Tech spending will near $4 trillion this year. Here's where all the money is going and why

Key Points
  • Worldwide IT spending is projected to near $4 trillion in 2019.
  • Enterprise software is the fastest-growing area of tech investment.
  • Cybersecurity threats will lead to spending of $125 billion.
  • CNBC's Technology Executive Council represents a wide range of industries and companies with a combined market capitalization of approximately $3 trillion, as well as technology stakeholders in the government and nonprofit sectors.
7-Eleven is undergoing what its leadership describes as a 'full stack digital transformation,' but the effort starts with a focus on what the consumer wants rather than what technology can deliver.
7-Eleven

Ask Ken Goldman, president of former Google executive chairman Eric Schmidt's family office, Hillspire, which industry is being disrupted by technology today and his answer might surprise you.

"Construction is being totally disrupted — the entire industry," he said.

The former chief financial officer of Yahoo, Fortinet and Siebel Systems, Goldman said companies cannot afford to make the mistake of thinking technology disruption is greatest in the tech sector itself, or limited to certain sectors of the economy.

"Every single industry in the world," said Goldman, who serves on the advisory board of the new CNBC Technology Executive Council (TEC).

A decade ago oil and gas companies were the stocks with the highest market capitalization. Saudi Arabia's oil giant Aramco is still more profitable than the iPhone maker, but the top of the market cap table has tilted. Now Goldman notes that all of the biggest market cap companies are tech (the top four U.S. publicly traded companies, to be exact). His warning: Disruption comes from the bottom up.

"The thing I've seen happen with companies inside and outside of tech is they get complacent and assume the newest will only take a small share. By the time it mushrooms, it's too late," he said.

$4 trillion to be spent globally on IT in 2019

Worldwide spending on information technology is expected to reach near-$4 trillion this year, according to Gartner, with the fastest growth rates in enterprise software, IT services and data-center spending, as the cloud still booms and greater cyberthreats loom.

Gartner forecasts $125 billion on cybersecurity spending alone in 2019.

"This threat is the same for all industries," said Jim Routh, chief security officer for CVS Health and member of the CNBC TEC Council. "Logistics and shipping brought to their knees. Pharmas brought to their knees. And health-care providers brought to their knees. Nation-state threat actors are more prevalent than ever before. Ask Marriott, " he said.

The flip side is the opportunity. Take Otis Elevator, which built the original lifts for the Eiffel Tower.

Neil Green, chief digital officer at the United Technologies subsidiary and also a member of the council, said moving from his former employer Intel to a 165-year-old company "where you press a button and arrive at a floor" isn't as unlikely as techies might think.

"People may think of an elevator business as being an old, boring industry," said Green, but with construction cranes dominating cities around the globe and skyscrapers of the last century being surpassed by new super-skyscrapers as high as 2.700 feet (more than double the Empire State Building), the creation of a digital industrial company is a requirement to keep up with three trends he sees shaping life for decades to come: urbanization, middle-class growth and connected and smart cities.

His view echoes a point many tech executives make to leadership teams, even though it may seem counterintuitive:

"I spend lots of time talking to C-suites and telling them, 'It doesn't start with tech,'" said 7-Eleven's chief digital, information and marketing officer Gurmeet Singh, a member of the TEC Council. "Do I say things like, We want to be a tech company. We want to be an AI company. Yes, but it is all related, all in service, to the customer."

Here are four key themes and leadership principles provided by members of CNBC's new TEC Council initiative.

1. Customer obsession comes before digital transformation
Seventy-seven customers in Reno, Nevada who lived within a mile of a store received items ordered from 7-Eleven delivered to their doorsteps via start-up Flirtey's drones in 2016.
Source: Flirty / 7-Eleven

Gurmeet Singh
Chief digital, information and marketing officer — 7-Eleven

7-Eleven has tested drones, has "Lab" stores where new concepts from local taqueria bars to craft beers are introduced, an on-demand delivery service, a Facebook Messenger bot, Amazon Lockers for in-store package pickup and Amazon Cash at more than 8,000 locations, a customer loyalty program app, testing a Scan & Pay self-checkout platform, and ongoing AI and augmented reality experiments still under wraps.

