Economy to Blame for E-Business Budget Cuts

A Forrester Research survey found that the number of large companies in North America that have cut their e-business budgets has nearly doubled in the past five months, and more than half the respondents point the finger at the weak economy for driving the cuts.

Adding to concerns about the economy, more than 60 percent of the respondents think the Sept. 11 attack will exacerbate current economic conditions. Forrester surveyed more than 800 businesses with more than $1 billion in revenue in May to understand their budget and spending changes since the start of the year. In the wake of the Sept. 11 attack, Forrester went back into the field in late September and early October to assess how these firms continued to adjust budgets and spending.

In May, Forrester found that only 17 percent of large companies had decreased their e-business budgets since the beginning of the year. But by October, nearly one-third of the firms reported such reductions. The amount by which the budgets were decreased is significant. The average reduction was only 0.3 percent last spring, whereas this fall, big companies said that they predict a nearly 6 percent budget drop this year.

“Many industry observers expected that Sept. 11 would result in a drastic drop in business travel, prompting a big influx in spending on such remote-meeting offerings as videoconferencing and instant messaging,” said David Weisman, vice president of global research at Forrester.

But the survey revealed a different trend: an anticipated 6 percent decrease in remote-meeting technology and a more than 6 percent increase in business-travel spending among big companies this year.

“Take a closer look at that technology and you’ll see it’s still too clumsy, awkward, and impersonal to spark a major investment,” Weisman said. “Furthermore, company travel budgets are up because although many people remain too frightened to fly, businesses are still committed to allocating travel resources to keep employees in the field.”

Despite shrunken e-business budgets, 44 percent of the firms plan to increase spending on disaster recovery by an average of 18 percent. Nearly 30 percent say they’ll spend an average of 22 percent more on security. Generally, however, major companies plan to decrease their spending on server hardware, CRM software and wireless and mobile data products.

The labor market has also experienced significant changes since May. Consultants are hit the hardest, with 60 percent of large companies reducing their consulting and implementation services budgets by an average of 30 percent. In addition to existing layoffs, 25 percent of big businesses plan to cut more headcount, and nearly 20 percent will reduce salary expenditures further.

Forrester’s report also found that as of October, all industry segments have cut their e-business budgets. The largest reductions are in technology and business services, which reported a 0.3 percent budget increase last spring; their budgets now have been cut by an average of 12 percent. In May, the financial sector saw a 1.5 percent budget increase; now they are experiencing a 1.7 percent decrease since the beginning of the year. The distribution industry said that their budgets fell about 2.5 percent in May; now they’re looking at a 3.3 percent reduction. Manufacturing budgets went up 0.4 percent in May; now they have decreased 6.3 percent.

A survey carried out across Europe by Gartner for its European Symposium ITxpo found that the number of companies planning to reduce their IT budgets increased by 10 percent points compared to last year. The Gartner survey also confirmed that investments are moving away from capital investment to cost containment and business processes, adding pressure to the already troubled hardware and telecommunications industries.

According to Peter Sondergaard, Gartner’s group vice president and head of research, the next 12 to 18 months are going to be what a “gap-year.”

“This is a period where the No. 1 priority should be to tidy up and lay foundations for the future — to be ready when the tide turns,” Sondergaard said.

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