Thursday, July 07, 2011

The IT Spending Recovery and Implications for Enterprise Software

Computer Economics has just published its 22nd annual IT Spending and Staffing Benchmarks study. The latest data, based on our survey from the first half of 2011, shows that the US and Canada have emerged from the IT spending recession of the past two years. At the same time, the recovery is weak and organizations have not returned to the IT spending growth rates of the middle part of the previous decade.

That said, some industry sectors are showing IT spending growth rates well above the median 2.0% for the composite sample, as shown in the accompanying figure. The insurance sector leads the way, at 5.0% growth in IT operational spending, followed by wholesale distribution, discrete manufacturing, high tech, healthcare, and process manufacturing, which all beat the composite median.

To no surprise, the sector dragging the averages down is government. Median IT operational spending by governments is falling 3%, the second year in a row that IT organizations in the government sector have reduced spending. The retail and banking and finance sectors also continue to show below-average growth in median IT spending, at 1% and 1.1% respectively.

Other key findings include:
  • IT operational budgets as a percentage of revenue is 1.6% this year, down from 1.8% of revenue in 2010, as revenue gains outpace investment in IT.
  • In a continuation of a six-year trend, IT operational spending per user this year is declining to $6,667, down from $7,002 the prior year, on an inflation-adjusted basis. The long-term trend is indicative of improving IT operational efficiency but is being pushed further by the cost-cutting of the past three years.
  • After three years of zero growth, IT capital spending is up 1.8% at the median. Discrete manufacturing, energy and utilities, and high-tech sectors show the strongest growth in capital investment.
  • The modest increase in IT spending this year is not reflected in IT hiring plans: only 34% of organizations are increasing IT headcount, while 27% are reducing staff levels.
A free 40+ page executive summary of the IT Spending and Staffing Benchmarks study is available, along with a description of the full report.

Implications for Enterprise Software

The recovery in IT spending is certainly good news for enterprise software buyers and sellers. The stronger-than-average recovery in the manufacturing and distribution sectors is especially welcome, as these sectors were hammered hard early in the recession. In our soon-to-be-completed technology trends survey, we are already seeing signs of increasing interest in expanding ERP systems, replacing legacy systems, and new investments in CRM, supply chain management, business intelligence, and mobility applications.

At the same time, our data shows the recovery is weak. Although many organizations are now willing to spend, they still have one foot on the brake, ready to cut back or postpone new spending initiatives if the recovery slows. Fear of a double-dip recession is far from over.

This cautionary mood means that sellers should expect buyers to negotiate hard on price. Flexibility in payment terms, with milestone payments instead of cash up front will also be well received. With its subscription-based pricing and avoidance of large up-front costs, software-as-a-service (SaaS) will continue to be an attractive option for many buyers. Finally, many buyers will be looking to add new functionality to existing systems, rather than completely replace them. Vendors that are able to play well with others will benefit the most in this environment.

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