IT economy goes further off the rails

It was a grim week: Intel cut its sales forecast, Sun announced big layoffs, and IDC lowered its IT spending projections for next year.

The drumbeat of economic bad news grew louder in the IT industry last week, as Intel Corp. reduced its fourth-quarter revenue forecast by as much as 20% and Sun Microsystems Inc. announced plans to lay off up to 18% of its workforce.

Even India is feeling the economic wallop: The country's largest technology trade group sharply cut its IT services hiring projections.

Meanwhile, market research firm IDC lowered its IT spending forecast for 2009, saying it now expects worldwide spending to grow by just 2.6% over this year's level — less than half its earlier 5.9% prediction. IDC now expects IT spending in the U.S. to grow a minuscule 0.9% next year.

Gartner Inc. similarly reduced its spending outlook last month, projecting 2.3% growth globally in 2009.

The more pessimistic forecasts were reinforced by survey results released last week by technology reseller CDW Corp. CDW, which commissions a bimonthly survey of IT decision-makers by an outside polling firm, said that in the latest survey, managing operational costs was the most-cited priority for next year.

Forty-one percent of the 1,058 respondents included cost management among their priorities. In comparison, 35% cited increasing their companies' market share and improving customer satisfaction, while 33% said that making technology improvements was a priority. The survey was conducted from Sept. 15 to 22, a time when the economic situation was just starting to go from bad to worse.

Prior to the Society for Information Management's annual member conference last week, Jerry Luftman, a professor at Stevens Institute of Technology and vice president of academic affairs at SIM, said that IT executives have been more proactive about reining in spending than they were during the dot-com bust and post-9/11 downturn.

That's reflected in the results of an online survey SIM conducted in June that had more than 300 respondents from 231 organizations. Among the findings: Respondents said they expected the average percentage of their IT budgets devoted to offshore work to increase from 3.3% this year to 5.6% in 2009.

However, only 15% of the respondents said they expected to reduce their IT head counts next year. Although the survey was conducted before the downturn accelerated, Luftman said he doesn't anticipate a big increase in the number of job cuts.

On the other hand, adding workers may not be in the cards either. For example, The Dannon Co. is looking to "retool" some IT staffers with new skills in areas such as sales or research and development in order to avoid head count increases, CIO E. Jeffrey Hutchinson said.

"What we need are not the technical skills — I can outsource those to other countries around the world," Hutchinson said. "We need the individual who has the breadth and depth of expertise [and] can be perceived by the functional or process areas as a value-add."

Various IT vendors are feeling the economic pinch. Companies such as SAP AG and Sun had already reported lower-than-expected financial results and warned of uncertain times ahead before Intel joined them last week, saying it is seeing "significantly" reduced demand.

The chip maker now expects its Q4 revenue to total between $8.7 billion and $9.3 billion — down from a previous forecast of $10.1 billion to $10.9 billion.

And on Friday, Sun said it will cut 5,000 to 6,000 jobs over the next 12 months.

Things could get worse if any, or all, of the Big Three U.S. automakers are forced into bankruptcy or out of business. That's possible if the government doesn't throw them a financial lifeline.

For now, the automakers are still buying IT products, said Kelly Thomas, an executive at supply chain software vendor i2 Technologies Inc. But, he added, they're putting off multiyear projects and have become reluctant to sign long-term contracts — an ominous sign for such a key industry.

Copyright © 2008 IDG Communications, Inc.

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