Slowdowns in economic growth, coupled with hesitancy to adopt new technology, will temporarily stall investments; high energy prices are partly to blame.
Posted Oct 14, 2005
IT spending will shrink from 7 percent increases in 2005 and 2006 to a mere 2 percent increase in 2007, then rebound to near double-digit growth by the close of the decade, according to a new report by Forrester Research. "Technology spending is currently very brittle. Without having a must-have technology, most businesses are only investing in technologies with tangible ROI," says Andrew Bartels, vice president at Forrester. "That means they will respond quickly if corporate revenues and earnings start to slow in an economic slowdown, which seem likely at some point in the next couple of years."
Business investments in new computers, communications equipment, and software is being driven by two factors: changes in overall economic growth and the state of new technology introduction or adoption. During the current period of adopting Internet technologies, which according to Forrester, started in 2001, overall tech spending has averaged 7 percent. However, Forrester anticipates that nominal US GDP will slow in the next two to three years, most likely in late 2006, and with it, IT spending. Rising interest rates and high energy prices will stall IT spending. In addition, when GDP growth stalls, IT spending slows even more, with cutbacks in equipment investment leading to decreases in spending on services and staffing within the IT department.
Forrester predicts that investments in IT technologies and services will fluctuate around the following compound annual growth rates (CAGR) through the remainder of the decade:
Computer equipment will set the pace with a CAGR of 9 percent through 2008 due to attractive prices/performance propositions from new servers, PCs, and storage hardware. This growth will remain strong into early 2006, but new investments will slip in late 2006 and 2007. Spending will rebound and rise to 11 percent in 2009-2010.
Software spending will hold steady at a 6 percent CAGR. There are no major new products from vendor heavyweights to stimulate software spending until the launch of Microsoft's new Vista operating system in late 2006 and the release of the new SOA-based application suites from Oracle and SAP in 2008, according to the report.
IT services spending will fall in 2007. The revival in IT consulting and systems integration that began in 2005 will slump to one percent by 2008. Growth will rebound to 13 percent by 2009-2010 as companies seek consulting to help navigate new technologies.
IT outsourcing will reach saturation. Firms will continue to outsource ongoing new development work, individual applications, and telecom networks. Growth will slow in 2007-2009 to 6 percent as the number of outsource prospects shrinks with adoption.
"We recommend that firms that want to get a jump on competitors should be investing in these emerging new technologies, many of which, like VoIP or server virtualization, have real savings value today," Bartels says. "That said, companies should recognize that most of the next generation of technology is still maturing, so there are risks, as well as rewards."
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