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12/14/2007
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Tech Spending To Slow

Does it mean a "hyper-disrupted IT market," or retrenchment?

Tighter credit, rising home foreclosures, and plummeting consumer confidence are catching up to IT. Tech spending is about to take a hit, according to several indicators. Forrester Research last week yanked back a prediction it made in October for purchases of technology equipment and services in the United States to grow next year by 8%, revising it to a more modest 4.6% growth.

Businesses are expected to be particularly cautious with spending on big-ticket computer and telecom equipment, prompting tech CEOs to warn shareholders that next year likely won't bear the same bounty as 2007. Last month, Cisco Systems CEO John Chambers warned analysts that short-term growth could be slowed by IT spending pullbacks in the credit-strapped financial sector, causing the company's stock to tumble. And last week, Hewlett-Packard forecast revenue growth as low as 5% for fiscal 2009, compared with projected 6.9% growth in 2008. Both would be significant drop-offs from the 14% revenue growth the company recorded for fiscal 2007, ended Oct. 31.

Analysts are advising CIOs to prepare for a worst-case scenario with the economy. "The biggest risk is if a CIO comes in with a fairly aggressive growth path, and the CEO comes down and says, 'Revenues aren't looking good, profits aren't looking good, and we need you to cut down that budget,'" says Forrester analyst Andrew Bartels. A week earlier, IDC issued a projection for worldwide IT market growth of 5.5% to 6% next year--even taking into account such booming sectors as China and India--down from a projected 6.9% this year.

BELTS ALREADY TIGHTENED

Many CIOs already expect to increase spending only modestly. While 61% of tech managers responding to the Society for Information Management's most recent survey say their 2007 budgets surpassed last year's, just 49% expect their 2008 budgets to be larger than this year's. Nearly one in three say their budgets will remain unchanged in 2008, and 21% expect to spend less. That's almost identical to the results of InformationWeek's recent CIO Effectiveness 2007 survey. Of the 724 CIOs, CXOs, IT managers, and line-of-business managers who participated, only 49% anticipate IT budgets will increase next year, 28% expect them to stay the same, and 16% are looking for them to go down (7% don't know).

chart: Budgets Less Bullish
The projected slowdown in IT spending growth isn't all bad news. It could give CIOs more negotiating power. "It'll be a good year for bargains," Forrester's Bartels predicts. Spending on computers and peripherals will increase just 2% in the United States next year, he projects, while spending on both communications equipment and IT services such as consulting will rise just 3%. Software will be the best-protected area of the IT market, with spending growth expected at 8%.

Uncertainty about the economy makes prognostication something of a crapshoot. IDC predicts that 2008 will be the year of the "Hyper-Disrupted IT Industry," meaning we'll see more vendors jumping into the software-as-a-service model and attempting to leverage other Web 2.0 trends such as online communities.

On the other hand, MGI Research last week predicted that SaaS vendors will be hit harder if the economy heads downward next year than conventional software vendors. SaaS vendors have more infrastructure costs to bear, and businesses will lower the number of subscribed employees if a poor economy stretches beyond nine months, MGI predicts.

chart: Growth In U.S. IT Purchases Slowing
Not so, says Greg Gianforte, CEO of RightNow Technologies, a vendor of subscription CRM software services. In an economic downturn, the SaaS model can look very compelling, since businesses can pay nominal subscription fees compared with big up-front licensing fees. "We saw that in the early part of this decade. When the whole software industry was in a fetal position under the desk, we were able to grow," he says.

Here's a prediction everyone in the IT industry agrees on: Vendors will focus more on developing economies in 2008. IT purchases among countries in the Asia-Pacific region are expected to hit $535 billion next year, up 14%, following a 19% rise in 2007, says Forrester. Comparing individual countries, the United States remains the biggest buyer of IT by far, projected to spend $533 billion this year. China, which will spend $117 billion this year, will surpass Japan, which will spend $173 billion, as the second-biggest buyer of IT products and services within a few years, Forrester predicts.

So close to the new year, most IT budgets are already set. Those who planned modestly should ride out the year comfortably. Ambitious planners could be dodging bullets if there's no improvement in the economy.

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