Tightfisted Budgets Loosen a Bit

Yet the economy continues to cast a shadow of uncertainty over the best-laid tech spending plans.

When Bogdan Butoi-Teodorescu, chief technology officer at Animas Corp., submitted his IT budget for 2008 this past summer, he requested a head-count increase of 10%, as well as a 12% budget boost. He was happy to hear that his budget numbers were approved - especially after two years of a flat IT budget - but he was both happy and surprised when the number of hires he requested was not only approved but exceeded.

"Amazingly, we got a 20% increase in head count," he says. "Based on what we delivered in '07, the company came back and said it strongly wanted to invest in our area."

Butoi-Teodorescu isn't the only IT executive with a positive budget outlook for next year, according to data collected in September 2007 via Computerworld's first-half 2008 Vital Signs survey. In the survey, 47% of respondents said they expect their IT budgets to increase in 2008, with an average increase of 12.5%.

Forecast 2008

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Also notable, 64% of respondents said that of all their companies' business areas, IT would see the largest budget increases. Last year, a somewhat smaller percentage (41%) saw budget increases, although the average amount of each increase was higher, at 21%.

While such a cheery budget outlook jibes with preliminary findings gathered in October by Gartner Inc. for its 2008 IT budget study, Gartner analyst Michael Smith predicts a turn for the worse when all the data is taken into account. In October, when about 500 of Gartner's expected 1,700 responses were in, 60% of the respondents had said IT budgets would rise in 2008, with an average increase of 4.8% to 6.4%.

But, Smith points out, that was before economic indicators darkened, specifically those related to the subprime lending crisis, which had negatively affected financial markets by late November. Combined with a sluggish housing market, rising oil prices, a weak U.S. dollar and waning consumer confidence - not to mention the predictions of a worldwide economic slowdown, if not outright recession - some of the fall's optimism was on shaky ground by year's end, Smith says.

"There are strong signs that the rate of budget increases we saw in the preliminary data will be tempered a bit," Smith says. "It shows how business-aware IT needs to be, because if something like housing sees a downturn, that affects hiring plans and IT investment strategies."

Forrester Research Inc. also sees a risk of the U.S. economy "falling out of bed," says Andrew Bartels, an analyst at the firm. In fact, he lowered his overall U.S. hardware and software spending estimate for 2008 from 8% in the fall to 5% in December. CIOs should plan for very small budget increases in '08, he says.

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Nearly half of all respondents expect their 2008 IT budgets will increase, up 6% from last year's figures.

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SOURCE: Computerworld's first-half 2008 Vital Signs survey; September 2007, 103 respondents

That's because the technology market goes through periods of innovation followed by digestion, Bartels says, and in 2008, companies will re-enter the innovation phase. In particular, he predicts that companies will begin to invest in service-oriented architecture, which requires renewed investment in infrastructure and applications. Software categories such as infrastructure management, databases, application servers and integration applications will see a growth rate of 8%, he says. Also popular will be business intelligence, enterprise content management, ERP, customer relationship management, supply chain management, product life-cycle management and storage resource management applications, which Bartels says will grow at rates of 8% to 9% each.

Another reason companies are looking to increase IT spending, Smith says, is that so many of them - particularly large ones - invested heavily in infrastructure in the late 1990s and then cut IT spending during the downturn of the early 2000s. Now, those investments are in need of renewal, he says.

Meanwhile, growth-oriented small and midsize companies are looking to technology to enhance their business strategies, Smith says. "There's interest in specific areas like business intelligence and enterprise information management, and a lot of that is coming from smaller companies that are growth-oriented," he says. In fact, according to Gartner's October snapshot, IT budget increases are highest among smaller companies, especially those with revenue below $500 million. The difference is even more marked among companies with revenue of $10 billion or more, mainly because of postmerger IT integration, Smith says.

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