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Tech Spending May Veer Off Fast Track

December 11, 2007

By Pui-Wing Tam and Ben Worthen
The Wall Street Journal Blogs.com

Global technology-spending growth, which had been reviving for the past few years, appears headed for a slowdown in 2008.

In recent weeks, research firms such as IDC and Forrester Research have revised down their tech-spending growth forecasts for next year. The firms blame subprime-mortgage fears, the turmoil in the U.S. financial sector and rising energy prices, among other factors, as reasons that chief information officers, or CIOs, won't raise budgets much next year.

David Cortese, a divisional chief information officer at Sony Pictures Entertainment Inc., a subsidiary of Sony Corp. (SNE) in Culver City, Calif., is one of those who won't be increasing his 2008 tech budget. Mr. Cortese says the portion of his company's tech budget dedicated to capital expenditures -- which is typically in the eight figures every year -- will stay at the same level as this year. While he still plans to spend on new technology, his goal is to shell out just enough to keep his company's information technology up-to-date.

That is because Mr. Cortese's unit installed a major software system from SAP AG (SAP) and he is focused on less-expensive tech projects that can reduce costs. His company's DVD business is being affected by an industry slowdown, he says. So "people's budgets are being held flat," Mr. Cortese says, though he adds, "It's not doom and gloom."

Experiences like Mr. Cortese's are being reflected in 2008 forecasts for technology-spending growth. Last week, IDC cut its 2008 projection for world-wide tech-spending growth to between 5.5% and 6%, down from a previous forecast of 6.6% and from this year's expected growth of 6.9%.

Much of the reduction in growth is due to a U.S. slowdown. Forrester Research says it predicts U.S. tech-spending growth of 5.2% for 2008, down from a previous 2008 forecast of 6.4% and from this year's expected 5.7% growth.

Research firm Gartner says it expects 2008 U.S. tech-spending growth of 5.7%, down from 6.1% this year. Tech-spending growth in other locales, particularly emerging markets such as India and China, is expected to be more robust.

The overall diminished forecasts come after a period of recovering global growth in technology spending. Following the dot-com bust in 2000, many companies curtailed spending on IT. That led to declines in world-wide tech spending in 2001 to 2003, according to IDC. But in 2004, technology spending began to grow again, rising 4.7% that year, 6.9% in 2005, 6.1% in 2006, and an expected 6.9% this year, says IDC. While that didn't approach the double-digit growth rates of the late 1990s, it helped tech companies such as Cisco Systems Inc. (CSCO) and Hewlett-Packard Co. (HPQ) and lifted tech stocks.

In the past three months as the U.S. economy has slowed, signs of caution among chief information officers have grown. In an October survey of CIOs, investment bank Goldman Sachs found indications of "decelerating spending growth." Last month, Cisco Chief Executive John Chambers said he expected U.S. tech spending to be "lumpy." Not long afterward, ChangeWave Research released a survey of corporate IT departments that found only 24% of the nearly 2,000 companies questioned plan to increase their budgets in 2008's first quarter compared with the fourth quarter. Eighty-three percent of those surveyed were U.S. firms.

Slower growth in tech spending won't cripple the economy -- tech makes up just 7% to 8% of the U.S. economy, according to Sanford C. Bernstein & Co. -- but it does mean tech growth may be confined to selective pockets next year, says Sarah Friar, an analyst at Goldman. She expects cautious information chiefs to turn their IT spending to projects that will help them reduce costs. Virtualization -- a technology that makes the back-office computers that send emails and process data more efficiently -- and tech outsourcing services, for instance, are likely to benefit, she says.

The U.S. Tennis Association's CIO, Larry Bonfante, says he plans to invest in tech projects next year that will directly benefit his business, such as software that helps emergency personnel coordinate their responses to incidents that occur at the U.S. Open, an event the USTA, of White Plains, N.Y., organizes.

Mr. Bonfante, who expects his seven-figure tech budget to stay flat in 2008, won't invest in other technology -- like Microsoft Corp.'s (MSFT) Windows Vista computer operating system -- because he doesn't see the business benefit. "We're being asked to be austere," he says.

Howard Weiner, chief information officer of the U.S. Merchant Marine Academy in Kings Point, N.Y., says tech budgets are always one of the first places organizations look to make cuts when economic conditions tighten. Mr. Weiner's budget is tied to the government's appropriation for the Department of Transportation that is yet to be finalized. If Congress can't agree on an appropriation, his IT budget in 2008 will stay the same as this year, he says.

Mr. Weiner says in real terms a flat tech budget means he will have less money to spend on new technology because his fixed costs -- like the salaries he pays his staff and the money he spends to support existing systems -- increase every year.

Not all information chiefs are looking at tighter purse strings next year. Chris France, chief information officer at Little Diversified Architectural Consulting Inc., an architectural-design company in Charlotte, N.C., says his seven-figure tech budget will rise 15% to 20% next year, about the same increase as this year. His budget is tied to the company's revenue, and the economic slowdown hasn't hit the commercial real-estate markets where Little works. In Charlotte, Mr. France estimates the vacancy rate is around 1% for commercial buildings.

Mr. France plans to invest his money in technology -- like a video-conferencing system -- that will help Little cut costs in the event of a downturn.

Overall, Mr. France remains optimistic about 2008. "We're still growing," he says.

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