In-Depth

IT Spending Optimism Disappears

IDC revises its IT spending estimates downward, IBM plans to cut 10,000 or more jobs—and things could get tougher still

• By Stephen Swoyer
• 05/10/2005

For many IT pessimists, the figurative cup is looking a lot less than half full these days. Market researcher International Data Corp. (IDC), for one, has revised its IT spending forecast downward.

IDC’s move came—Cassandra-like—on the same day IBM Corp. announced plans to lay off between 10,000 and 13,000 employees, mostly in the European Union.

If anything, however, IBM’s move—and Big Blue’s dismal Q1, 2005 earnings—underscored IDC’s warning about worsening economic conditions in Europe, which have caused many firms to curtail major IT purchases.

IDC has downgraded its IT spending estimates for Western Europe from 5.6 percent to 4 percent. This was in spite of the fact that U.S. firms have increased their technology budgets and started new projects on security, regulatory compliance, infrastructure management, and business intelligence.

Even so, IDC now projects that IT spending in the U.S. will grow at a 5 percent clip this year; that’s down from the market watcher’s earlier estimate of 5.8 percent. Elsewhere, the researcher says IT spending in Japan will remain essentially flat, with only 1 percent growth.

IBM positioned its proposed job cuts as part of a “restructuring” that could result in layoffs for as many as 13,000 employees, most of them based in the EU, and a pre-tax charge of up to $1.7 billion. Last month, IBM announced earnings that fell far short of consensus expectations for the first quarter of 2005. At the time, Big Blue blamed softness in key European markets such as France, Germany, and Italy, as well as in the Pacific rim, notably Japan.

IBM’s move was expected. Last month, CFO Michael Loughridge acknowledged that Big Blue had “execution issues” during Q1, but refused to attribute his company’s poor quarter to a general slackening in IT spending. At the time, Loughridge confirmed that IBM would announce a restructuring sometime in Q2 to deal with these issues.

The company defended its proposed restructuring, saying it would shift employees into more direct client relationship roles and eliminate the “traditional pan-European management layer” required to coordinate activities across countries’ borders.

“As a result, IBM will create a number of smaller, more flexible local operating units in Europe to increase direct client contact,” Big Blue said in a statement. “On a worldwide basis, IBM plans to improve the efficiency of its services operations by consolidating much of the service delivery workload into fewer locations by using standard job roles, processes and tools.”

IDC warned that things could get bumpier still. "We remain focused on the downside of expectations for Q2 and the rest of the year, with interest rates, oil prices, and currency fluctuations all potential wild cards which could impact business confidence and investment." said Stephen Minton, vice president of Worldwide IT Markets at IDC, in a statement.