Deflating IT Budgets: Behind the Numbers

Following a report on the latest IT spending data from technology research company Computer Economics that found 42 percent of surveyed companies were reducing IT staff, eWEEK interviewed Computer Economics analyst John Longwell.

In an e-mail exchange June 24, Longwell explained some of the nuances of the company's latest report, "IT Spending and Staffing Benchmarks 2010/2011," which found budgets in 2010 to be a whole closer to 2009 numbers than expected. Last year, 46 percent of 200 companies surveyed in the United States and Canada reduced IT headcount. This year, just under 30 percent of companies surveyed said they have the budget to increase staff, but numbers on capital spending are slightly up.

"It seems the mood has shifted from cautious optimism to hopeful pessimism," said Computer Economics President Frank Scavo.

The following is the question and answer exchange between Longwell and eWEEK.

IDC predicts [3.4 percent] growth in capital spending in 2010, and the latest Computer Economics data appears to show there is money being spent on infrastructure. What are you seeing with capital spending?

Capital spending seems to be recovering slightly faster than IT operational spending, which makes sense. Capital spending is more flexible; it is easier to start and stop projects than hire and fire people.

But even in capital spending, the trend is weak. At the median, we are not seeing any change over last year in capital or operational budgets. Some companies, though, are increasing spending. At the 75th percentile, capital spending budgets are up 15 percent. That compares with an 11 percent drop at the 25th percentile.

Some sectors, like retail, wholesale distribution and process manufacturing, are investing in IT projects. Other sectors, like government and utilities, are slashing capital spending. So it's a mixed picture and it is a little early to start celebrating.

What areas of IT are being spent on?

General areas that are rising as a percentage of the IT budget are network infrastructure technology, data center OS and management software, and applications software, and areas that falling this year are servers and storage hardware and telecom/datacom carrier expenses.

What kinds of projects are being budgeted for?

We'll have a better idea in a few weeks. We are still assessing our technology adoption data, but will be releasing that separately.

Is there any alignment between companies that are reducing staff and capital spending? Or are those companies reducing operational budgets still spending on hardware, software and services?

It's a real mixed picture. We find many companies are cutting operational expenses while increasing capital spending. There are strategic investments being made and companies are adjusting their priorities. Large organizations, of course, have the means to cut and invest at the same time, and that's what we're seeing. Utilities seem to be cutting capital spending, but not operational spending. Retailers are cutting operational spending, but making capital investments.

What is really interesting is very few companies are maintaining the status quo. They are either cutting spending or increasing spending. Organizations are searching for ways to become more efficient and we will certainly see some efficiency gains coming out of this recession.

Is outsourcing of operations at play at all?

That's an interesting question. We won't have a complete picture of what is occurring in outsourcing until we analyze the data closer and release our outsourcing study later this year.

What we saw over the last two years is some pullback from outsourcing at the edges. As companies cut IT expenses, they also reduced outsourcing expenses. In terms of priorities, most organizations are not focused on outsourcing as a strategy to reduce costs. They are not back-sourcing either; It appears to be status quo.

The one exception is government. City and county governments are placing far greater emphasis today on outsourcing in response to the pressures being placed on their budgets. That may include following the lead of Los Angeles and outsourcing e-mail to the cloud. We'll have to wait and see. That could develop into a big trend this year.