At First Banks Inc., the name of the game is finding new ways to keep up with the giant financial institutions that have billions of dollars to spend on new products and services.

"We're a midsize bank. We can't keep up with the big guys in terms of their IT spending," says Rick Nolle, CIO at Clayton, Mo.-based First Banks. Even with a 10% to 12% budget increase planned for 2014, "we have to find ways where we can do things differently that give us a boost here and there," he says.

So about 36% of the bank's 2014 IT budget will be spent on service providers that do everything from hosting its online banking system and providing mobile apps for customers to providing assistance for corporate customers -- some 40 apps in all, hosted by a handful of banking-specific vendors. Nolle's team customizes some vendors' "vanilla" apps, or waits for vendors to add new features that the big players already have.

"We try to work between the vendors to innovate -- finding ways to connect things together differently that give us a new service, that give us some independence from vendors, that differentiate us from other guys in the market," he explains.

In fact, hosted services have become the bank's focus. "Whenever any kind of replacement need comes up, the first place we're going to look is in the cloud -- what can we subscribe to or have somebody put up for us?" Nolle says. The bank has plans for a mortgage loan origination system hosted in the cloud, and possibly a new retail banking system that it will subscribe to via a software-as-a-service model. And both of those will cost less than it currently costs to maintain existing systems.

That's a common theme in 2014 enterprise IT budgeting.

Computerworld's Forecast 2014 survey of 221 IT executives shows that IT budgets are continuing to make a nice recovery. Some 36% of our survey respondents said that they expect an increase in their IT budgets, while half said that their budgets will hold steady. What's more, budgeting for services is outpacing spending on hardware and software, and that has a domino effect on the skills that IT organizations need. While some organizations have cut staff when adding outside help, others have held steady or even added IT staffers because, if an IT organization is buying services, it needs more people with vendor management and negotiation skills.

According to Gartner, IT budgets will chug along with small but steady 2.9% average annual increases through 2014.

That doesn't surprise some analysts even though the economy is looking up in many segments. "IT budgets are normally less precocious than the economy," says Gartner analyst John Lovelock. "We have longer purchasing cycles. We can [cut spending] relatively quickly, but the inverse isn't always true."

Forecast 2014

Top Budget Priorities

" Top five areas of increased IT spending in 2014:

1. Security technologies

2. Cloud computing

3. Virtualization

4. Wireless/mobile

5. Business analytics

" Top five areas of decreased IT spending in 2014:

1. Hardware

2. On-premises software

3. Data center consolidation/optimization

4. IT/network services management

5. Unified communications

Top Business Priorities

Containing costs: 65%

Optimizing and automating business processes: 55%

Optimizing existing investments: 48%

Accelerating business process and agility: 45%

Improving collaboration with business: 34%

Biggest Leadership Challenges

Budget constraints/economic pressures: 26%

Managing expectations/business alignment: 14%

Security: 11%

Managing projects: 10%

Managing personnel: 7%

Improving the customer experience: 7%

Source: Computerworld 2014 Forecast survey of 221 IT executives, June 2013

Computerworld's survey showed a slightly higher average IT budget increase of 4.4% for 2014. And Forrester Research is even more optimistic, predicting that U.S. IT budgets will increase 6.7% in 2014, with spending on software, the cloud and analytics rising and hardware expenditures falling. Forrester analyst Andrew Bartels says his firm based its outlook on expectations that the U.S. economy will improve in 2014, exports to China, India and Europe will increase, and many companies will be itching to buy new technologies.

"Cloud, mobile, smart technologies are all very desirable, and we're finding that as companies are prioritizing those -- and as the economy improves -- they'll have more room to spend on that," Bartels says.

But while IT budgets are growing, and goals center around improving service levels, productivity and customer satisfaction, containing costs is still the No. 1 business priority for 65% of Computerworld's survey respondents, and about a quarter of survey takers cite budget constraints as the biggest leadership challenge.

As always, the pressure is on for IT to do more.

The Big Squeeze

These days, IT is being squeezed from all directions. Two years ago, Texas A&M University-Kingsville underwent massive spending cuts that slashed its IT budget by almost 22%. But with the economic downturn also came 25% enrollment growth, which often happens when unemployed people decide to learn new skills.

"Now our departments are looking to us for how to handle the increase when they [also] have less staff," says Robert Paulson, CIO and associate vice president of technology. But with the university's IT budget rising only 3% in 2014, "it puts more demands on technology and using technology wisely," he adds. "Now we're looking at long-range budgets, and it seems very difficult to get that IT money back."

To help out the 30-person IT staff, almost a quarter of the $4 million IT budget will go toward hosted systems, managed services, and consultants and consulting services.