But the biggest threat to company is not any single competitor.

"Our biggest threat is understanding the customer, who the customer is today and who it will be tomorrow. What people miss, what we have been clear about, is saying, 'Do not start with digital, be customer-obsessed and digitally enabled, and those are very carefully chosen words."

The company's No. 1 leadership principle, outlined by 7-Eleven CEO Joe DePinto in a speech to employees last year, is to be "customer-obsessed."

It has 55 million of them conducting 20 billion transactions a day.

Singh's favorite example of everything people get wrong about disruption is the Blockbuster-Netflix history. "Netflix did not eliminate Blockbuster from a tech perspective. They went after customer issues, like late fees, and then evolved over time into streaming because they followed where the customer is going and where the customer needs to be, even when broadband wasn't ready for streaming."

7-Eleven has roughly 68,000 stores, and 52 percent of the U.S. population lives within one mile of a 7-Eleven location. There is significant value in a network of stores open 24/7, and the company has put innovating for the customer at the forefront of their digital transformation strategy. 

"We were deliberate in strategy not saying we were creating the store of the future. That is where retailers miss the point. ... The framework which applies to any industry is to ask, 'How do I create experiences of the future for the customer?' Bringing the right experience, whether inside or outside the store, that is what I worry about. Tech is just the facilitator of experience."

2. Cybersecurity spend can't slow as threats continue to grow
Paulino do Rego Barros, interim chief executive officer of Equifax, from left, Richard Smith, former chief executive officer of Equifax and Marissa Mayer, former chief executive officer of Yahoo!, testify during a 2017 Senate hearing on corporate hacking incidents.
Olivier Douliery | Bloomberg | Getty Images

Jim Routh
Chief security officer — CVS Health

Routh, who held top security posts at J.P. Morgan and American Express before joining Aetna, now CVS Health, thought the overall threat level would decrease moving from financial services to health care. "Turns out I was wrong," he said.

The Anthem breach, which occurred between late 2014 and early 2015 and involved 79 million accounts, was the first example of a nation-state threat actor going after health care. Now it is a given that all companies face a diversity of threat actor tactics. ""Nation-state-sponsored threat actors are initiating attacks for political reasons that impact private industries as collateral damage from the cyberattack. There are many different players performing roles in the criminal cyber ecosystem today, including nation-state-sponsored activities to commit fraud for profit. Five years ago nation-state-sponsored cybercriminals weren't as brazen in attacks on private infrastructure. Today that has fundamentally changed."

Routh said one aspect of the cybersecurity risk that many people still do not understand is how easy it remains for criminals to access systems through simple methods and how even a low rate of success in hacking can be highly valuable.

The common tactic of using someone's credentials to get into their site or mobile app — an individual's password used across multiple sites is the prime example — continues to pay off for hackers. Routh explained that harvesting the credentials from any site allows hackers to try them out across other domains. A success rate of just 1.5 percent to 2 percent with credentials across multiple domains is effective, because these criminals are working on a large scale. "There is no shortage of credentials — over 20 billion to 30 billion credentials on the dark web," he said.

Even though getting in only 1 percent to 2 percent of the time may seem low, when hackers gain access, they are doing so without the enterprise being notified, because it seems to be the account owner logging in. Those success rates are going up, too. "Each year, credential stuffing is growing in scale and scope because it works."

While the password already is doomed to obsolescence as a method of authentication, that event is still a long way off.

"It will continue and drive the need for increased budget, and there is no evidence it will slow," Routh said.

3. Many companies need a rethink from top to bottom
An Otis installation on Seoul's Lotte Tower, the tallest skyscraper in South Korea and at over 1,800-feet, the fifth-highest building in the world.
Otis Elevator/United Technologies

Neil Green
Chief digital officer — Otis Elevator

Otis Elevator moves 2 billion people a day, employs 33,000 mechanics carrying tens of thousands of mobile phones and has 30 years of data from remote monitoring of elevators that it has not yet figured out what to do with.

