A View of IT Spending: Part One

Last week Forrester Research released a report entitled, U.S. IT Spending Summary: Q2 2006, in which the company adjusts its previous projections on U.S. investment in IT. The reason for the changes is newly released and revised data from the U.S. Department of Commerce. Data from the Department of Commerce is one of two sources that Forrester relies heavily on when making its projections, the other being data collected from IT product vendors. Therefore, it was, “a big deal,” that one of these two was recently revised downward. However, Forrester does note that the new government data removes some discrepancies between the two sources; “the government’s revisions now bring the two measures of growth in IT investment more into line.” With things now in line Forrester expects that IT spending will slow more than anticipated; the research company now forecasts IT spending to grow six percent in 2006 and only three percent in 2007.

Showing the most dampened growth was computer equipment sales, “The U.S. Department of Commerce estimated the growth rate in business investment in computer and peripheral equipment in Q2 2006 to be 1 percent.” (Vendor data indicates a slowdown in this area as well.) In this category the hardest hit was PCs; though Lenovo, Dell, and HP saw increases in revenues they were low and in the single digits. As with computer and peripherals, data from both the Department of Commerce and vendors indicates that, “communications equipment sales growth slumped.” Department of Commerce data showed a drop in this area from 18 percent in Q1 to ten percent in Q2 and vendor data indicates an even slower growth, two percent, down from Q1’s 11 percent. Elsewhere, despite the fact that IBM and Hitachi showed, “U.S. storage revenues that we estimate were up by more than 20 percent,” Forrester says that, “even once-hot storage started to slow.” The only market keeping steady in this category appears to be software. Government data shows that software investment in Q2 was the same as in Q1, seven percent, and vendor data shows growth of 12 percent in Q2 which was up from Q1’s ten percent.

As the software segment’s stability indicates, “the data on IT spending by industry and size of company shows that the slowdown is not universal; there are segments of the market that are still growing.” Spending by small and medium sized businesses (SMBs) is also set to rise. SMBs are expected to spend $344 billion in 2006, up from 2005’s $325 billion. This increase reflects a rise of six percent in 2006, compared to, “the 3.4% growth it experienced in 2005;” and will give SMBs an almost equal, 47.5 percent, share of total U.S. IT spending. However, the fact that a few areas may hold steady or show some growth is not likely to float the entire industry. “There are still a couple of quarters in which U.S. tech purchases could bounce back up, but the prospects for a slowdown in 2007 are now looking very real.”

Another Forrester report, released at the beginning of the month and which surveyed, “1,000 IT decision-makers to learn about their approach to IT governance,” also indicates slowed spending. Compared to numbers from November of 2005, when 42 percent of North American firms anticipated increased budgets for 2006, only 32 percent anticipate growth for 2007.

Finally, U.S. IT Spending Summary: Q2 2006 points out that though projections have been revised down, changes in actual spending may take a quarter or two to reflect this. “The Q4 2005 US GDP growth was weak, so weaker growth in IT investment two quarters later in Q2 2006 is not surprising.” Therefore, Forrester expects a weak Q4 in 2006, “as the concerns about the economic outlook after the poor GDP growth in Q2 2006 affect buying decisions with a two-quarter lag once again.”

A more complete version of this posting, with accompanying informational charts, journal articles, and research reports can be found at the website of Analyst Views Weekly.

More information on this topic can be found in the IT Services Section of Northern Light’s Software, Computers, & Services Market Intelligence Center.

And in the following articles:

Market Share: IT Spending Uncertainties Mean Rough Ride Ahead
Washington Technology, October 16, 2006
Publicly traded government IT companies have suffered this year because of tighter budgets and delays in approvals of the fiscal 2006 budget. Organic growth has slowed, dropping from 13 percent in the second quarter a year ago to 6 percent in this year’s second quarter.

Survey Shows It’s Back to Network Basics for IT Spending
NetworkWorld, October 13, 2006
Enterprise IT managers in the next 12 months will be investing their IT dollars in servers, desktops, virtualization, wireless and Windows Vista. Or so say the results of a survey that Forrester Research released Wednesday. The research firm in May surveyed some 715 IT decision makers at North American firms and found that among the top priorities are some of IT’s most basic needs

Report: Fed IT Budgets Slashed for Fiscal 2007
InformationWeek, October 3, 2006
The top federal IT budgets will take a 50 percent nosedive in fiscal year 2007 (FY07), according to a report issued Tuesday by government market research firm Input. In all, the potential value of the top 20 IT government budgets is predicted to decline to $120 billion from the previous year’s $240 billion total. Procurements for the DHS, the Army and the General Services Administration (GSA) account for half of the business in the top 20, the market research firm said.

CIO Survey: IT Spending Projections Slipped in Q3
ComputerWorld, October 2, 2006
According to the quarterly CIO Magazine Tech Poll released today (download PDF), IT spending projections decreased in the third quarter of this year. While companies still envision spending more on IT next year, they expect the overall increase to be smaller than they were predicting earlier in the year, said the report.

Tie Your IT Budget to Business Strategy
ComputerWorld, August 21, 2006
The approach used in most organizations today is known as incremental budgeting. This involves looking at last year’s IT budget and increasing or cutting the amount based on spending plans, corporate mandates, etc. The challenge with incremental budgeting is that it assumes that IT planners have a good grasp of the demands they will face in the coming year. It also assumes that the IT budget planner can correctly predict how pricing for hardware, software and services will evolve — no easy task.

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