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IT Budgets Flat or Falling for Remainder of 2009

By Allen Bernard

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To reduce the effect of outliers on the middle, Computer Economics (CE) uses the median when reporting its findings. What this means for CIOs reading their latest research is a little less than half of those surveyed (45%) were actually able to increase their operational spending this year, while 17% of CIOs had to get by with what they had last year and 38% are grappling with operational budget cuts.

Capital spending, on the other, was already hit hard in 2007/2008 so remained flat this year compared to 2008, which was flat compared to 2007, when capital spending budgets increased just 4.0%. "I'm not sure there's too much surprising as we're looking at budgets for this year," said John Longwell, CE's director of Research and lead author of this year's 2009/2010 IT Spending and Staffing report. "It's a flat growth from prior years which is not particularly surprising."

This is also true for IT spending as a percentage of revenue. As revenues have declined, so has IT spending. CIOs have been reducing this number steadily since 2006 when spending as a percentage of revenue stood at 2.0%. This year's number is unchanged from last year at 1.5%.

All in all, this report, while not rosy but any means, shows an IT environment still fairly stable even though the world is in the throws of the worst economic downturn since the Great Depression. About half of the 202 IT executives surveyed indicate they are getting by; and that's not so bad. Of course, it is highly sector specific. Manufacturing and retail, as can be imagined, are fairing much worse than healthcare and, believe it or not, banking and finance. "We think that's probably largely do to consolidating and merging systems," said Longwell. "There's a cost involved in that. Also, were not looking at the total market. We're looking at the typical bank."

In other words, they are looking at companies that are still standing. Not Lehman Brothers or Washington Mutual's effect on spending, for example.

Things were much worse for IT in the aftermath of Y2K, dot-com and 9/11:

"Nevertheless," the report states, "there is a silver lining: the current value of 45% increasing IT budgets is well above the 36% realized in 2002 in the aftermath of the 2001 recession. This indicates that the current recession, though reportedly more severe than any since the Great Depression, is actually not as acute in terms of IT spending as the 2001 recession. This is because the 2001 recession was led by the technology sector. There was a widespread overspending on IT in the late 1990s, fueled by economic expansion, the buildup to Y2K, and the dot-com bubble. As a result, many IT organizations experienced severe cutbacks in spending in the 2001 recession and in the two years thereafter."

Another bright note is most (54.6%) of the exec's surveyed feel their budgets are at least meeting the current needs of the business. CE's conclusion is CIOs have done a very good job of managing IT financially and, because of this, they have not had to resort to Draconian measures to bring IT in line with reduced demand from the business:

"Contrary to the wishes of IT product and services providers, growing IT budgets are not always appropriate. When recession causes business volume to decline and user head counts to fall, it is incumbent on IT executives to scale back their level of IT operational spending to meet economic realities. (This) is a testament to the ability of many IT executives to cut spending while still meeting the needs of the business."

What has changed dramatically from last year, and reflects the "new normal" at many organizations, is CIO's priorities list. Reducing the cost of IT to the business is the new No.1 priority for most CIOs. Coming in at No.2 is leveraging IT for strategic value; at No.3 is improving IT's service levels. Bringing new systems online has, not surprisingly, fallen out of favor, but upgrading existing systems has not.

"IT managers need to stay focused on the strategic as opposed to making just short-term, tactical cost cutting measures and I think this study indicates this is indeed what is happening," said Longwell by way of explanation.

What else has changed is headcount. Most CIOs are reducing staff this year. Through most of last year, IT staffers had it pretty good because CIOs were looking elsewhere to cut costs. Now, things have caught with them and 46% of IT organizations plan to cut staff; some as deep as 10%. This is up 24% from last year. For the best and brightest, however, they may be able to find work at the 27% of companies that plan to add staff this year so things might not be all bad.

At the end of the day, these numbers do reflect the new reality that IT is important to most businesses and is no longer viewed simply as a cost center to slashed at the first sign of a downturn, said Longwell. So, there is that. "You need IT to make the business more efficient and more productive. That doesn't mean there isn't a lot of pressure on IT folks to reduce their budgets."