Modest Growth for IT Spending in 2005

The annual onslaught of media and analyst predictions is in and it looks like enterprises will up spending on outsourced information technology (IT) this year as more companies opt out of software and hardware maintenance. Worldwide IT spending will rise, going up between four and seven percent, depending on whom you ask, with small- and mid-size (SMB) businesses playing the role of big spender.
Each analyst crunches the numbers a little differently, so determining a consensus opinion is difficult. It’s best to let the figures tell the story, and so here is a sampling of predictions for 2005.
Weighing in on the conservative side, Forrester Research in Cambridge, Mass. surveyed more than 1,300 IT decision makers for its quarterly “CIO Confidence Poll,” and finds that enterprises plan to increase IT spending by 3.9 percent in 2005. If that bears out, it will be a smaller increase than last year’s rise, which many analysts put between five and six percent.
Forrester finds evidence that the business trend toward outsourcing IT systems and services is growing. In the year 2000, U.S. companies spent $47 billion on outsourced IT, it says. This year, they will spend $84 billion. By 2008 that figure will rise to a whopping $99 billion. It finds that many SMBs will raise their IT spending and that many companies plan to spend more than last year on outsourcing.
Of company executives that told Forrester they plan to upgrade applications, 69 percent said they will prioritize the purchase of consulting help to do so. Demand for systems integration services is expected to go up ten percent this year, from 34 percent in 2004 to 44 percent for 2005. Likewise, Forrester forecasts that applications maintenance outsourcing will grow 27 percent.

IDC is optimistic

Framingham, Mass.-based International Data Corp. (IDC) released data in two major studies: “Worldwide IT Spending 2004-2008 by Vertical Market Forecast Update: North America, Western Europe, Asia/Pacific, and Rest of World” and “U.S. IT Spending by Vertical Market 2004-2008 Forecast.” It finds IT spending to be on the rise, despite the still-challenging global economy. Worldwide IT spending reached $965 billion in 2004 and will increase at a compound annual growth rate of six percent from 2004 to 2008, reaching $1.2 trillion, it says. “We remain optimistic about the U.S. and global IT opportunities for vendors,” wrote Anne Lu, manager for IDC’s Worldwide Vertical Markets research program, in a press release.
Among its major findings, IDC estimates that worldwide software spending will grow seven percent, reaching $213 billion in 2005. It expects spending on IT services worldwide to reach $423.8 billion, a yearly growth rate of 5.7 percent. And it says hardware market revenue will reach $465 billion by 2008.
In Stamford, Conn. researcher Meta Group released its “Annual Worldwide IT Benchmark Report,” in which it surveyed more than 1,900 companies from more than 30 countries and 20 industry sectors. Meta predicts IT spending will rise four to five percent worldwide this year. Further, Meta expects the Asia-Pacific region to lead the spending growth, and EMEA (Europe, Middle East and Africa) spending to grow more than North America’s. Like other analysts, Meta says that companies will try to squeeze more value from IT by shifting from fixed-cost systems to systems with variable costs and outsourced software, hardware and labor.
Stamford, Conn. researcher Gartner announced that worldwide IT spending will increase by five percent this year. And New York-based eMarketer, which aggregates estimates from a number of other researchers, finds that small and medium businesses will be the strongest IT buyers this year. It expects SMBs to increase IT spending six to eight percent.
Several analysts predict that education, insurance and healthcare companies are likely to be the big IT spenders this year, while construction and engineering and transportation are likely to hold purse strings tightly.
As for the type of technology in demand, insiders list security software, storage systems and service-oriented architecture (SOA) as the year’s hottest commodities. “SOA was the acronym du jour in 2004, and all the big players… are vying in the SOA space, promoting the use of component-based interchangeable application architectures as the new wave of IT infrastructure,” wrote the InfoWorld news staff in its December 30, 2004, article, “2005: The year ahead.” SAP is right in line with the 2005 trend toward Web services and SOA, with its Enterprise Services Architecture (ESA) and its SAP NetWeaver and SAP xApps solutions.

CIO stands for chief information optimist

Who says chief information officers (CIOs) are a pessimistic bunch? Forrester findings say otherwise. It polled executives and found that 54 percent have a positive outlook for their businesses in 2005, compared with 44 percent in 2004. The researcher finds optimism to have increased in each quarter last year. This year may shape up to be even better. In the first quarter of 2004, 33 percent of CIOs described the business climate as strong, compared with 54 percent that say it is strong today.
Another source, CIO magazine, also says things are looking up from the CIO’s perspective. It does a monthly poll of CIOs from a broad range of industries. Its January findings were that IT budgets will go up an average of 5.4 percent over the next 12 months. That’s a bit lower than its findings from just one month earlier, in December 2004, when CIOs said they expected budgets to rise 6.7 percent. It remains to be seen if the 2005 numbers agree with the CIOs’ current predictions. In 2004 the poll found that CIOs expected spending to go up 8.2 percent, but it actually rose just 5.8 percent.
The final word comes from a well-known pundit and InfoWorld editor at large Ephraim Schwartz in his column, “Delivering the Goods,” on December 17, 2004. He wrote up his own list of what he expects to be IT priorities for 2005. He was clear in saying he wasn’t making predictions, but instead was noting what he believes businesses want and how technology can deliver it.
Schwartz devoted several bullet points to the idea that companies want to squeeze more value from technology and reduce their IT spending. “Minimizing the number of platforms companies have to support has always been the pot of gold at the end of the rainbow,” he wrote. He also wrote that cutting costs is a top focus and outsourcing will be on center stage. “Hosted and managed applications, as well as offshoring, are becoming more enticing than ever,” he wrote.

Sarah Z. Sleeper
Sarah Z. Sleeper