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IT Spending Slowdown: 'Soft Landing' or Hard Times Ahead?
IT Spending Slowdown: 'Soft Landing' or Hard Times Ahead?

September 11, 2006

IT Business Edge

Question: Your research shows that the percentage of companies reporting increased IT spending for the fourth quarter of 2006 is at its lowest point in more than three years. Did you attempt to determine why companies appear to be scaling back their IT spending?

Carton: We have been tracking a slowdown in the growth rate for corporate IT spending ever since last May — and our most recent survey picked up a clear deceleration in the projected growth rate for the fourth quarter. But there appear to be multiple reasons behind the deceleration: Importantly, three-in-10 survey respondents said their corporate IT spending would be lower due to rising energy prices. And surprisingly, another 15 percent said it would be lower because of increased geopolitical tension in the Middle East. Other probable factors include a well-documented slowdown in overall economic growth and a looming election that may well result in a power shift in Washington.


Question: In particular, anticipated spending for hardware (PCs and servers) appears very soft for Q4. What about spending in other areas, such as software and services?

Carton: Back in our July corporate software survey, we picked up a clear reduction in the growth rate of corporate software spending. Only 30 percent of respondents said their company plans to spend more for software in 2006 compared to 2005 — a clear slowdown from the 42 percent high we saw in April 2006. Moreover, 17 percent said they’d spend less, which was seven points worse than our April results. Where do we see particular areas of weakness? While security software is still the top category respondents said their company is buying in 2006, it's down a whopping seven points since April — led by a drop in anti-spyware software. Other weakening areas include portal and e-business development software and business intelligence and reporting.


Question: Just 16 percent of respondents said they had spent "more than planned" thus far in the third quarter, and 20 percent say they've actually spent "less than planned." Does this imply that companies are getting better at cost control, or are other factors coming into play?

Carton: I think that the corporate slowdown in IT spending has been pretty well managed to date. You have to remember that there was a surge in corporate IT spending during the fourth quarter of 2005, and once again in the first quarter of this year. So generally speaking, it hasn’t been quite as hard for companies to pull back on their IT budgets when other factors — such as rapidly increasing energy costs — have come into play. In other words, the third quarter cutbacks in IT spending have generally been well planned for and haven't caused too much pain to date. However, our survey results suggest that could change. It remains to be seen whether our projected fourth quarter deceleration in IT spending is indicative of the soft landing the Street has been looking for, or is a harbinger of tougher days to come.