A View of IT Spending: Part Two

The last Analyst Views Weekly examined several reports on IT spending from Forrester Research. In brief the findings of those reports indicated a slowdown in current and upcoming IT investment; six percent growth in 2006 and only 3 percent growth in 2007. The number of IT decision makers anticipating increased budgets in 2007 was 32 percent, a ten percent drop from the previous year. This week, in part two of the look at IT Spending, Analyst Views Weekly looks at a report from EQUS Group which, “investigated major IT trends for 2007,” and briefly at the results from CIO Magazine’s quarterly Tech Poll. Due to the differing nature of the three reports, the specifics they report on and how they divide categories of spending, a complete synthesis of the data is challenging. However, though EQUS Group paints a slightly more optimistic trend in spending, the three sources do overlap in some areas; particularly that spending on computer hardware will be hit particularly hard in the next several quarters, and that IT security is a palpable concern.

According to EQUS Group, the number one IT concern among those interviewed was security, “If one issue haunts IT managers, architects, and execs, it’s security.” Though all areas of security and privacy were rated as, “high or very high importance by most IT decision-makers,” it was unsupervised access to organizations’ networks and proprietary data that is the cause of most concern. Such access includes employee-supplied equipment for use in telecommuting, employee-owned mobile devices, login from public terminals, and thumb drive use. The control that the organization exerted over such devices had an impact on the level of concern, however, with newer devices such as thumb drives, “several IT decision-makers indicated that they do not have a firm policy on thumb drives and other writable storage.”

As far as budget projections go for 2007, EQUS reports that, “IT budgets look strong again for 2007; 92 percent reported flat or increasing expenditures for 2007, and in most IT areas many more businesses are increasing spending than are tightening purse strings.” This is despite the fact that, “most IT execs continue to stress a strong ongoing focus on cost reduction.” With security as the top concern among IT executives, it is not surprising that all respondents indicated that this area of spending will either stay flat or increase. For 53 percent spending will stay as is and 47 percent state that it will increase; an average increase of 16 percent is noted. Also seeing little decrease in allotted budget were Server Software and Hardware; 44 percent of respondents see an increase in spending on software and 45 percent indicate the same for hardware. Enterprise software is also expected to see significant increases.

According to the EQUS Group, there were only two areas that are receiving, “significant decreases” in spending. Only 29 percent of respondents indicated an increase in Desktop Hardware spending; for 18 percent the amount spent will decrease and for the remaining 53 percent it will stay the same. This should not come as a surprise, as overall market projections for desktop hardware have been in decline for some time. Also, not surprisingly, the amount spent on consulting will also drop; this is anticipated by 22 percent of respondents.

CIO Magazine released the results of its CIO Magazine Tech Poll on October 2 and though the CIO poll reports data differently than EQUS, the two do report on some of the same areas. For example, CIO does not separate spending on desktop vs. notebooks; it reports that overall spending on, “Computer Hardware” rose for 46.9 percent of respondents. Likewise, it does not report on overall IT Security spending, but does report on, “Security Software.” Here, the conclusion can be drawn that this is indeed an area of high importance; for both those expecting spending to increase or remain the same the number is identical, 46.9 percent. (EQUS reported virtually the same, 53 percent staying the same and 47 percent increasing.) However, though the two reports concur that Security is a major issue, they differ on how high on the list of concerns this is. EQUS respondents placed Security as the number one concern while according to CIO, where the results show 48.1 percent plan to increase spending here, “Storage regained its position as the top spending priority for CIOs.” Overall according to the poll, IT spending projections decreased in July-September with CIOs predicting IT spending increases of 6.5 percent over the next 12 months, down from 6.9 percent in April-June.

Perhaps the most obvious thing to learn from the resources examined for the Analyst Views look at IT spending is that no one source may be enough, and that even one may be too many.

A more complete version of this posting, with accompanying informational charts, journal articles, and research reports can be found at the website of Analyst Views Weekly.

