IT Spending Takes a Hit

Overall business IT spending is expected to fall more than 12 percent from 2000 estimates, according to Cahners In-Stat. It would be the first such decline in the last decade.

The impact of the Sept. 11 attack is also expected to drive spending further downward, particularly among smaller companies (those with less than 100 full-time employees), where business failures are believed to be on the rise. This, combined with smaller IT budgets overall in 2001, should lead to falling IT spending among U.S. businesses this year and a slow recovery in the future, found In-Stat’s report “Entering the Access Era: IT Spending & the Factors Influencing IT Purchases.” The report is available in four editions examining the SOHO, small business, middle market and enterprise sectors.

“This is literally a ‘new’ economy,” said Kneko Burney, director of In-Stat’s eBusiness Infrastructure & Services research. “The unfortunate reality is that many businesses overinvested in IT products and services in 2000, creating conditions for sluggish demand in 2001. This alone was expected to lead to a decline in IT spending prior to Sept. 11. However, one month after these events, we believe the fear and economic uncertainty following will lead to a freeze in IT investments for the next few months and will continue to negatively impact our economy and IT spending well into 2002.”

The areas of IT spending In-Stat expects to be least affected are communication services and networking and outside services like applications integration and hosting.


Per-Firm IT Spending
(includes products, services and personnel)
Market Company Size
(FT employees)
2001
Spending
Change
from 2000
Enterprise 1,000+ $19 million -18%
Middle market 100 to 999 $846,000 -13%
Small business 5 to 99 $70,000 -17%
SOHO business <5 $6,000 -27%
Source: Cahners In-Stat

The quarterly Channel Tracker report from Global Touch, Inc., which monitors the pulse of the IT channel in both the United States and Europe, found that customer demand for IT products continues to lag, particularly in the U.S. market. The survey, done in conjunction with the Morgan Stanley Technology Group, examines such key factors as demand, vendor outlooks, pricing and inventory levels. The Q3 2001 report includes data obtained from almost 500 IT industry companies.

“On the positive side, inventories continue to be well controlled,” said Denise Sangster, president and CEO of Global Touch. “However, overall IT spending does not appear to be headed up as we have historically experienced in the last quarter of the calendar year due to uncertain and changing world conditions.”

The report notes that should demand continue to fall or remain flat, the market could see broad price wars if IT vendors and channel partners try to overcome a lack of volume by reducing prices to stimulate demand. This could cause additional financial problems since the IT channel already operates on razor-thin margins, which would only be exacerbated by further price reductions. Unless sustainable volumes return, the combination of lower volumes and lower margins could create a “domino” effect of liquidity problems that would ripple up and down the supply chain of the IT industry.

“Unless the economy rebounds soon, and that appears doubtful, we could be witnessing the beginning of significant problems for the entire IT industry,” Sangster said. “As we move through the fourth quarter and into 2002, we see a market environment where vendors will need to more broadly share the debt load or risk losing their distribution partners to financial ruin. Without a doubt, cash will be king in the coming months.”

Other findings from Global Touch’s Channel Tracker report include:

  • More than 60 percent of the participants in both the United States and Europe reported that third quarter sales were below expectations.
  • More than half (57 percent) of respondents reported that planned U.S. customer orders of PC servers were cancelled or postponed during the third quarter. Only 18 percent reported a similar situation in Europe.
  • Sales of PC desktops and servers appear to be hardest hit in the United States, with more than 50 percent of respondents citing that they were below expectations.
  • Year-to-year U.S. revenue projections for the fourth quarter are expected to be flat or down for all of the major PC desktop vendors, including Apple, Compaq, HP and IBM. Projections for Europe are much stronger with most expecting moderate to very strong growth for the same vendors.
  • Revenue projections for the U.S. server market show flat growth for Compaq and HP and moderate growth for IBM. In Europe, all three vendors can expect at least moderate growth.

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