Report reveals lower than expected IT spending in 2005

The IT recession has morphed into a new IT reality in which cautious technology spending has fundamentally altered how organisations are allocating their IT investments, according to the annual Worldwide IT Trends & Benchmark Report released by META Group, a leading provider of IT research, advisory services and strategic consulting.

Report findings reveal a lukewarm IT economy, with 2005 spending projected to increase by only 4% to 5%. While the figure is lower than many published reports, META Group analysts argue it has far-reaching implications as it likely represents the new `steady state` of IT.

"IT budgets are not simply declining or levelling-off," said Howard Rubin, senior vice-president at META Group. "Rather, they are changing completely. Companies are shifting from a pure cost-cut mode to a model that emphasises agility and efficiency. They are removing fixed costs in favour of variable costs. As a result, technology spending will have a significant impact on the IT landscape with respect to vendor health and viability in the year ahead."

In addition to its implications for the IT landscape, report findings also serve as a critical measure to help IT management set targets to monitor organisational performance, and align technology goals with broader business objectives. The report also provides valuable market research, predicting forward-looking IT trends specific to geographies, industries and technologies.

To that end, the report contains some surprising geographic information as well as trends, which may forewarn major regional spending reductions. Among the most interesting findings are those which debunk the common myth of the relative strength of the North American IT economy, by revealing that 2005 Europe/Middle East/Africa (EMEA) spending is actually projected to surpass North American spending levels. Asia Pacific is expected to experience the most growth among the regions researched, and in so doing, will set a new precedent for IT efficiency. Conversely, IT spending in Latin America is expected to decrease.

Specific to how companies in various regions will spend their IT dollars, research indicates that companies are reallocating the savings derived from cuts in infrastructure to invest in new development initiatives. These investments are being focused on technologies that support the organic growth of a business (defined as "grow the business" categories) and technologies that enable the creation of new business models and entrance into new markets (defined as "transform the business" categories).

Outsourcing companies will also continue to reap the benefits of reallocated IT budgets. Enterprises are expected to decrease their spend on IT labour and instead invest in outsourcing commoditised, non-strategic services, such as infrastructure and applications maintenance activities. The former is expected to decrease from 36% of total IT spend in 2004 to 31% in 2005, while the latter is expected to increase from 20% in 2004 to 25% in 2005.

Finally, overall investments in specific technologies are expected to level off or decrease. Of the 32 technology investment areas sampled, only two (security and Web applications development) are expected to see spending increases in 2005 as compared to 2004 levels.

"Unlike the technology boom wherein companies threw money against a whole set of technologies or the IT recession wherein companies cut spending across the board, the new IT reality is being driven by efficiency," continued Rubin. "Companies understand the volatility of the marketplace and are endeavouring to create an organisation flexible enough to respond to unexpected market changes, without making significant up-front investments in unproven technologies."

This year`s report also revealed surprising results about the types of organisations that will drive the pockets of IT spend - results with significant consequences to the vendor community. Smaller companies, not the large organisations known for their deep pockets, will drive growth. In fact, organisations with revenues in excess of $1 billion are either holding spending steady or planning to decrease their IT budgets. This trend holds especially true for the largest organisations - those with revenues in excess of $10 billion.

The industries that are spearheading spending growth are also surprising and have similar implications to the IT landscape. Education, which has shown relatively low IT spending levels in the past year, has indicated the strongest growth in 2005, followed by insurance and healthcare. Conversely, the construction and engineering, and transportation industries plan to decrease investments.

"More important than the industries that are up and those that are down, are how the budgets are being allocated and the implications on the IT economy at large," concluded Rubin. "Smart companies will no longer cut at random. Instead, they will use benchmark figures, like those in the report, to drive and support the right IT investment decisions while mitigating the risk of investing in the wrong technologies, industries and geographies."