Weak IT Budgets Change More Than Just Dollars and Cents

Weak IT budgets haven't just put a crimp on spending. According to a recent report by Forrester Research, the economic downturn has resulted in significant changes in how IT handles projects, how they're funded, and how much oversight IT labors under.

One result, said Tom Pohlmann, research director for Forrester and the author of "How Companies Govern Their IT Spending," is that just 5% of IT spending is really up for grabs for new technology investments. The rest, he said, is already accounted for. That leaves both new in-house initiatives and the vendors that hope to sell their newest wares scrambling for a very small piece of the pie.

While 21% of IT budgets are slated for new investments, three-fourths of that, or 16%, is already earmarked for existing or planned projects, leaving just 5% available for as-yet-undecided spending.

And even that money doesn't grow on trees. Project sponsors take note: Most companies won't commit to funding a new project beyond 11 months, and the idea of even more granular "chunking," as the technique is called, is on the rise. Six-month-long funding chunks, Pohlmann said, are common.

This drop in discretionary spending is just one of the challenges IT must now deal with. "Today's IT decision makers are feeling the heat on several fronts," said Pohlmann, who also cited other factors, including tighter fiscal controls and business unit oversight.

Tight budgets--and the desire by management to squeeze the most out of every dollar--have put IT under closer spending supervision, said Pohlmann. In part, that's due to an increase in the collaboration between IT and enterprise business units: More than 60% of business units fund at least some IT investments, and more than half of the IT shops surveyed said their company's business units set the direction-- and thus the spending--of IT.

"This involvement has led to an environment where any new investment, regardless of the dollar amount, requires executive approval in 30% of the companies," said Pohlmann. The go-go days of the 1990s, when IT spent whatever it felt it needed, are over.

One tack that companies are increasingly taking in an attempt to get a better handle on IT spending is the project management officer (PMO), who oversees technology initiatives and reports back to management about progress. More IT shops than ever work with a PMO; in the last year, the prevalence of IT departments with one almost doubled. A majority of shops now have such a watchdog.

But while IT managers generally believe these watchdogs are effective in improving project delivery, they don't think they keep management any more informed on who's working on what than IT does when it's on its own, according to the Forrester survey.

Offshore outsourcing, one of the hottest topics in IT during 2003, is another way that companies feel they can get more for their money--if they try it out, something companies seem reluctant to do.

"Despite the hype, only 29% of North American IT shops, and only 21% of midsize companies, tap into offshore providers," said Pohlmann. And fewer than one in 10 shops not currently using offshore outsourcing said they had definite plans to try one out in the next year.

But while offshore outsourcing use remains in the minority, Pohlmann noted encouraging signs from those who have turned to overseas service providers. In every area that Forrester rated, better than two out of three companies that use offshore outsourcing reported back that they were satisfied.

"More than 70% of [offshore outsourcing] clients express satisfaction with their current providers," Pohlmann said, "and 68% of current users plan on doing more offshore." That's what's behind the trend that will drive more than 3 million U.S. services industry jobs offshore in the next 15 years, said Pohlmann.

The survey of more than 700 IT executives, the majority of whom work at enterprises with revenues of at least $1 billion, also highlighted the continued downturn in overall technology budgets.

At midyear, said Pohlmann, IT spending is below planned levels. As a result, Forrester has downsized its yearly spending estimates; it now projects that IT spending will grow just 1.3% in 2003, as opposed to earlier growth estimates of almost 2%.