Otis knows a great deal about what is happening in a building: the busy times of day, how often people are stopping at a particular floor. "We're starting to think through a way to monetize those insights we have," Green said. "Data science is part of digital transformation. Otis has a rich history of data, and it is a huge opportunity to drive service transformation and new revenue streams."

"I think about it as a connected experience. I don't view it as an elevator anymore. Before I joined, I thought of an elevator as a means to get from floor to floor, but now I am thinking of it as part of a connected passenger experience. If the passenger spends 30 seconds in an elevator, how do I add value when they are on it, and after they have exited, or before they have even gotten on," Green said.

Data analysis will also play a big role in elevator maintenance as algorithms that never existed before allow Otis to predict what maintenance issues may occur. "As we gather data and make predictions and the outcomes are more accurate, that will drive greater value," Green said.

It is going to cost the company: R&D has increased by 50 percent. And Green knows the return on investment isn't a certainty. "I worry about people talking about data monetization, because it is easier said than done and we need to articulate value to the end user on why they should pay."

tech spending

The data science is just one of many new digital ideas that are forcing a rethink of what Otis Elevator does and how it delivers to customers.

The company has customers all over the world putting up ever taller buildings that require a new approach to delivery, especially as more residents in high rises increase use of delivery services. "Whether it is commercial or residential, delivery of food as an example gets a lot of attention. We are having lots of conversations on how to automate and deliver."

Green said Otis also has started sharing ideas with helicopter maker Sikorsky, which used to be part of UTC but is now part of Lockheed Martin, on urban air mobility. "How do we create autonomous air taxis, and what role do we play? How do we collaborate?"

4. Tech needs more seats at the boardroom table
The World's top human Go player, 19-year-old Ke Jie (L) competes against AI program AlphaGo, which was developed by DeepMind, the artificial intelligence arm of Google's parent Alphabet. Machine won the three-game match against man in 2017. The AI didn't lose a single game.
VCG | Visual China Group | Getty Images

Ken Goldman
President — Hillspire, family office of former Google executive chairman Eric Schmidt

It is not enough for boards of directors to be asking the right questions. They need to add digital expertise directly to the board.

"You already have accounting and auditing, but not cybersecurity? Really think through this. More and more boards are looking at how to bring on a chief information officer or chief technology officer from another company to their board. It is still the exception, but what I am hearing from people I trust ... is that people are talking about how to bring on digital expertise to the board."

Even in an area already core to board action, audit and accounting, Goldman said technology will fundamentally alter the landscape. Hillspire is hiring in AI and operating with "tremendous interest" in artificial intelligence, and the former CFO said the finance function is an area where AI will play a big role.

"Every board is worried and thinking about how AI and machine learning can affect their industry. It will affect audits and accounting, using the latest AI techniques for quality control in audit work, and this is unquestionably transformative."

"Where I am on boards, there are two things everyone talks about: how digital can transform or disrupt, and cybersecurity. Cybersecurity pervades everything and disruption is occurring fundamentally."

ABOUT THE CNBC TECHNOLOGY EXECUTIVE COUNCIL

From corporations — public and private — to nonprofits and government entities, the members of the CNBC Technology Executive Council are tops in their field, transforming organizations by leveraging innovation and disruption. The council, in conjunction with CNBC, lead ongoing high-priority discussions about employing breakthrough technologies to solve problems and power growth while addressing the challenges presented by these innovations.

ABOUT THE CNBC TECHNOLOGY EXECUTIVE COUNCIL ADVISORY BOARD

The CNBC Technology Executive Council Advisory Board consists of highly accomplished experts hailing from all corners of the tech world, cutting across a variety of industries and the public sector, with a significant technology pedigree. These high-profile thought leaders offer perspective on the most pressing issues facing the industry and aids in the formation of the CNBC Technology Executive Council.

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Key Points
  • Companies have access to unprecedented technology, but also pressure to explain the choices they make to the public.
  • AI, data analytics and 5G communications are transformational opportunities, but they pose big risks.
  • CNBC has created the Technology Executive Council to frame the conversation about the digital age and ensure issues like privacy and bias are addressed as innovation accelerates.