Ever since Y2K proved to be a non-event and the dot-com sector started to implode, information technology (IT) budgets have been feeling the finance department's increasingly sharp budgetary blade. In the beginning of 2002, the carnage to IT budgets looked as if it would be particularly bloody, but the hemorrhaging subsided as the year progressed. Spending ended up flat to slightly depressed from 2001 levels, which of course were already a far cry from the double-digit growth rates of the late 1990s.
So what is the outlook for 2003? A year ago, 2003 looked like the comeback year with spending growth predictions of 8%, 9% and even 11%. In the world of IT, hope clearly springs eternal. So should we be worried that even the most optimistic technology consultants are feeling a bit queasy about 2003 at this point?
The pessimism reflects the economy, which many analysts say put IT projects on ice in 2002. This year's slow start would augur a similar showing in 2003. Throw a potential war in Iraq into the mix, and IT spending could be even weaker.
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Those who argue for slightly higher growth usually point to pent-up demand: People have to upgrade older systems, and there is an immediate need for better real-time financial snapshots. Simply complying with many new regulations, such as those set forth in the Sarbanes-Oxley Act, should prompt some spending. (See story on Page 17.) "The longer IT holds on to old equipment and software, the more insistent they become that they upgrade," says Andrew Efstathiou, an analyst at the Yankee Group in Boston.
But finance departments–at least in 2001 and 2002–were more in the habit of cutting top-line spending and then letting departments decide how to allocate. If that continues in 2003, many executives can easily see a scenario in which compliance projects, for instance, are funded but overall spending remains the same or less. As the pessimists point out, budget cuts sometimes lag the reality of the economy. "I think 2002 was a year when people really started to implement a lot of the cuts that were hinted at in 2001," said Jed Rubin, an IT analyst at Meta Group in New York. "What some financial managers are saying to IT is that they see IT represents 10% of total operations spending, and they're telling them to scale that back without understanding what that means."
True enough. But once the economy shows signs of real life, the curbs are often at least relaxed much more quickly. Efstathiou predicts that corporations will follow the trend they established in 2002, sitting out the first half on the sidelines and then releasing funds in the second. "The economy will be improving and enterprises will see their own revenue streams improve, and that's when they will release contracts and undertake initiatives they have in the pipeline but have on hold," he says.
So when the spending does resume, what will companies buy? In addition to the upgrades, Meta's Rubin sees Web-related spending increasing, but cautions against a significant jump. Outsourcing might also get a boost, as cost-conscious companies look to move these expenses off their books, Yankee Group's Efstathiou says.
Meredith Childs, an associate analyst at Forrester Research in Cambridge, Mass., notes that companies may also start spending more on disaster recovery systems and customer relationship management software as ways to protect and maintain revenue.
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