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IT In 2007: Budget and Trends

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“As things stand, we think that next year should be relatively healthy.” So says IDC analyst Stephen Minton, speaking during the research firm’s telebriefing about the state of IT in 2007. IDC issued its forecasts for a broad range of tech sectors, from security to networking to Vista adoption.

Underneath the analysts’ generally positive tone, some doubts were evident. Specifically, the specter of a hard landing in the U.S. economy’s downturn – which could dampen IT spending. IDC refers to this as one of the
“wild cards” of next year’s tech picture.

Among the critical trends that IDC identified:

• 2006 The growth of IT spending in 2006 has proceeded with expectations, despite macroeconomic factors like a spike in oil prices and a slump in housing sales.

• Top Sectors 2007 Key areas that will see robust spending in 2007 include security, mobility, application upgrades – in particularly back office apps – and business intelligence. “Infrastructure is still a big focus as well,” Minton says. “It’s the reason why we still have high growth rates for things like storage solution and storage management software.”

• Disruptive influences Forces that might upset the apple cart include Web-based software – which IDC notes is growing surprisingly fast – and the impact of open source software.

• Workers? A shortage of skilled workers will play a role, due to management resistance to hiring and a scarcity of certain key skill sets among IT staffers.

• Smooth Sailing – Probably “If you look at the overall industry picture for 2007, we don’t think it’s going to be massively different from 2006,” Minton says. Global IT spending in ‘07 will be around 6.5 percent, essentially in line with the ’06 figure. But Minton points out that this assumes we don’t have additional negative shifts in the economy, and none of a host of possible wildcards don’t rear their ugly head.

• Growth rates by Sector IDC predicts that the various sectors of U.S. tech spending will grow in 2007 as follows: Servers: 4 percent; PC: more than 6 percent; Network: almost 8 percent; Storage: a little over 2 percent; Software: topping 8 percent; Services: more than 5 percent.

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A Hard Landing

“The next huge change in the macro picture is the confirmed expectation of a significant slowdown in the U.S. economy, and a current probability…of a harder landing,” says IDC analyst Anna Toncheva. A hard landing, defined as negative growth quarter to quarter, will occur “probably in the next half year,” she says. Driving this downturn is a slump in housing sales.

So what’s the implication for IT spending?

Third quarter growth rates in investment in software and equipment are the slowest since 2003, she says. Consequently, “We would expect significant moderation in investment in software and hardware going forward.”

Despite a fall in oil prices, consumer spending is in peril. U.S. consumers have been spending from their assets rather than their income, and have had a negative personal savings rate of late. Since that can’t continue, “The consumer is left to the support of its labor-driven income,” she says.

The result: “Since consumer demand will decelerate, we expect that business spending will falter going forward.”

Moreover, corporate profits are headed lower, in IDC’s forecast. “If not by the end of 2006, then definitely in 2007, margins will be severely contracted,” she says. Productivity growth is flat, and on an annual growth it’s the slowest it’s been since 1997.

“The bright spot could be overseas growth,” she says. “Companies with non-U.S. operations should see strong operating leverage abroad.” If the dollar continues to decline that could also improve the bottom line for non-U.S. operations. Yet even this uptick could turn south given that many countries’ economies depend heavily on the U.S. consumer, she says.

In sum, the risks for IT spending growth are “tilted toward the downside.” Forward-looking ratios of IT demand confirm this expectation, Toncheva says.

Bottom line: “IT spending will moderate going forward, but, to give a more positive spin to all the dismal stuff, IT spending will probably be much better than other components of business investment.”

But there’s a caveat: Business investment could be disrupted by trouble in one of the world’s hotspots, like Venezuela, Iran and North Korea.

A Bright Spot

The tech sector that IDC expects to see the most sustained growth over the next few years is software.

For 2007, the percentages of companies that say they will spend on given types of software are as follows:

Next page: Hot Sectors, Vista adoption

Trends in Software: 2007

Within the healthy expenditure on software, IDC’s Minton identified the following trends:

• OS software: The robust spending on OS software partially reflects interest in Vista. “And of course we also have the adoption of other operating systems, in particular Linux,” he notes.

• Authoring software: A drivers in this sector is
interest in Microsoft’s upcoming Office release.

• Storage software: “The storage solutions sector has performed extremely well over the last twelve months, and storage resource management is one of those areas which is growing at a double digit rate.”

• Web-based software: “This is one of those areas that is showing significant increases when we track back to surveys twelve months ago.”

While industry observers had expected much of the interest in Web-based software would come from small companies, IDC finds great interest among large enterprises. Perhaps surprisingly, more than 40 percent of companies with 1,000 or more employees expect to implement some form of Web-based application in the next twelve months, and almost as many plan on experimenting with it.

Web-based software “is a positive wild card” for IT spending in ’07, Minton says. “There are a lot of implications around Web-based software, not just around the software itself, but around all the massive amounts of infrastructures delivering these Web-based solutions.”

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Drivers and Inhibitors of Spending

A big driver of spending in 2007 will be security, IDC forecasts. “Security has been a pretty consistently ranked driver for the last few years,” Minton says.

With spending on hardware past its peak, many companies are now focusing on back office apps, like their databases and their ERP apps. It’s the mid-size firms who are most focused on this, IDC reports.

Another big driver will be real time business monitoring, and CRM apps. “Business intelligence is one of those sectors that we expect to be growing at that double digit rate.”

Also hot will be spending that supports a mobile workforce. “We see continued growth in the rollout of mobile e-mail and data solutions,” Minton says.

More drivers: VoIP solutions (particularly among larger firms) and VPN and wireless LAN development. IDC expects the wireless data sector to grow at double-digit rates for the next five years. The research firm forecasts that North American and Latin American wireless data growth rates will top a jaw-dropping 50 percent.

Among inhibitors, if the price of oil surges again, that could delay spending plans. Other inhibitors of spending include a poor ROI on previous projects, satisfaction with current computing, and that timeless catchall, “senior management caution.”

Additionally, many firms list “skill shortage,” as a growth inhibitor. Specifically, some Java and Web 2.0 skills are harder to find, Minton says.

Vista Adoption

Although the roll out of Microsoft’s new OS will clearly affect IT spending, “It’s not going to have the kind of dramatic impact that Windows 95 had,” Minton says. “It’s not going to be something that drives overall IT spending up by a couple of percentage points just because of the mass rush to go out and buy it.”

But it will shift some spending on PCs from the end of 2006 into 2007, particularly among consumer who defer holiday PC spending while waiting for Vista.

The Resilience of IT

Despite the questionable economic picture, IDC continues to feel upbeat about worldwide IT spending in 2007.

In fact, next year’s IT spending could actually be slightly higher than this year’s, Minton says, though he concedes that this conclusion may appear counterintuitive in the face of a cloudy macroeconomic forecast.

The reasons for the comparatively higher ’07 are: 1) ’06 spending is coming in lower than expected in Europe and Japan, and 2) PC sales are expected to move higher in the US and internationally, partially due to the upcoming Vista launch.

Although IT growth isn’t expected to be the frisky colt it was in the late ‘90s, it remains a solid workhorse. “We’re talking about an industry that’s growing a little bit faster than GDP, but is clearly more mature than it was in the past,” Minton says.

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