Spending Growth Slows, But No Panic

Spending Growth Slows, But No Panic

An economic slowdown provides the ultimate test of how business executives view information technology. They are forced to decide which category systems fall into: need to have, nice to have or in your dreams. Some abort projects, opting for short-term savings over long-term gains. Such pennywise, pound-foolish missteps can haunt companies--and careers--for years to come.

Our 2008 IT Spending Survey was fielded in late December and early January, when worries about the economy dominated the news. However, results show that despite growing concern over IT costs, executives are not making panic-stricken purchase and deployment decisions. Overall spending growth, on average, is down, but that reflects belt tightening and a long-term shift in cost structure at large organizations toward services. Average spending is increasing quickly among companies earning less than $500 million.

Other indications that companies are not sacrificing IT: Overall, projects will make up nearly half of all 2008 IT spending, and spending on enterprise applications, virtualization, storage--technologies needed to achieve strategic business goals and reduce long-term IT costs--is growing by well over 10 percent. (The survey covers 35 technologies and 15 kinds of consulting, outsourcing and managed IT services.)

We can't say a recession won't push companies to make painful choices down the road. But for now, IT investments continue to be made. It doesn't look like CIOs are about to panic anytime soon.

IT Spending Growth Slows

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IT Spending Growth Slows

The 1.7 percent average increase in IT budgets masks large variances and surprising resiliency. Large companies are reining in spending this year partially due to concern about a recession, and some are making large enough cuts to affect overall spending percentages.

But despite dour economic news, respondents expect their company's revenues and profits to grow in 2008, as they did last year. So companies below $100 million in yearly revenue are increasing spending by nearly 15 percent, and spending at companies with annual revenues of $100 million to $999 million is climbing by 7 percent.

Whether it's due to optimism or the reality that IT is too pervasive or critical to be easily cut, caution about IT spending isn't preventing IT departments from going ahead with important investments. Most IT executives say they expect money will be available to fund new initiatives later this year, even if they work for large companies and regardless of whether or not they are more concerned about IT spending than they were a year ago. And as other findings will show, there are many other indications that IT organizations plan to invest in technology in 2008.

 Strategic Investments Continue

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Strategic Investments Continue

On average, this year's IT budgets are 4.3 percent greater than actual 2007 spending, but few of the 50 technologies and services on this year's list are increasing at a lower rate. Companies are not skimping on technologies that will help them achieve their most important goals.

Application software and systems: Creating or improving strategic applications is the top technology priority for 2008, according to our December 2007 Top Trends Survey. So after investing in Web services and infrastructure, a perennial priority in recent years, technology spending appears to be moving to applications; about two-thirds of the 20 technologies receiving the biggest spending boost are in this category.

The top two business priorities for IT in 2008 are delivering better customer service and improving business processes. Companies, therefore, have increased their investments in customer self-service technologies, collaboration, business intelligence and content management, database systems and business process management software by 12 percent or more. The large increase in open source reflects the high quality of this software and the hopes, especially among smaller companies, that it can help reduce costs.

Architecture, infrastructure, tools: Virtualization is seen as one of the best opportunities to reduce IT spending. And that helps make it the hottest technology in this study--the one with the largest increase in actual spending and the greatest increase in companies that budget for it. The adoption rate for voice over IP--an inexpensive alternative to conventional telephony--also is accelerating. But spending grows more slowly for application development tools, despite the increases in spending on applications, perhaps in part because low-cost open source tools are making inroads.

Security: Commitment to security does not translate to increased spending. Spending on security tools is growing at a slower rate than spending on most other technologies, and fewer companies are budgeting for anti-virus software. Those dollars go instead to security management services and network monitoring services. As was the case last year, spending on disaster recovery/business continuity services is rising faster than spending on security software.

Hardware: Corporate IT budgets include fewer PCs and networking equipment this year, but dollars continue to flow to other kinds of hardware. An analysis by our sister publication Baseline of our January Customer Strategies Survey found the amount of customer data companies store is increasing by 43 percent a year. That forces companies to increase spending on storage equipment and it drives storage virtualization as well. The push for consolidation may be the reason mainframe spending is increasing by 10 percent. Price competition and corporate wariness about Microsoft Vista are helping to keep PC spending down.

Consulting, outsourcing and training: Many CIOs turn to strategy consultants to help them create strategic applications; spending here is up by more than 10 percent. That's twice the spending increase for technical training. Large companies are the culprits here: Tech training spending is rising just 2.7 percent among companies with revenues of more than $1 billion. Some of those training dollars go to outsourcing and services.

Managed services and telecommunications: Though average spending by software as a service users is up nearly 13 percent, the number of IT budgets including SaaS adoption is increasing slowly. Spending on most services is increasing by less than 7 percent. Services are one of the first places companies rein in costs when times get tough, as our September 2007 Cost Management Survey revealed, and that appears to be the case now.

Spending Growth Slows, But No Panic

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To sort the data by rank, percentage, or alphabetical order, click on any column heading.

Spending Growth Slows, But No Panic

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No Signs (Yet) of Panicked Cost-Cutting

Companies spend on IT to save money later. Instead of slashing projects, CIOs keep projects going. Instead of cutting staff or rushing to outsource, CIOs consider certain investments and cost-reducing practices as better ways to limit spending.

True, IT staff represents just 30 percent of IT budgets at large companies, but that is the result of a long-term shift in their IT cost structure toward outsourcing and services. It's allowed big companies to devote a larger share of their IT budget to projects and a smaller share to maintenance, than smaller firms can.

Spending Growth Slows, But No Panic

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Pressure to Reduce Costs Rises

Increased pressure does not mean IT is under attack. Line executives are growing more concerned about IT spending levels. But their concern is rarely fed by a perception that IT organizations are profligate spenders, according to respondents. If management is confident IT spending is being managed well, companies will be less likely to drastically slash their IT costs.

Still, IT executives will have to continue to be prudent about IT investments, demonstrating the value of IT and reducing IT costs where they can. This is especially true for the 40 percent of respondents who believe their companies should spend more on IT but work at organizations where concern about IT spending has increased. They will have a tough time getting the additional funds they want unless they prove they are controlling IT costs.
 

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