As users of IBM's eServer iSeries are making final decisions about their IT budgets for 2006, they are getting confusing signals about what other companies will spend next year. In recent months, IT spending surveys have yielded widely differing results. This reflects a feeling among many firms that they face a more uncertain business environment in 2006 than they did during this year.
The growing anxiety among companies stands in stark contrast to the confidence that prevailed during the second half of 2004. When I wrote an article last year about IT spending forecasts for 2005, surveys by multiple research firms agreed that North American small and medium-size businesses would increase their outlays by between 6% and 7%. In addition, polls of projected spending by CIO Magazine Tech Poll were generating consistent numbers every month. Indeed, in seven surveys conducted from May through November of 2004, companies told CIO Magazine that their IT spending for the next 12 months would grow between 7.4% and 8.7%.
As an examination of this year's figures demonstrates, those days of consistent optimism are behind us. Just look at the wide differences between the spending growth estimates that CIO Magazine survey participants provided during the last seven months of this year.
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Projected Growth in IT Spending Over the Next 12 Months
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April
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7.9%
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May
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4.8%
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June
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6.0%
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July
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10.1%
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August
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7.1%
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September
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9.3%
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October
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5.2%
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[Source: CIO Magazine Tech Poll]
In all my years of studying IT budgets, I have never seen an ongoing spending survey come up with such different numbers in this short of a time frame. Clearly, the survey participants are responding to rapidly changing economic outlooks. Those same changing outlooks could be influencing the IT spending studies of other research groups. Earlier this month, for instance, Forrester Group predicted that worldwide IT spending will increase by 7% in 2006, but by only 2% in 2007. A day later, Gartner Group estimated that IT spending in the United States will grow by 5.5% in 2006, but that European spending will grow by only 3%. Taken together, these figures paint a picture of confusion and caution over 2006 expenditures.
Making Sense of the Numbers
From where I sit, many companies have good reason to be confused and cautious about the business forecast for 2006. The year is shaping up to be a period when inflation levels and interest rates will rise or, at the least, be highly volatile. It is also likely that housing values in North America will cease to appreciate in many regions and may actually decline in some areas. In such an environment, consumers will have less disposable income and feel less confident about their financial futures. Their reaction will be to cut back on discretionary spending.
As a result, companies that make, distribute, or sell consumer discretionary goods could have a tough time meeting their revenue and profit objectives. High energy prices could also hurt the travel, transportation, and leisure industries. In addition, banks could face shrinking margins as yield curves flatten and loan defaults increase. I believe that many companies in these industries are reducing their 2006 IT budgets at this moment or will do so during the course of the year.
By contrast, companies in some industries could escape 2006 with little or no damage to their IT budgets. Among them, firms in the energy industry could be the most likely to keep any budget increases they are granted. In addition, companies in non-cyclical industries such as healthcare and utilities should be able to honor previously promised spending increases. However, if a recession rears its head in 2006--a distinct possibility in my opinion--even these industries could cut back on IT spending during the second half of the year.
If this forecast has you worrying about your job, please be aware that I do not expect layoffs at iSeries shops during 2006. However, if my predictions are accurate, I do expect some cutbacks in capital spending as the year progresses. As such, if you have a capital budget for 2006 and plan to invest in new capabilities, I would recommend that you make those investments earlier in the year rather than later. I would also encourage you to think through how your IT investments will reduce costs and improve corporate profitability. Your thoughts on those topics could receive increasing scrutiny over the course of the year.
Finally, I would encourage all of you to remind your senior management team--if you have not done so already--about the strengths of the iSeries as a platform for simplifying IT infrastructures. As numerous studies have demonstrated, the iSeries is a leader when it comes to keeping operational costs under control. That strength should hold the server in good stead as IT organizations seek to navigate the uncertain year ahead.
Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology. You can reach him at
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