2008 IT Spending Outlook Modest at Best

By Allen Bernard

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While most companies are not anticipating budget cuts for 2008, the one rosy outlook for budget increases has been, on average, halved, according to the research firm Computer Economics (CE), which has been tracking IT spending and budgeting trends since 1990.

“(IT execs) are not yet hitting the panic button but they’re keeping a close eye on how business conditions will evolve going into next year,” said Frank Scavo, president of CE. “They know if corporate profits are taking a hit next year, they’re going to be asked to cut (budgets).”

Technology spending by business and governmental organizations in the U.S. and Canada was strong in the first half of 2007, but IT managers must now predict how an uncertain economy will impact their budgets in the year ahead.

In CE’s most recent IT Spending, Staffing, and Technology Trends study, published in June, IT operational budgets increased by a healthy 5% over 2006 levels.

The company’s most recent survey of 125 IT decision-makers conducted in September and October, found that IT spending levels in 2007 have held up quite well against original budgets, but expectations for IT spending increases in 2008 are quite modest, especially among larger organizations. This article summarizes the results of the survey.

“The factors I think primarily are uncertainty in the economic environment in general. … the weakness in the housing market sector and the credit market; already they’re seeing softness in consumer spending,” said Scavo. “Cisco just made some noises about IT spending growth being weak next year … and Cisco, of course, is a bell weather for the IT sector in general.”

2007 Actual IT Spending vs. Budgets

CE asked respondents to predict whether their actual IT operational spending for 2007 will come in under or over their original budgets. Throughout this study, "IT spending" refers to IT operational spending, which includes all current-year expenses related to IT. It does not include capital investments.

The majority (54%) indicated their actual IT spending for 2007 will be about the same as budgeted. Of the remaining respondents, 25% are spending less than the amount budgeted and 21% are spending more. This shows a slight trend in the composite sample toward a pullback in IT spending levels this year.

When analyzing data by organization size, it is clear spending restraint is most pronounced among large organizations—defined as those with annual revenues greater than U.S. $750 million. Medium organizations are those with $250-750 million, and small organizations have less than $250 million in annual revenue. For the purposes of this study, we did not include any respondents with less than $30 million in revenue.

Thirty-three percent of large organizations indicated their 2007 IT spending levels will be less than originally budgeted—a significantly greater number than the 22% who said their actual spending exceeded their budgets.

The trend among medium organizations is the opposite: 20% expect actual spending to be greater than the budgeted amount, and only 10% expect it to be less. Small organizations fall somewhere in between medium and large organization. One-fourth expect actual spending to come in under budget, while 20% expect to overspend.

Expected Change in IT Spending Levels for 2008

Turning to expectations for 2008, CE found that the majority of organizations expect their IT spending levels to increase next year. Nearly two-thirds of respondents expect their IT budgets to increase in 2008, while only 12% expect budget cuts. Once again, however, large organizations show a more conservative outlook. Among large companies, only 60% expect their IT budgets to increase, while 16% are actually expecting budget cuts. Only 10% of small organizations and 7% of midsize organizations expect budget cuts.

We have seen that the majority of respondents expect budget increases in 2008. But how large an increase do they expect? As shown in Figure 5, the median percentage increase for the composite sample is 2.5%. Though positive, these expectations are conservative and well below the 5% increase we saw in 2007 budgets over the previous year. In fact, if these expectations are accurate, 2008 will show the lowest level of IT spending increase since 2004.

Large organizations have the most conservative expectations. Large organizations at the median expect IT spending to increase by only 2%. Midsize organizations expect a 2.75% increase, while small organizations are projecting a 3% increase at the median.

“The average CIO should keep an eye on business conditions and be prepared to further lower their IT discretionary spending in the coming year,” advised Scavo. “If business conditions worsen, it’s very likely CIOs will be asked to tighten their belt.”

Outlook for 2008 IT Spending

The ability to fund increases in IT spending levels next year will depend primarily on the overall health of the economy. Therefore, a review of current economic conditions is helpful in understanding the outlook for 2008.

In the third quarter of 2007, U.S. GDP growth increased at a healthy 3.9% clip, according to advance estimates from the U.S. Department of Commerce. This follows an increase of 3.8% in the second quarter. These two quarters demonstrate a rebound from the weak 0.6% growth rate logged in the first quarter. Because of the economic rebound in the second and third quarters, it is not surprising that the vast majority of organizations report actual IT spending this year at or above budgeted levels.

The outlook for IT spending in 2008, however, depends on management expectations for economic growth in the coming year. Here, there are already signs of trouble:

  • The widely reported weaknesses of the housing sector and credit markets are already leading to softness in consumer spending.
  • Risk of inflation and a weak dollar may well prevent the U.S. Federal Reserve from further lowering interest rates, which could hinder economic growth. Although a weak dollar may provide a temporary boost to the U.S. export market, in the long run it makes goods more expensive to U.S. consumers and businesses, leading to higher costs.
  • In October, the U.S. Labor Department reported that temporary jobs were down 70,000 from a year ago. That's the largest decline in five years. Although businesses added 110,000 full-time jobs during the same period, the pullback in temporary positions could be the first sign of a weakening employment picture, as temporary jobs are generally the first to be cut.
  • Although these problems have not yet noticeably affected business investment (of which IT spending is a part), they could be precursors to slowing growth, if not outright recession, in 2008.

    CE’s survey data indicates IT executives have already scaled back their expectations for IT spending increases in 2008. If economic conditions do worsen, CE expects that median IT spending increases in 2008 will be flat compared to 2007. CE does not yet, however, see widespread IT spending cuts in 2008.