In-Depth

IT Spending Poised for Modest Rebound, Analysts Say

Managers laud expanding budgets, but say they’re under more pressure to cost-justify new projects and stretch IT dollars

• By Stephen Swoyer
• 12/14/2004

In March, market research firm Gartner Inc. optimistically predicted that IT spending was poised to rebound in 2005, albeit modestly. Predictions like this have famously come and gone, but at Gartner’s Symposium/ITxpo—held in Orlando in mid-October—analysts stuck with this forecast, predicting a five percent uptick in IT spending in 2005.

This optimism is shared by many IT administrators, who report that their IT budgets have, indeed, expanded in 2005—often dramatically. At the same time, they stress, they’re under even more pressure to cost-justify new projects and—regardless of having a bigger IT billfold—must find innovative ways to stretch their IT dollars.

“Spending for 2005 has definitely increased. There is some increase for support and maintenance, but a very sizable portion of the increase is towards new projects [such as Microsoft] Exchange 2003, some network infrastructure upgrades, and various security initiatives,” confirms Andrew Baker, a director of network services and security with a prominent media conglomerate. Adds Baker: “To some extent, we are making up for lost technology time.”

For many companies, however, the resurgence in planned IT spending is a fragile thing. Take Joe Poole, a mainframe systems programmer with a prominent retail chain based in the United States, who says that his IT department’s 2005 budget looks good—on paper. Depending on how the Christmas shopping season shapes up, he stresses, this could change.

“We have a list of 2005 projects that are being considered, but we've also seen approved projects dumped at the last minute,” he confirms. “Retailers are always reviewing the previous season—if sales were good, more projects get approved.”

So if companies have, in fact, loosened their purse strings, how are they spending their IT dollars? In a survey of 100 corporate buyers released in June, Bank of America found that fully 70 percent of respondents anticipated that their application budgets would grow over the next six to 12 months. Bank of America indicated that respondents planned to invest their money in any of three areas: business intelligence, compliance, and financial management software.

Consultancy Forrester Research, for its part, anticipates that spending on computer hardware will explode in 2005 (up 14 percent), while spending on other technologies—including network equipment (up 4 percent in 2005, following 16 percent growth in 2004), software (up three percent in 2005) and IT consulting (up three percent in 2005)—will grow only modestly.

Predictably, most IT professionals say that their IT budget dollars are earmarked for a variety of purposes.

“There are some new, custom-built apps that are being rolled out, but our major initiatives center around security and consolidation,” says network director Baker. “In particular, Sarbanes-Oxley is a big issue on the horizon.”

Elsewhere on the security front, says Baker, his organization plans sizeable investments in vulnerability assessment, patch management, disaster recovery and business continuity, antivirus, anti-spyware, and anti-spam technologies.

Don Cave, a consultant with a prominent insurance company based in the Northeast, says that his client organization plans to invest in custom application development. More to the point, Cave says, his company has earmarked budget dollars to help integrate the fruits of outsourced application development projects into its existing application infrastructure. “[We’re] taking outsourced applications and coding them into existing systems,” he explains.

Like many companies, Cave’s organization also plans to focus on business intelligence initiatives in 2005. “[We’re] expanding the [data] warehouse to accommodate more data, and provide more consolidated reporting. The warehouse is becoming more [of] a data factory for new applications” with 75 percent growth each year, he comments.

Similarly, Robert Williams, a senior IT manager with semiconductor reseller MicroChip Technology Inc., says that his organization has big BI plans in 2005. “We hope to spend money on new BI tools to enhance our data warehousing environment,” said Williams in an interview this summer.

To that end, MicroChip is participating in Microsoft’s SQL Server 2005 beta program, and plans to go live on SQL Server 2005 when it ships next year. “We will look at [Microsoft’s] [OLAP] analysis tools as well as Business Objects for the end-user interface,” he continued. MicroChip also plans to ramp up its data integration efforts, specifically consolidating transaction processing within one system, as opposed to several, non-aligned systems. “All the arguments for data warehousing hold true. It’s just a matter of convincing executives how good it can get if they make the investment,” Williams concluded.

Mainframe programmer Poole says his employer has several new technology initiatives on tap for 2005, including RFID investments, vendor invoicing via EDI, an enterprise portal, and enhancements to its commerce site. One of his organization’s biggest projects, he says, is reducing its dependence on ISV software. The reason? Maintenance costs, which—at 5 percent of budget—“make a [mainframe] CPU upgrade an ulcer producer.”

Most IT managers report that although the size of their budgets has increased, they’re still under-financed. In some cases, these IT managers report, this flies in the face of common sense. “Oddly—or as usual—they are denying some projects that are obviously going to be done anyway. There is even more effort to hide reality,” says consultant Cave.

This isn’t to say that such projects won’t eventually see the light of day, he stresses. “Of course, they will be introduced later as ‘emergency’ or having an ROI because of degradation producing costs. Then someone can look like a hero for fixing something that never should have been broken with good planning,” he explains. “They'll cut the budget up front and save the system on the back end. Twice heroes.”

Thanks to the lean years of economic downturn, network director Baker says, many organizations have found creative ways to do more with less. Baker’s budget didn’t increase in 2004, for example, but that didn’t stop him from going ahead with several new projects.

“Our budget didn't really increase for 2004. Very little was earmarked in the way of new projects, although we did begin to pursue some new projects—minus budgets,” he confirms. Baker’s solution: Stealth projects, using leftover funds from projects that have officially been approved.

Similarly, mainframe programmer Poole says it often takes a worst-case scenario to win approval for new projects. “In my world of hardware, the best way to get new projects approved is when the old stuff isn't sufficient to [do] the job at hand,” he explains. “If you run out of MIPS, it's very apparent. Same thing when you run out of disk space when the pet project of the year is a data warehouse—you'll get more disk [space] approved quickly.”

Because companies are increasingly skeptical about IT investments, administrators say they’re under more pressure than ever to cost-justify potential projects. “Our capital budget worksheets look more intimidating every year. ROI, net present value, net future values, corporate sponsor, etc. It's a long exercise to get something approved,” concludes Poole.

Network director Baker concurs. “There's definitely a need to cost-justify virtually all of our IT projects, and while ROI calculations aren't highly refined today, we're moving towards more sophisticated analysis in order to ensure that we're not just deploying technology for technology's sake,” he comments.

While many IT managers doubtlessly believe that business executives are overly skeptical of proposed IT investments, some concede that the newfound emphasis on cost-justification can occasionally be a good thing.

“This time there are major business enhancements in the budget. Some of this is to decrease maintenance costs on parts of the system that cost too much to support,” says Cave. “A major one of these is probably a wise investment and overdue and will provide … possible ROI in less than 1 year because the current cost is large and outsourced.”

Related Article:

Enterprise Systems' IT Budgeting Survey Results: What's Ahead for 2005
http://www.esj.com/surveys/itbudget2004.aspx