The good news is right there on the balance sheets of some of the nation’s largest and most influential IT companies: Their income and revenue are higher and growing again, and the effects are starting to be very noticeable across the U.S. tech industry.
That’s the conclusion of a new study from Chicago-based IT management and tech consulting firm Maven Wave Partners LLC, which argues that the IT economy has been steadily improving since the fourth quarter of 2010 based on corporate earnings and hiring data.
For the study, “The End of the IT Spending Squeeze, Predictions for Corporate Spending on Hardware, Software and the IT Workforce,” Maven Wave reviewed improving economic figures from bellwether IT vendors, including IBM, Hewlett-Packard Co., Microsoft Corp., Oracle Corp. and others, and correlated them with slowly improving employment numbers in businesses across the nation.
What the data shows, says Maven Wave Partner Brian Farrar, is that slowly increasing employment numbers are helping to drive IT spending based on what Maven Wave calls “the $2.40 rule.”
The $2.40 rule means that for every $1 a company spends on employee labor costs it spends another $2.40 on hardware and software costs for the new employees, Farrar says. When layoffs occur during downturns, they lead to corresponding cutbacks to IT spending because there are fewer workers that require the investment. Since the fourth quarter of last year, those cutbacks have been declining, he adds.
“That’s what gave us the confidence that the [IT spending] squeeze is over,” Farrar said. “It means that people will again start investing in IT, and that is in fact what is happening. “Hardware and software are beginning to move again.”
According to the recently released 11-page report, IT investment is expected to continue to improve through 2012, based on historical indicators. “Strong Q1 earnings announcements from IT giants such as IBM, Intel, Microsoft and Oracle provide additional early indications that the IT Spending Squeeze is indeed over,” the report states.
“What we’re forecasting is a return to the historical correlation between those two things hardware and software spending and labor spending,” Farrar said. “They should move together again. It’s being boosted by slow but steady new hiring that is driving IT spending.”
There is one caveat, according to Maven Wave: An update this month for the Spending Squeeze report points out that there could be some weakness in the second quarter of 2011 “as companies digest the substantial increase in IT investment made in 1Q 2011.”
That’s not bad news, Farrar says. “We see it as a pause, but not a decline,” he adds.
The data in the study was brought together by pulling a representative sample set of technology vendors, then forecasting the revenues for each based on their own secular comments to the financial press, to their customers and through Maven Wave’s own research, Farrar said. The study looks at about 80 percent of the total enterprise software and hardware market, according to the company.
“It’s not one of those studies where we interview 1,000 CIOs and ask them if they are optimistic about the future,” Farrar said. “I don’t think there’s much value in that approach.”