Solid Spending Growth Predicted Through 2008

Of the 195 CIOs polled for Forrester’s Q3 CIO Confidence Poll the majority plan to increase 2005 IT budgets an average of 6.4%.

The report also found that, overall, “IT optimism” is up quarter over quarter, with the number of CIOs citing a very strong business climate for their industries tripling. This is the first time in three quarters such optimism has been seen.

Seventy-one percent of respondents expect even better performance three business quarters from now, compared with only five percent anticipating a decline. Thirty-nine percent of CIOs are spending above their budgeted run-rates — up from 34% this past quarter.

Technology Digestion

These findings are consistent with the cyclical nature of IT spending, where periods of digestion and refinement follow periods of heavy technology investment. Forrester’s analysis of business investments in IT over the past six decades reveals that eight- to 10-year periods of significant IT spending growth occur after the introduction of a major new technology.

These phases are followed by equal periods in which firms reduce their rate of new investment to focus on ROI and process change that drive business value from the new technology. Forrester estimates that the US is halfway through the current cycle of technology digestion, which started in 2001.

While the next four years will remain relatively quiet in terms of major technology innovations and surges in new investments, the foundation for the next big wave of transforming technologies is taking shape, but our research identifies Organic IT, the X Internet, Web services, and SOA for applications as the key elements of the next technology wave.

Based on its proprietary models, Forrester predicts that investment in information technology and spending on IT services by U.S. companies and governments will increase at the following CAGRs (compound annual growth rate) during the next four years:

— Computer hardware spending will hit its stride at nine percent. Using a three-year depreciation model, growth in computer hardware expenses will peak in 2005 at 14% and then level off. Improved price/performance, the spread of Linux and other open source software, and the growing adoption of blade servers will drive near-term growth.

— Network equipment will grow modestly at an average of four percent. Although spending on new equipment by communications carriers and enterprises will grow by 16% in 2004, it will slow to a moderate four percent in 2005. The need to replace aging LAN equipment and investments in network security appliances will drive demand from enterprises, while carriers will cut investments.

— Software spending eventually will recover with seven percent growth. In 2005, software spending will grow only three percent, with systems management, storage software, and security applications showing the largest increases. Forrester sees spending picking up in 2006 and beyond as applications based on services-oriented architectures (SOA), composite applications, and Web services become more mainstream.

— IT consulting and integrations spending will post modest growth at four percent. This sector took a hit from slowed demand for large enterprise applications, Internet consulting, and the absence of a new “killer app.”

These same factors will limit growth in 2005 to three percent. Future growth will come from companies backfilling projects with consultants rather than new hires and the need for consulting on emerging technologies like RFID, open source, and business process management software.