2008 is budget balancing act for CIOs

Forrester Research revises IT spending downward for 2008, cautioning CIOs to budget conservatively.

With the economy looking "dicey," Forrester Research Inc. says CIOs need to budget conservatively but not be lulled

into thinking small about IT strategy.

"There is a very good likelihood that the economic slowdown we are seeing in the U.S. will in fact translate into slower growth in the U.S. IT market," said Andrew Bartels, a vice president at the Cambridge, Mass.-based research firm.

On the bright side, 2008 should be another good year for bargains from U.S. vendors, Bartels said in a conference call Thursday with reporters. Don't go looking for deals, however, without considering vendor longevity. While 2008 probably will not see the mega acquisitions of 2007, consolidation of "second- and third-tier" vendors likely will continue in 2008, Bartels said.

 

Looking beyond the anticipated slowdown in 2008, CIOs should prepare now for a "new wave" of IT investment starting in late 2008 and early 2009. This next cycle of technology spending will be driven by service-oriented architectures (SOA), unified communications and green IT.

Juggling act

What a difference a few months make. With the clouds over the national economy darkening, Forrester is revising its estimates of U.S. investment in IT goods and services dramatically downward for next year, from an earlier forecast of 8% growth in 2008 to 4.8%.

The revised forecast assumes that the U.S. economy will grow a slow 1% to 2% from now until the second or third quarter of 2008 but escape a recession.

The note of caution is the latest in a flurry of warnings from IT prognosticators. Last month, Stamford, Conn.-based Gartner Inc. advised CIOs to prepare two budgets for next year -- one for the status quo, and a cost-cutting version in the event of a recession. Last week, Framingham, Mass.-based IDC trimmed its growth estimates for 2008 from 6.6% to between 5.5% and 6%.

There are exceptions to the herd, however. Mark R. Anderson, CEO of "Strategic News Service," a predictive newsletter covering the computing and communications industries, is playing the contrarian. Anderson, known for his accurate forecasts of important technology market shifts, is predicting a 9% growth rate.

Forrester believes the slowdown in technology purchases likely will be concentrated in the first three quarters of 2008, then start to rebound. If that's true, 2008 will mimic the roller coaster ride of the past 12 months, when U.S. IT investment growth dropped to about 3% in the last half of 2006 but managed to climb to 6% and 7% in following months. It ended at a predicted overall growth rate in 2007 of 5.3%, according to the latest Department of Commerce figures.

Forrester remains committed to its bullish outlook for 2009 and beyond, forecasting double-digit growth rates of about 12%.

What does all the percentage parsing mean for CIOs?

Because the economy is looking dicey, I think it is very important for CIOs to plan conservatively.

Andrew Bartels, vice president, Forrester Research Inc.

"Because the economy is looking dicey, I think it is very important for CIOs to plan conservatively. You almost have to plan for the possibility of recession happening," Bartels said.

That means having a contingency plan if you're asked to cut costs, and pushing big decisions to the second half of the year.

But it's also very important "not to get sucked down" into the 2008 slowdown, Bartels said, adding "It's a tough act." CIOs will have to "juggle two objectives," or jeopardize their companies' ability to compete in the future.

"Don't get so cautious that you miss out on the key investments you need to get prepared for SOA, unified communications and organic IT. These are the building blocks we think will be the foundation stones of a whole new generation of technology … that will help companies achieve optimal business results," Bartels said.

How hard will it be to cut? Veteran Fortune 500 CIO Jim Noble, most recently managing director of Global Infrastructure Solutions at Merrill Lynch & Co., said most IT budgets contain plenty of "fair game" for cuts.

"If you take a company with $1 billion IT budget, there is maybe only $100 million that absolutely shouldn't be touched, and there's $900 million of stuff going on out there is fair game," said Noble, immediate past president of the Society of Information Management (SIM).

In the Forrester scenario, the biggest IT investment cutbacks will be in network and computer equipment, with software purchases less affected. Forrester isn't revising its 2008 outlook for IT operating budgets, now predicting 5% as opposed to 6% growth, with spending on IT services (consultants and contractors) taking the biggest hit. Spending on IT compensation and outsourcing is expected to hold steady. Decreased investment in capital goods also means a lower level of depreciation.

It's the economy, stupid

How can you plan for the future, without waiting for analysts to revise their forecasts? According to Forrester, tech investment correlates closely with nominal gross domestic product growth. The correspondence is especially close in times when companies are digesting mature technologies.

"We have seen this current period starting in about 2000 and continue until 2008, when we think it will move into a stronger outlook going forward," Bartels said.

Forrester predicts the U.S. will avoid a recession because economic strengths, such as legal, health care and education services, as well as a robust export market, should offset things like durable goods and commercial real estate. Such areas are affected by the tight credit markets, job losses, weak dollar and higher gasoline prices that threaten economic growth.

"If you see two or more months of declines in nonfarm payroll employment, clearly get worried. If gas prices go above $4 per gallon, that would be another factor that … could tip us over," Bartels said.

Global snapshot

After a strong 2007 (12% growth), global IT purchases will slow slightly in 2008 but still register a healthy 9% growth rate, although with a wide divergence between the major industrial countries in North America and Europe and other parts of the world.

"Measured in U.S. dollars, growth looks pretty good," Bartels said. "Measured in local currencies, the picture is a little different." The Asia Pacific region, Eastern Europe, the Middle East and Africa all should see IT purchases grow by a robust 15% in their local currencies, but growth will be about 5% in the United States, Canada, Latin America and Europe.

Discrepancies also show in IT purchasing, with non-U.S. and European markets spending heavily on computer equipment and goods, and the major industrial countries sinking a large proportion of the their IT budgets into software. Bottom line: the US market, though still the largest purchaser of IT goods and services, no longer sets the pace or the priorities.

"The good news is, we don't think there is going to be a recession, and consequently we don't think we're going to see a downturn in global IT purchases," Bartels said.

Let us know what you think about the story; email Linda Tucci, Senior News Writer.

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