IT Budgets Hit the Wall

A new survey pokes holes in cheery forecasts of increased corporate tech spending.
Scott LeibsDecember 1, 2002

An October report from research and consulting firm Meta Group Inc. painted a bleak picture for information technology budgets, suggesting that anticipated increases are largely illusory and, worse, that cost-cutting efforts have now “hit the wall.” According to lead author and executive vice president Howard Rubin, projected IT budget increases are “artificial,” at least those that are expressed as a percentage of revenues: with revenues dropping, flat IT budgets seem to be getting larger.

More distressing, a prolonged focus on reducing discretionary costs has put some companies at risk. “Companies that have focused on cuts have pretty much exhausted the savings opportunities,” says Rubin. “They really have no place to go, and there is a danger that aging systems will crack.”

To achieve further cuts, Rubin says companies will have to renegotiate licenses, typically to usage-based models, and move toward “selective sourcing” of components. “Just as consumers chase ever-declining cell-phone plans,” he says, “so too will companies have to be willing to switch suppliers when better deals come along.”

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Rubin suggests that this is not so much a dire situation as what he terms a “natural evolution” of IT economics. “IT is no longer a separate domain,” he explains. “The same principles of investment and risk that drive the rest of the business should now be brought to technology purchases and deployment.” But he warns that impatient C-level executives who demand further cuts could put operations at risk, particularly in customer-facing areas where “24/7” response has become expected.

Meanwhile, rival research firm Gartner said in October that worldwide IT budgets will grow 7 percent next year, in actual dollars, led by spending in telecommunications and IT services. In August, a survey conducted by CFO magazine and Morgan Stanley found that among larger companies, nearly twice as many CFOs anticipated flat IT spending in 2003 as anticipated an increase, and nearly one in five anticipated a(nother) decrease.

Who Cut the Most

Change in IT spending, 2001-­2002.

  • -22.2% Information Technology
  • -13.6% Electronics
  • -12.2% Consumer Products
  • -10.9% Financial Services
  • -7.5% Construction and Engineering
  • -7.3% Transportation
  • -5.5% Energy
  • -4.4% Telecommunications
  • -4.0% Utilities
  • -2.4% Media
  • -2.1% Chemicals
  • -1.3% Metals/Natural Resources
  • -1.2% Manufacturing
  • -0.1% Retail
  • Banking +0.3%
  • Professional Services +1.3%
  • Food and Beverage +1.7%
  • Health Care +2.6%
  • Insurance +3.4%
  • Pharmaceuticals +6.5%
  • Hospitality and Travel +10.0%
  • -3.1% Average

Source: Meta Group