Office 365 arrives to flat IT spending

Overall IT spending barely rises above last year

Microsoft is pitching its cloud-based Office 365 as a less costly alternative to on-premises software, assuming IT managers can find money in their budgets for a migration.

Private-sector IT spending is flat year over year in the U.S., and the rate of growth in public-sector tech spending is declining, according to two separate studies.

IDC this week reported that it expects IT spending, including private- and public-sector spending in the U.S., to increase 5.6% this year, following last year's 5.5% increase. But the rate of growth in public-sector IT spending is declining. Last year, public-sector spending increased 5.46%, but this year it is forecast to rise only 3.8%, said Ted Dangson, an analyst at IDC.

Microsoft presented its Office 365 as a cost-saving option at a time when public-sector IT managers, in particular, are showing a willingness to move to the cloud.

Google has taken advantage of the public sector's interest in the cloud. The company recently won a contract to provide its hosted Google Apps to the Wyoming state government. State officials have said they expect to save more than a $1 million a year by rolling Google Apps out to 10,000 users.

Microsoft said it expects Office 365 adopters to cut costs anywhere from 50% to 200%, depending on a wide range of factors -- including the cost of operating a data center versus tapping into the vendor's cloud.

But limited budgets may still make the move hard.

"The challenge is going to be that moving to the cloud does require some upfront money," said Susie Adams, CTO of Microsoft's federal government business unit, which handles sales to government. "You've got to migrate off existing systems into the cloud to realize those cost savings," she said.

The public sector represents a sizable share of overall U.S. IT spending. In 2010, the private sector accounted for nearly $391 billion in IT spending, and the public sector accounted for about $91 billion.

Computer Economics, in its annual IT Spending and Staffing Benchmark study, said that it expects public-sector IT operation spending, which doesn't include capital spending, to decline by 3% this year, meaning it would be the only sector in which such spending declined. IT spending in the insurance industry, in contrast, is expected to grow by 5%.

Government is not cutting-edge when it comes to IT, "but they are certainly a big chunk of the economy, and they are laying off workers and reducing their capital and operational spending," said John Longwell, vice president of research at Computer Economics.

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov, or subscribe to Patrick's RSS feed . His email address is

Copyright © 2011 IDG Communications, Inc.

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