More information on this topic can be found in the IT Services Section of Northern Light's Software, Computers, & Services Market Intelligence Center

And in the following articles:

CIOs Are Sitting on a Gold Mine
CRM Today, October 15, 2006
A just-released research study — Unlocking the Value of IT - from Ventana Research confirms rigorous management of IT operations leads to more effective IT spending and revealed that companies that take this approach also have had the fastest growth in IT budgets over the past three years. Moreover, CIOs in companies with more effective spending practices also had greater influence in setting IT budgets than those that did not.

Just How Important Is IT Anyway?
BusinessWeek Online, October 9, 2006
Nicholas Carr touched off a heated debate on the role of information technology in business with the publication in 2003 of his Harvard Business Review article "IT Doesn't Matter" and the 2004 book Does IT Matter? Information Technology and the Corrosion of Competitive Advantage. Almost three years later, the discussion continues. Businessweek.com's Kate Norton spoke with Carr and Robert L. McDowell, Microsoft's vice-president for information worker business value, following a Microsoft-hosted panel in London on Oct. 4, about how the debate has changed and where it's headed.

CIOs: IT Budgets to Grow 6.5% over Next Year
Circuits Assembly, October 2, 2006
A September poll of CIOs predicts IT budgets will grow 6.5% over the next 12 months, down slightly from 6.9% in June. Optimism among CIOs at the biggest companies was higher than in the previous two quarters, suggesting seasonal strength among the biggest companies as the year ends, said Deutsche Bank, which cosponsors the poll.

What Keeps CIOs Awake at Night? Old and New Worries, Says Survey
InformationWeek, September 18, 2006
What's keeping CIOs up at night? Issues involving IT alignment, staff, security, and speed are among the challenges that many business technology leaders are most likely to lose sleep over, according to a new survey by the Society for Information Management. The top three IT management concerns of CIOs in 2006 are the alignment of IT and business at their companies; attracting, developing, and retaining IT talent; and security and privacy issues, according to SIM's latest annual survey, which polled 139 CIOs.

CIO Survey: IT Spending Projections Down in Q2
ComputerWorld, July 5, 2006
IT spending projections for the next 12 months decreased in the April-June quarter, as CIOs predicted that they will increase IT spending by only 6.9% during the next year. That's down from 8.6% in the first quarter of the year, when CIOs said they expected spending to rise over the next year, according to the quarterly CIO Magazine Tech Poll released last week.

A View of IT Spending: Part One

Last week Forrester Research released a report entitled, U.S. IT Spending Summary: Q2 2006, in which the company adjusts its previous projections on U.S. investment in IT. The reason for the changes is newly released and revised data from the U.S. Department of Commerce. Data from the Department of Commerce is one of two sources that Forrester relies heavily on when making its projections, the other being data collected from IT product vendors. Therefore, it was, “a big deal,” that one of these two was recently revised downward. However, Forrester does note that the new government data removes some discrepancies between the two sources; “the government's revisions now bring the two measures of growth in IT investment more into line.” With things now in line Forrester expects that IT spending will slow more than anticipated; the research company now forecasts IT spending to grow six percent in 2006 and only three percent in 2007.

Showing the most dampened growth was computer equipment sales, “The U.S. Department of Commerce estimated the growth rate in business investment in computer and peripheral equipment in Q2 2006 to be 1 percent.” (Vendor data indicates a slowdown in this area as well.) In this category the hardest hit was PCs; though Lenovo, Dell, and HP saw increases in revenues they were low and in the single digits. As with computer and peripherals, data from both the Department of Commerce and vendors indicates that, “communications equipment sales growth slumped.” Department of Commerce data showed a drop in this area from 18 percent in Q1 to ten percent in Q2 and vendor data indicates an even slower growth, two percent, down from Q1’s 11 percent. Elsewhere, despite the fact that IBM and Hitachi showed, “U.S. storage revenues that we estimate were up by more than 20 percent,” Forrester says that, “even once-hot storage started to slow.” The only market keeping steady in this category appears to be software. Government data shows that software investment in Q2 was the same as in Q1, seven percent, and vendor data shows growth of 12 percent in Q2 which was up from Q1’s ten percent.

