In-Depth

IT Spending Rises Despite Tough Economic Times

IT spending should eclipse $3.4 trillion this year -- a year-over-year growth rate of 8 percent

• By Stephen Swoyer
• 08/26/2008

Last week, market watcher Gartner Inc. issued a report in which it projects that IT spending should eclipse $3.4 trillion this year -- that's a year-over-year growth rate of 8 percent.

That may seem at odds with another recent Gartner survey, this time of CIOs, that suggested a slowdown in IT hiring is possible -- not what you'd expect when IT spending is rising (see http://www.esj.com/Enterprise/article.aspx?EditorialsID=3273).

Gartner principals insist that ongoing economic uncertainty doesn't seem to have adversely impacted IT spending.

"The U.S.-led economic downturn shows no sign of causing a recession in IT spending," said Jim Tully, vice president and distinguished analyst at Gartner, in a statement. "In subsequent years we will see reduced growth, but the fundamentals remain strong. Emerging regions, replacement of obsolete systems and some technology shifts are driving growth."

There's a caveat, of course: one reason IT spending seems so strong is because it's measured in dollars, a currency that has undergone a period of protracted decline relative to others. According to Gartner, that helps to account for much of the "growth" measured by its survey. On an adjusted basis -- i.e., measured in terms of "constant currency" -- IT spending is growing at about 4.5 percent.

Aside from its surprising -- perhaps even provocative -- spending projections, the Gartner report does contain a few other surprises. For example, researchers say it looks like we're transitioning away from traditional IT leasing or buying models toward a services-based model.

"Organizations are switching from company-owned hardware and software assets to per-use service-based models. This will impact the industry in various ways," Tully said. "The projected shift to cloud computing, for example, will result in dramatic growth in IT products in some areas and in significant reductions in other areas. In general, assets will be utilized with greater efficiency, and we are assuming that the overall effect on market growth will be neutral. We also recognize that there is considerable upside potential for higher growth."

The two biggest IT budget categories are software (which is poised to grow by fully 10 percent in 2008) and IT services (with an estimated 9.4 percent growth). This isn't surprising, according to Gartner, which concludes that the IT services sector actually benefits from ongoing innovation in software technology -- i.e., new software typically requires labor-intensive services to implement.

"Most companies updated their software systems during the period 1997 through 2001, so we are in the middle of an upgrade cycle that should extend past the end of this decade," said Joanne Correia, managing vice president at Gartner, in a release.

"However, the replacement of systems does not automatically equate to new software market growth," she continues, citing the growth of software-as-a-Service (SaaS), cloud computing, SOA, Web 2.0, and open source software as particularly disruptive technologies. "Many of these factors are impacting market growth as enterprises replace assets with per-use services."

According to Gartner, most of today's IT spending gets funneled toward services rather than discrete products. It's a trend that's only going to get more pronounced over time.

"Spending in IT services is being supported by two main factors," said Kathryn Hale, research vice president at Gartner, in a statement. "Businesses are investing in improvements to internal processes aimed at reducing costs, while often maintaining some of the prior interest in innovation. The second factor is that globalization allows IT services providers to mitigate the risk of weakening demand by operating in more markets."

On the hardware side, sales of PCs are fueling most of the growth. Currently, PC revenues account for about 60 percent of total hardware spending. What's surprising, according to Gartner, is that PC sales should continue to soar -- in spite of disruptive technologies such as virtualization and Web 2.0 -- with no let-down in sight.

"The market growth outside of the U.S. and the effects of the weak dollar are major factors in growth in U.S. dollar terms. In addition to regional shifts, a strong shift to mobile PCs is occurring," Tully said.