IT Spending Outlook Brightens, But Executives Waffling

Executives are showing signs of opening up the coffers for more spending but they’re looking towards the future, not fixing the problems of today. And that’s becoming a mixed blessing for IT staffs around corporate America.

Despite a growing backlog for software application support in large
enterprises, most executives are slow to beef up their budgets, though a modest gain in several surveys show promise for the coming months. Analysts agree it’s encouraging news for the industry, but whether IT budgets are
resurgent or just going through a hiccup in the normal flatline of budget projections remains to be seen.

CIO Magazine recently polled 206 chief information officers (CIOs), chief executive officers (CEOs) and chief operating officers (COOs) for its monthly survey on IT spending habits and found, on average, a boost of 6.4 percent in IT spending in the next 12 months. Last month, the survey showed a 4.5 percent increase.

Although nearly 50 percent of those polled said their application backlog was “significant,” only a small percentage said they would increase spending to fix the problem.

“The question is how much backlog can companies sustain before their
competitive edge is compromised,” said Gary Beach, CIO Magazine group
publisher.

Instead, companies are looking at replacing their older legacy systems with new hardware.

“We are seeing purse strings begin to loosen up with the growing demand to
replace older systems and the belief that the economy is beginning to
improve,” said Jim Shepherd, AMR Research senior vice president. “For this
new IT spending to be of most benefit, companies must act now to ensure
their IT programs are focused on improving business processes, and ensuring
consistency across the enterprise.”

In its latest report, AMR found that more than 80 percent of those polled
expect to slightly increase, or at the very least hold fast, with their
current IT budgets.

In what’s become a mantra for many Fortune 100 companies the past couple
years, “tight financial conditions” and weak profits equal less money spent
internally on software and hardware upgrades to the system. When asked, 22
percent replied that IT capacity was just fine.

Nevertheless, research firms are continuing to find positive signs in the
economy’s turnaround, which translates into confidence and bigger IT budgets.

Earlier this year, IDC reported the
retail industry would be spending nearly $30 billion a year on IT by the
year 2007, a small increase of 5.4 percent. Retail, though not hit nearly
as hard as the high-tech community in the late 90s, has been dealing with a
weak economy the past seven months.

The other sectors are coming around now, too, whether they really want to
spend the money or not. AMR Research expects IT spending to slowly
increase over the coming months in the manufacturing and services
industries, with a two percent increase in 2004.

The bulk of money, according to the report, goes to enterprise resource
planning (ERP) infrastructure and supply chain management (SCM)
software. For application development within the company, more than 57
percent of executives are looking at outsourcing instead of relying on
their staff.

What has some analysts worried, however, is the fluctuating numbers shown
in monthly polls like those shown by CIO Magazine. It points to executives
unsure where they want to go with their IT departments and making it hard
for analysts to determine whether IT spending is really on the rise, or
being determined by the economy.

For example, in the CIO Magazine polls conducted the past five months the
polls have swung from this month’s percentage high of 6.4 to 4.5 in July, 5.6 in June, 3.3 in May and 4.2 in April. In regards to 12-month IT budget outlooks, the same inconsistency has played out: CIOs this month expect 2.5 percent growth over the next year, while just last month they were saying 4.5
percent. The month before that, June, the IT budget outlook was at 1.9
percent.

Deutsche Bank Securities, Inc., analysts said in a report they were
encouraged by the August numbers in the CIO Magazine poll — the most
optimistic in 15 months — but “in our view, the monthly swings in
expectations imply that no clear trend is evident yet … despite this, we
remain optimistic that spending is likely to resume in 2003, particularly
given that roughly 59 percent of the panelists see either a ‘modest’ pickup
in IT spending or a ‘bright future’ over the next three months.”

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