Wall Street's collapse puts IT spending in (some) peril

The turmoil in the financial markets isn't expected to lead to a tech-spending recession. But budgets may be in for some paring.

The overall economic cost of Wall Street's collapse has yet to be totaled. But it's clear that IT departments will be laboring under some changed conditions in the months ahead.

Despite the turmoil in the financial markets, consulting firms Gartner Inc. and Forrester Research Inc. are both still forecasting that IT spending will fare better than the economy as a whole and continue to grow on a year-to-year basis.

The tech industry may be "even more resilient than we had originally imagined," Gartner analysts Ken McGee and Mark McDonald wrote in a report sent to the firm's clients last week. But they also said that they expect IT growth rates to be "very low" until the business climate improves.

That could happen by the second half of next year, the analysts said. They advised IT managers to hedge a little and prepare two budgets for next year: one based on the directions they get from corporate executives, and an alternative "growth budget."

Forrester analyst Andrew Bartels has actually raised his growth forecast for IT purchases this year to 5.4%, up from a May prediction of 3.4%. But in a report issued Sept. 24, Bartels said that he expects to see a slowdown in tech buying for the remainder of the year and into the first half of 2009. Bartels, who once predicted a 10% increase in IT spending next year, now believes the growth level will be just above 6%.

Charles King, an analyst at Pund-IT Inc. in Hayward, Calif., said many IT managers are likely to delay both new projects and upgrades to products such as Windows Server 2008. "Unless a business can prove that it's absolutely critical to have those products to improve earnings or save a significant amount of money, I would expect companies to put off purchases as far as they possibly can," he said.

The CIO Executive Board, an Arlington, Va.-based association for IT execs, said last week that more than half of the 50 CIOs it surveyed on Sept. 25 are putting nonessential projects on hold and that nearly 25% have frozen IT hiring. In addition, a majority said that they are re-evaluating their budget plans for next year.

Tight credit could be an even more immediate problem for IT managers who are looking to buy or lease new equipment or are embarking on major projects.

The credit problem, resulting from banks being unwilling to add more loans to their current debt loads, is "the biggest threat from a buyer's standpoint," said Brian Babineau, an analyst at Enterprise Strategy Group in Milford, Mass. "A lot of IT purchases are financed."

Budget-cutting may drive some companies to engage in more offshore outsourcing. But the presidential election is a potential wild card. Eugene Kublanov, CEO of outsourcing consultancy NeoIT Inc. in San Ramon, Calif., said the next president could propose tax incentives to encourage job growth in the U.S. — especially if Democratic candidate Barack Obama is elected.

The IT job market is likely to see an influx of newly available talent, partly because of payroll cutbacks in the financial services industry as newly merged banks consolidate their systems and data centers. And a longer-term outcome of Wall Street's implosion may be increased enrollments in computer science programs at U.S. universities, as IT becomes a more attractive career option for students who might have pursued banking and finance paths before.

One thing that won't change, though, is the advice IT managers are getting on how they can reduce costs by consolidating servers and installing virtualization technology.

Ken Brill, executive director of The Uptime Institute Inc. in Santa Fe, N.M., said that as many as 15% of the servers in any data center are "comatose." Eliminating those systems can save lots of money — as can focusing on energy savings when buying new servers, according to Brill. And the time may be even riper for such steps now. "Maybe in this downturn," he said, "efficiency will become more important."

Copyright © 2008 IDG Communications, Inc.

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