IT Spending in 2002: Cautious and Conservative

Estimated total U.S. IT spending in 2001 could decrease by as much as 5 percent from 2000 and increase 4 percent over 2001 in 2002, according to Giga Information Group, Inc. This follows greater than 20 percent growth rates in IT spending in both 1999 and 2000.

“The great majority of enterprises are and will be much more conservative and cautious about their IT investments, focusing on leveraging their existing IT systems more effectively and making them more secure, acquiring new applications and infrastructure only when they deliver tangible benefits, and avoiding large-ticket capital investments whenever possible,” said Giga chairman and CEO Robert Weiler.

Overall, IT will be a drag on the economy through 2002 rather than the engine for growth it was in the 1990s, according to Andrew Bartels, Giga vice president and lead author of the IT spending forecast. IT vendors — especially those selling computer and telecom hardware — will continue to struggle with weak demand until the second half of 2002 at the earliest. “Software and consulting and outsourcing vendors will do a bit better, with growth potential into the very low double digits in 2002,” Bartels said.

Computer and communications hardware has taken the brunt of the cuts, with investment dropping by more than 20 percent this year compared with 2000 levels. Growth here is expected to be flat in 2002. Software and IT consulting, outsourcing and other services have held up better, with some single-digit growth in 2001 and the potential for a slight increase in 2002.

“The cutback in IT spending has been uneven,” Bartels said. “Among individual companies, we continue to see some financially strong companies that are increasing their IT budgets by 15 percent or more, but this is offset by the loss of IT spending by companies that fail, such as Enron, Exodus, various dot-coms, etc., and by general conservatism in spending by most companies.”

By industry, the telecom, retail, high tech, brokerage and transportation sectors have experienced most of this year’s cuts in IT budgets, while government, health care and services sectors are still increasing IT budgets.

Within IT budgets, some categories of spending continue to see relatively good growth (though still much slower than in 1999 and 2000), such as security, application servers and integration, data warehouses and analytics, e-procurement and e-sourcing software, database software, portals, CRM software, human resource and financial management applications, outsourcing of information systems and application development.

In what may be a sign of more conservative IT spending, research from International Data Corp. (IDC) found that Microsoft customers have been slow to migrate toward Microsoft’s new technologies. The research, which is based on a survey of more than 300 IT managers known to be Windows NT or Windows 2000 users, found Microsoft customers are “walking, not running” to technologies such as Windows XP, Windows.Net, Active Directory and Licensing 6.0 terms.

“Most Microsoft customers will continue to follow the Windows roadmap, with broad plans for Active Directory deployment,” said Al Gillen, research manager for IDC’s Operating Environments service. “However, users say their movement to Microsoft’s latest operating systems will proceed on their schedule, not on Microsoft’s schedule.”

In terms of purchasing plans, Licensing 6.0 does not appear to have a dramatic impact on most users. The majority of IT managers surveyed are either still evaluating the new licensing process effects or are not concerned with the changes it introduces. However, 15.4 percent of survey respondents said that Licensing 6.0 provides them incentive to seek alternate products, citing the increase in Microsoft’s software licensing cost as the primary reason.

“The bigger picture shows that few customers will be replacing their Microsoft technology with alternate products over the short term, so competitive products need to continue to offer a strong story of interoperability with Microsoft environments,” Gillen said.

Despite the slow IT sector, this is not an unusual adoption pattern for Microsoft technologies. No apparent rush is expected by businesses to adopt Windows XP or Windows.Net, especially because many IT managers are still implementing Windows 2000. Three out of four companies report that they are only at the beginning stages of this adoption process with many smaller organizations further along than larger companies.

Active Directory adoption appears to coincide with the implementation of Windows 2000. For a majority of users, Active Directory is the directory service of choice for their Windows environments, but Active Directory has also been a reason for delaying implementation of the server operating environment. According to IDC’s survey, 36 percent of respondents have delayed their Windows 2000 rollouts because of the complexity associated with Active Directory.