Now that summer is officially over and IT staffs are getting back to work, the days are fast approaching when many of you will start drafting your IT budget proposals for 2007. While I hate to be the bearer of bad news, the chances are good that most of you will receive smaller budget increases for the coming year than you did for the current one. However, do not despair. I have ideas to offer that could help you get the funding you need to stay afloat.

As those of you who have read my previous articles on IT spending will remember, I predicted last year that many companies would face economic headwinds in 2006 that would lead them to be more cautious about IT spending, especially during the second half of the year. That caution has been rearing its head lately in IT spending studies. Two months ago, a CIO magazine tech poll found that IT executives were predicting a 6.9% increase in their spending over the next 12 months. While that represents a solid increase, it was down from the 8.6% increase that managers predicted in a similar survey completed three months earlier.

Last month, a study of IT spending that ChangeWave Research conducts on a quarterly basis showed a further erosion in corporate confidence. When ChangeWave asked executives whether their IT spending for the fourth quarter of 2006 will increase or decrease when compared to the current quarter, only 27% said that spending would increase. By contrast, 33% stated they would increase next-quarter spending in the same survey three months earlier, while 36% predicted increases in the survey that was conducted six months ago. Just as bad, 19% predicted spending decreases for the fourth quarter of this year, up six points from the 13% who predicted declines three months ago.

What conclusions should System i shops draw from these numbers? My biggest takeaway is that growing concerns over the 2007 economic picture will lead many chief financial officers (CFOs) to take red pencils to their budgets for the coming year. They will do so because of...

• Stagnant or falling house values that are leading homeowners to put discretionary spending on hold
• Higher inflation fueled by increased costs for oil and other commodities
• Labor costs that are growing due to declines in the number of available workers and increased turnover
• Geopolitical tensions that could lead to further economic dislocations

Despite these sobering problems, the world is not heading for a financial Hades in the proverbial hand basket. Despite Intel's announcement last week that it will lay off 10,500 employees, few companies have plans to shed workers. Moreover, there is little sign that consumers will reduce their spending on consumer staples or vital services such as healthcare. In addition, much of eastern and southern Asia is experiencing an industrial revolution that shows little sign of abating. That revolution is creating hundreds of millions of middle-class consumers who want to live as we do. Their spending will benefit North American firms that are establishing ties with Asian markets.

What's the bottom line? Over the next year, I predict that the economy will experience a significant reduction in growth rates but not a full-blown recession. That said, some industries will experience their own mini-recessions. At the top of this list will be homebuilders and industries that rely on housing growth for their sales. Companies that make or distribute consumer discretionary products, not to mention discretionary services, could also see contracting revenues. On the other hand, a likely decline in the value of the dollar could prop up U.S.-based firms that have significant export businesses, as their goods will become cheaper.

On the whole, I expect IT budget increases among North American small and medium-sized businesses will decline from the 6% to 8% levels that were common for the last three years to the 4% to 6% range. Most of this increase will get soaked up by increased staff compensation. As such, spending on new hardware and software will likely be flat next year. However, many companies could become more optimistic about the economy during the second half of 2007 as they sense that the worst of the slowdown is behind them. That could lead some firms to loosen their purse strings a little.

With these thoughts in mind, here are some suggestions for how you can craft a winning IT budget proposal for next year. First, take the time to understand how economic trends might affect your industry and factor those trends into your proposal. If you show your CFO that you understand the world beyond the data center, the respect you gain will help you when tough budget decisions have to be made. Second, use your budget proposal as an opportunity to explore creative options with your management team. For instance, if you think that the economic environment will be more favorable during the second half of 2007, ask for a mid-2007 budget reevaluation. Finally, recognize that 2007 will likely be a year when most companies put the focus back on cutting costs instead of seizing new opportunities. As such, find ways to make any proposals for new IT spending contribute to greater staff productivity, reduced overhead, and other benefits that can flow quickly to the corporate bottom line. Since the System i has a history of helping companies realize such benefits, smart investments in the platform could help you dodge the economic storm clouds that are forming on the horizon.

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 This email address is being protected from spambots. You need JavaScript enabled to view it..

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology.

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