While hosted services certainly help with staffing, Paulson has little evidence that they save money. "We're doing it for the skills and the personnel we don't have. That is what I've seen at other places, too," he says. "We're looking at augmentation -- somebody to come in and help us get to where we need to be."

Indeed, IT departments that use services report that, more than saving money, the approach frees up people for mission-critical work, fills skills gaps and improves efficiency. Whether IT can better meet their goals by shifting to more managed services remains to be seen, but survey takers are certainly giving it a try.

Forecast 2014

What Will Be Cut in 2014?

With the rise in SaaS and platform as a service, it's no surprise that hardware, on-premises software and data center optimization are among the five lowest IT budget priorities for next year, according to Computerworld's 2014 Forecast Survey.

For example, the Bridgeport, Conn., public school system will replace Microsoft Office with Google Apps for Education, which is free, for all staff and students. "Students have never had email, and now [they will]," says CIO David Andrade. Moreover, they "will have their own data storage -- saving space on our networks," he adds. "They can also share and collaborate on their work with this."

Rounding out the bottom five spending priorities are network services management and unified communications, such as email, videoconferencing and telephony.

First Banks, for example, will retire 140 PBX phone switches and replace them with an enterprisewide VoIP system. "Our voice costs are going to go down by probably a million bucks," says CIO Rick Nolle. "Some of it will be savings and some of it will be reinvested in other things."

The bank also plans to spend less on networking. "The WAN connection cost is an area where we keep getting more... banddwidth and services for less bottom line," says Nolle.

-- Stacy Collett

"Until now, we were more of a 'do it all -- we build it all ourselves' organization," says Bharat Amin, business technology officer at BAE Systems in Arlington, Va. "Now we are putting more emphasis on 'we can't do it all.' We may have to buy things and selectively outsource, and we may have to buy services."

The lingering impact of the U.S. government's budget sequester has left the defense, aerospace and security firm's 2014 budget plan up in the air. "The general outlook for 2014 is the same as this year, maybe a slight reduction because we're not sure of the effect of sequestration," Amin says.

The deficit-reduction measures required by the 2011 Budget Control Act mandate two rounds of cuts, each averaging about $50 billion per year through 2021. The White House has submitted a fiscal 2014 defense request that complies with the first round but not the second. In July, U.S. Defense Secretary Chuck Hagel wrote a letter to Congress requesting relief from the additional $50 billion in cuts -- arguing that the scale and abruptness of the reductions would damage the nation's defenses.

Congress could make a decision by the end of the year, "but not having that visibility, we have to play all the scenarios. We're keeping our Plan B ready," says Amin.

Plan B involves saving money by using more hosted services. For example, BAE could cut its spending on office productivity tools in half by moving to Office 365, Microsoft's cloud-based version of Office and SharePoint.

"Our business is challenged to become more cost-competitive because as [sales decline] and new opportunities are shrinking -- either you're stealing [customers] from someone else or you have to be very cost-competitive to win new business," Amin says.

Spending on hosted services will account for about one-third of next year's IT budget at Texas Multicore Technologies in Austin. The three-year-old maker of multicore programming tools uses SaaS-based systems for human resources, accounting and customer relationship management. The majority of its servers are also hosted at providers' data centers.

CIO John Havener says using services doesn't really cut costs, but it does improve efficiency. "I think [the cost of hosted services is] pretty close to the same as what we'd invest if I capitalized the hardware [cost]," he says. "We're trying to stay at the forefront of the technology, meaning we end up having to replace servers at least two to three times a year -- and that build-out time is pretty significant for my IT staff. I need some better way to do that."

With hosted data centers, "we can define the process and hand it off to one of those service providers and they can get it prepped to a degree that it minimizes our time doing the configuring on our side," says Havener.

Forecast 2014

Where Will the IT Dollars Go After 2014?

IT budgets in 2015 and beyond may bear little resemblance to the budgets of 2014. In fact, Gartner analyst John Lovelock reports that his firm predicts that IT departments won't be in charge of deciding how to spend the majority of the "interesting dollars." That money will be spent within lines of business -- and IT will be left to deal with the implications.

"CIOs in many cases are ceding control of [mobile technology deployments], at least in the early stages, to other departments," he says. "In hospitals, it wasn't the CIO who said, 'Let's get tablets for doctors.' It was doctors who said, 'We have tablets and we want to use them.'

"It wasn't the CIO who said, 'We want voice recognition for radiologists.' It was radiologists who got it and forced it on the CIO. It's not the insurance companies that put information out on cellphones, it was the adjustors who were in the field," says Lovelock.

