group, Inc.
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