As the software segment’s stability indicates, “the data on IT spending by industry and size of company shows that the slowdown is not universal; there are segments of the market that are still growing.” Spending by small and medium sized businesses (SMBs) is also set to rise. SMBs are expected to spend $344 billion in 2006, up from 2005’s $325 billion. This increase reflects a rise of six percent in 2006, compared to, “the 3.4% growth it experienced in 2005;” and will give SMBs an almost equal, 47.5 percent, share of total U.S. IT spending. However, the fact that a few areas may hold steady or show some growth is not likely to float the entire industry. “There are still a couple of quarters in which U.S. tech purchases could bounce back up, but the prospects for a slowdown in 2007 are now looking very real.”

Another Forrester report, released at the beginning of the month and which surveyed, “1,000 IT decision-makers to learn about their approach to IT governance,” also indicates slowed spending. Compared to numbers from November of 2005, when 42 percent of North American firms anticipated increased budgets for 2006, only 32 percent anticipate growth for 2007.

Finally, U.S. IT Spending Summary: Q2 2006 points out that though projections have been revised down, changes in actual spending may take a quarter or two to reflect this. “The Q4 2005 US GDP growth was weak, so weaker growth in IT investment two quarters later in Q2 2006 is not surprising.” Therefore, Forrester expects a weak Q4 in 2006, “as the concerns about the economic outlook after the poor GDP growth in Q2 2006 affect buying decisions with a two-quarter lag once again.”

A more complete version of this posting, with accompanying informational charts, journal articles, and research reports can be found at the website of Analyst Views Weekly.

More information on this topic can be found in the IT Services Section of Northern Light's Software, Computers, & Services Market Intelligence Center.

And in the following articles:

Market Share: IT Spending Uncertainties Mean Rough Ride Ahead
Washington Technology, October 16, 2006
Publicly traded government IT companies have suffered this year because of tighter budgets and delays in approvals of the fiscal 2006 budget. Organic growth has slowed, dropping from 13 percent in the second quarter a year ago to 6 percent in this year’s second quarter.

Survey Shows It's Back to Network Basics for IT Spending
NetworkWorld, October 13, 2006
Enterprise IT managers in the next 12 months will be investing their IT dollars in servers, desktops, virtualization, wireless and Windows Vista. Or so say the results of a survey that Forrester Research released Wednesday. The research firm in May surveyed some 715 IT decision makers at North American firms and found that among the top priorities are some of IT's most basic needs

Report: Fed IT Budgets Slashed for Fiscal 2007
InformationWeek, October 3, 2006
The top federal IT budgets will take a 50 percent nosedive in fiscal year 2007 (FY07), according to a report issued Tuesday by government market research firm Input. In all, the potential value of the top 20 IT government budgets is predicted to decline to $120 billion from the previous year's $240 billion total. Procurements for the DHS, the Army and the General Services Administration (GSA) account for half of the business in the top 20, the market research firm said.

CIO Survey: IT Spending Projections Slipped in Q3
ComputerWorld, October 2, 2006
According to the quarterly CIO Magazine Tech Poll released today (download PDF), IT spending projections decreased in the third quarter of this year. While companies still envision spending more on IT next year, they expect the overall increase to be smaller than they were predicting earlier in the year, said the report.

Tie Your IT Budget to Business Strategy
ComputerWorld, August 21, 2006
The approach used in most organizations today is known as incremental budgeting. This involves looking at last year's IT budget and increasing or cutting the amount based on spending plans, corporate mandates, etc. The challenge with incremental budgeting is that it assumes that IT planners have a good grasp of the demands they will face in the coming year. It also assumes that the IT budget planner can correctly predict how pricing for hardware, software and services will evolve -- no easy task.