Conservative year ahead for IT budgets

Although the IT budgets of some businesses remain unaffected by the recent economic downturn and uncertainty caused by the Sept. 11 terrorist attacks, the vast majority of companies are tightening their belts and focusing on IT projects that they’re confident will provide tangible business benefits, according to a new report by Giga Information Group Inc.

The report, released earlier this month, revises downward an earlier forecast for this year and next. The latest forecast predicts that IT budgets will decline by five per cent in 2001 and increase by four per cent in 2002. Prior to the Sept. 11 terrorist attacks and current economic downturn, Cambridge, Mass.-based Giga had predicted that total IT budgets in 2001 would be down only three per cent and would then recover in 2002 with an increase of seven per cent.

“The great majority of enterprises are and will be much more conservative and cautious about their IT investments, focusing on leveraging their existing IT systems more effectively and making them more secure, acquiring new applications and infrastructure only when they deliver tangible benefits, and avoiding large-ticket capital investments whenever possible,” the report states. “As a result, IT overall will be a drag on the economy through 2002, not the engine of growth that it was in the 1990s.”

The news tracks with results from other recent surveys. An October Computerworld survey of 150 senior IT executives at midsize and large U.S. companies, for example, found that 68 per cent of the respondents expect their IT budgets next year to shrink or remain flat. Another October survey of 209 senior executives at large U.S. companies by Cambridge-based Forrester Research Inc. found that companies had expected to cut this year’s IT spending by 0.3 per cent on average in May, but as of October, they were anticipating those cuts to average 5.7 per cent.

IT vendors, especially those that sell computer and telecommunications hardware, will be among the hardest hit and will continue to struggle with weak demand until the second half of 2002 at the earliest, according to Andrew Bartels, an analyst at Giga and the principal author of the report, which is based on data from several government and private sources.

Despite the economic downturn, some areas of IT continue to see relatively healthy growth rates. Companies continue to focus their budget dollars on security, application servers and integration, data warehouses and analytics, e-procurement and e-sourcing software, database software, portals, customer relationship management (CRM) software, human resource and financial management applications, outsourcing of information systems and application development, according to Giga.

Recent interviews with users confirm the mixed picture portrayed in the Giga report. Although some users see no changes in their investment strategy, others see a return to the basics.

“Our investments in information systems are undiminished,” said Randolph Smith, an IT manager at Atlanta-based United Parcel Service Inc. “We are concentrating on things like authentication, access control and secure communications.”

David John, first vice-president and CIO at Bayerische Landesbank, a German bank with branch offices in the United States, said that while branch management hasn’t been affected directly by the economic downturn and the events of Sept. 11, branch managers are being forced to re-evaluate the “feasibility” of some projects that were planned for 2002.

Garrett Grainger, executive vice-president and CIO at Dixon Ticonderoga Co., a consumer products company in Heathrow, Fla., said that although a process review had been under way prior to Sept. 11 as a means of identifying cost-containment opportunities, his company has no plans to cut spending on critical projects, especially security.

“There is a lot of talk about the need to increase security spending and make things more secure,” noted Mike Hager, vice-president of network security and disaster recovery at Denver-based OppenheimerFunds. “However, when budget cuts are made, they are across the board, and security takes a hit like other things.” In difficult economic times, “you don’t want to put $5,000 locks on $20 doors to protect bubblegum,” said Hager in a recent Webcast on security. “It just doesn’t make sense.”

The IT sectors that will see a 10 per cent or greater decline in investment include servers, mainframes, network infrastructure, storage hardware, desktop and e-marketplace software, e-business and management consulting services, and IT training and education, according to the Giga report.

Investment in computers and communication equipment is on track to be down 20 per cent in 2001 from 2000 and is likely to be down another three per cent and two per cent, respectively, in 2002 and 2003, according to the Giga report. Investment in software is holding up better, with a four per cent gain in 2001 compared to 2000, and a projected increase of eight per cent in 2002.

Software consulting and outsourcing vendors will do slightly better than IT hardware vendors, with growth in spending of eight per cent and 12 per cent, respectively, in 2002, Giga forecasts. Although 2002 will be a year to find great deals, companies will need to pay careful attention to the viability of their vendor, according to Giga.

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