IT services spending nicked, but not axed

A second-quarter report from Forrester Research shows that more than 40% of IT executives have already cut overall budgets this year and 24% have cut discretionary spending.

IT spending and services have proved resilient in the current contagion of economic woes. But the immunity period appears to be over for some CIOs, according to new research from Forrester Research Inc.

In a survey of more than 950 IT senior executives at large businesses, 43% told Forrester they have already cut their overall 2008 budgets due to the economic slowdown. Twenty-four percent of those surveyed said they have cut discretionary spending; 28% said current conditions have had no impact on their budgets.

Still, spending on IT services -- a category that has held up well globally according to other forecasts -- holds fast.

Only 16% of those surveyed told Forrester they have already cut spending on IT services. While the great majority are taking a hard line with suppliers -- 70% said they plan to renegotiate contracts for lower rates -- they "are still expecting to pay more for services," said John McCarthy, principal analyst at Cambridge, Mass.-based Forrester.

The survey of IT executives across North America and Europe was taken during the second quarter.

Not surprisingly, the polling shows that some firms are getting beat up more than others.

"This is not an across-the-board spending slowdown; the impact of the economy on IT budgets varies widely by industry and geography," said McCarthy, on the polling data.

This is not an across-the-board spending slowdown; the impact on the economy on IT budgets varies widely by industry and geography.

John McCarthy, principal analyst, Forrester Research Inc.

Hardest hit are financial firms (49% have cut IT budgets). Least affected are businesses in media, entertainment and leisure (39% reported budget cuts). When the survey was taken, North American CIOs were under more pressure to cut costs than their European counterparts; Forrester says that may no longer be true, however, as weak economic conditions have infected other parts of the globe.

CIOs were cautioned by Forrester as far back as December to prepare two budgets for 2008. And this is not the first sign the industry has seen of budget cuts. Gartner Inc. reported back in April that one in four U.S. CIOs reduced their 2008 budgets during the first quarter, prompting the Stamford, Conn.-based consultancy to lower the growth rate for U.S IT budgets from 3.1% to 2.3%. But back then budgets remained unchanged in the first quarter for a large majority -- 65% -- and 10% said their budgets had actually increased during the first three months of the year.

The Forrester polling also turned up some interesting trends on spending:

  • 45% percent of businesses plan to increase their use of applications outsourcing.
  • 43% of firms said they plan to increase their infrastructure outsourcing.
  • 20% of firms will outsource convergent telecommunications and network management, a hot growth area in 2008.
  • 43% of respondents want to move more work offshore.

Also notable is the attitude toward outsourcing. IT executives continue to embrace the model of using a third party for IT delivery, but many (52%) tell Forrester that the cost savings continue to fall short of what they expected. They also groused about inconsistent or poor service quality (40%) and the inability of their vendors to adapt quickly to changes in the business (35%).

Meanwhile, firms have only scratched the surface when it comes to offshoring, but that seems due to change. A modest 9% of firms use offshore IT labor "wherever and whenever possible," according to Forrester. But 14% are "ramping up" use; 19% are piloting offshore projects; and 22% not currently using offshore labor are "actively tracking developments." The biggest concern among those who have not put their feet in the water is the quality of work done.

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

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