IT Spending Outlook Brightens, But Executives Waffling

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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 Magazinepolled 206 chief information officers (CIOs), chief executive officers (CEOs) and chief operating officers (COOs) for an August 2003 survey on IT spending habits and found, on average, a boost of 6.4 percent in IT spending in the next 12 months. The previous 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 Researchsenior 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 a 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.

In March 2003, IDCreported 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 the August 2003 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.”