In-Depth

Happy Days Are Here Again – Sort Of

Spending on storage and software should grow fastest next year. Among CIOs' top priorities next year: cost reduction, security, application integration, and Sarbanes-Oxley compliance.

• By Stephen Swoyer
• 12/16/2003

The company's final TechStrat Survey of 2003 finds that good things are in store for 2004, with overall IT spending expected to increase modestly, and spending on software and storage, among other technologies, projected to grow more rapidly. At the same time, the company finds that organizations will continue to spend on outsourced services, and says that one area of concern – offshore outsourcing – today accounts for only a small percentage of all outsourcing services revenue.

Elsewhere, nearly one-tenth of CIOs have started to test the utility computing waters, while a majority of CIOs say they’re concerned enough about the security of software from Microsoft Corp. to look to open source alternatives.

Return to Growth

According to Merrill Lynch first vice president Steven Milunovich, three-quarters of CIOs surveyed expect their overall IT budgets will grow by one percent in 2004. This marks a two percent decline from CIO estimates in the firm’s last TechStrat Survey, published in August. While Milunovich cautions that this change is within acceptable parameters, he concedes that it’s not a good sign. “We consider a 2 percent fluctuation within a normal noise level of such surveys, but it’s not encouraging,” he writes. “Top IBM execs have said they see modest growth in IT spending next year; EMC looks for about 4 percent.”

The good news is that CIOs see a lot of flexibility in their growth estimates: 48 percent say there’s a chance that they’ll revise their budget growth numbers up or down, depending on the breaks; 60 percent of CIOs anticipate revising their growth numbers downward as conditions change. “Our guess is that the flexibility of IT spending within a budget cycle has increased given the volatility of the past few years,” he speculates.

The flexibility of budget reviews has also changed. While the majority of CIOs still review their budget growth estimates on a quarterly basis, many – up to 25 percent – now do it on a monthly basis.

Software and Storage Spending Setting the Pace

Projected software spending in 2004 will outpace overall IT spending: On average, CIOs expect their software budgets will grow by 3 percent next year. CIOs are more wary than in the past, however, with 65 percent conceding that skepticism about ISV claims has made them hesitant to spend on software. “Vendors hurt themselves with elaborate claims during the bubble,” Milunovich concludes, noting that users reported being “burned in the past” by over-hyped software. “Many now run detailed tests to validate vendor claims or have performance metrics written into contracts.”

One bright spot is that a majority of CIOs (77 percent) report that they don’t have, or never had, any “shelfware”—or software licenses that they’ve already paid for. Elsewhere on the software front, a majority of CIOs (72 percent) reported that ISVs are increasingly moving from a conventional licensing to a software subscription model, with 53 percent saying that they’re in favor of subscription licensing and another 40 percent opposed. Seven percent remain unsure. Merrill Lynch says that software subscriptions are gaining momentum as organizations transition to pay-as-you-go infrastructures.

Another hot area of growth is storage spending: CIOs said that their storage budgets grew by six percent in 2003, and expect them to grow by an additional eight percent in 2004. “Although storage spending is well below previous growthlevels, it’s been one of the best areas in tech this year,” Milunovich writes. “The key drivers of storage outlays, according to CIOs, are growth in data and consolidation to save money. Related positives include records retention, instant-retrieve backup, data warehousing, and larger file sizes.”

EMC Corp. and IBM made the most gains in terms of storage market share, with EMC notching an uptake of its new Symmetrix DMX arrays, with 58 percent of existing Symmetrix customers investing in the new systems.

Elsewhere, the hot button issues on the lists of most CIOs are little changed from last year: A majority said that cost reduction was their top priority issue for 2004, with security, application integration, and – a sign of the times – Sarbanes-Oxley compliance rounding out the top four. Most CIOs also said that doing more with the same dollars and cutting costs were more important than increasing IT spending to generate revenue growth and investing in new technologies. “The themes of cost reduction and security appear to continue into next year,” he writes. “All these answers point to flattish spending next year. Certainly innovation again will take a back seat.”

Outsourcing Coming on Strong

Still another trend that should carry over into 2004 is the strong growth in outsourcing. Merrill Lynch found that 55 percent of CIOs plan to increase their spending on outsourcing in 2004, while only 15 percent say that their spend will decrease; 16 percent didn’t plan to change their spending on outsourcing, while 14 percent apparently don’t outsource at all.

As expected, application development was the most popular outsourced service, followed by help desk, HR, and call center services. Interest in offshore outsourcing was stronger in the U.S. (6 percent) than in Europe (3 percent). Most CIOs who outsource with offshore providers report that they’re satisfied with the experience, although 30 percent say that they’re unsatisfied. All told, Milunovich says, offshore outsourcing accounts for only a small percentage of overall outsourcing revenue. “A fairly modest portion of outsourcing has gone offshore, which likely means there is room for growth. Most, but not all, have been happy with their experience,” he writes.

Among other advantages, CIO respondents typically said that offshore outsourcing gave them access to strong skill sets at a lower cost, was both on time and on budget, and was easier and cheaper than training their own internal staff. Not quite everything was roses, however: CIOs reported experiencing some fairly predictable problems, such as control and communications issues, a lack of quality, and a failure to realize expected cost savings.

There are signs that CIOs are testing the utility computing waters, too. The survey notes that 30 percent of CIOs have talked with IBM about its eBusiness on Demand initiative, with nearly 10 percent reporting that they’ve actually tapped Big Blue for on Demand services. While these numbers may seem a bit on the low side, Milunovich stresses that utility computing is a still developing market.

Finally, it appears that CIOs may finally be losing patience with what they perceive to be questionable security of Microsoft products: 58 percent said that concerns about security issues associated with the use of Microsoft products has caused them to seriously consider open source alternatives.