At some companies, decisions about bring-your-own-device policies have already been taken over by HR departments. And overall, more and more dollars are being taken out of the CIOs' hands, to be spent by others.

A cascade of IT requirements inevitably follows. "The CIO in some cases is scrambling and saying, 'I didn't recognize there would be this much demand on my network and this much demand on my storage, or this much need for processing power or these security risks,'" says Lovelock. "So they'll start to play catch-up."

-- Stacy Collett

Wireless Budgets Up

The surge in use of mobile devices has turned connectivity in general and wireless upgrades in particular into IT budget priorities, with funds earmarked for RFID, remote access, Wi-Fi, mobile/wireless devices and mobile device management, among other things.

At Texas A&M Kingsville, wireless networking will receive the largest share of the university's 2014 IT budget. "Our version of wireless is probably five years old, and nobody has thought about all these wireless devices, just laptops," Paulson says. "Now there's a huge demand for more wireless. No more access points just at the corners of the building. Now you have to cover everywhere."

Havener plans to deploy a mobile device management (MDM) system at Texas Multicore in 2014 to handle bring-your-own-device traffic from its 108 staffers across the globe.

"I've got a variety of developers, engineers and scientists worldwide who are looking for the easiest way to connect to our internal resources," he says. "I've got folks through academia who are very Apple-based, and there are the engineers who are heavily biased toward Linux environments or mainframe supercomputing, and then a bunch of business and marketing folks focused on classic Windows. So [an MDM system] would provide a seamless transition for all those folks to attach to our resources and get out of it what they need. It will define what we provide, how we provide it and what they need to do to access it."

The budget isn't budging next year at the Bridgeport, Conn., public school system. Still, CIO David Andrade will spend 30% of his 2014 IT budget on upgrading network connections and increasing Wi-Fi capabilities in 39 buildings.

"We have 100Mbps switches in our buildings, and we need to upgrade those to gigabit switches to increase the bandwidth," Andrade explains. "We have some Wi-Fi coverage but are adding thousands of mobile devices and need to add access points and bandwidth" to accommodate more than 15,000 desktops, laptops, Chromebooks and other wireless devices.

Gartner also expects to see a huge uptick in network equipment replacements. The equipment that was purchased and installed even a year ago can't handle the growth in mobile data, Lovelock says. Further down the road, the growth in mobile usage will have a "'trickle effect' -- do I have enough servers, storage, bandwidth, applications and security to handle mobile?" Lovelock says.

Big Data Still a Big Deal

Business analytics are also on the shortlist of top IT purchase plans for 2014. Spending priorities include big data, enterprise analytics, data mining and business intelligence tools.

Investments in big data technology like Hadoop and MapReduce will command 45% to 60% of the IT budget at Texas Multicore. "It's a solution that we really haven't exploited yet, and we see tremendous potential in that environment," says Havener. "So adjusting technologies and taking advantage of what it can provide will be significant. We're also very aware that it's limited in its capabilities. A lot of folks talk about how slow and how challenging it is to do a Hadoop query. But we can speed that up through in-memory and some development capabilities that we have in-house on the order of six to 12 times faster than standard Hadoop. So we see a great opportunity there."

Rounding out the top five technology purchases for 2014 are virtualization of desktops, servers, storage, networks and mobile systems, and security technologies, such as access control, intrusion prevention, malware protection and identity management tools.

While Computerworld survey takers say they will spend less on storage in 2014, Gartner predicts that storage sales will actually increase with the explosion of mobile data, big data and new types of digital files. Although the price of storage is coming down, Lovelock says, spending on storage is going up.

"Storage has one of the highest growths we're seeing across the board, at 7% growth," Lovelock says. "You can say it's just about big data, but the fact is there is a lot of data collection and duplication going on." In the healthcare industry, for example, new digital radiology and digital pathology technologies both generate data that require additional storage.

Yet the best-laid plans can always be ruined. While companies would like to firm up their 2014 budgets, there are a number of political and economic issues yet to play out this year that could impact next year's spending plans, says Forrester's Bartels.

For starters, if Congress delays raising the federal debt ceiling, "that could take a lot of wind out of sails in 2014. We're not predicting that, but we can't rule it out," he says.

There are also lingering concerns about the European economy and worries that China's economic slowdown may continue. "Those are things we [at Forrester] worry about," Bartels says. "But if cooler and wiser heads can deal with it, they won't happen."

In the meantime, IT leaders must plan for the unexpected. That's what Havener does at Texas Multicore. "I maintain a 20% to 25% discretionary pool to deal with those issues that will come up," he says. "[It's] great if you've got that luxury."