While IT spending was virtually flat during 2003, recent studies indicate that many companies will finally start opening their checkbooks during 2004. There are also signals that spending increases could be the greatest at medium-size businesses. That is good news for cash-strapped IT departments, especially since many of them are hammering out the details of their 2004 budget requests this month.
The latest good news comes from a monthly poll of IT budgets conducted by CIO magazine. In last month's poll--which garnered 206 responses drawn almost entirely from North American firms--IT managers indicated that their companies plan to increase IT budgets by an average of 6.4% over the next 12 months. That figure includes budgets for hardware, software, IT staff salaries, and IT services.
By contrast, the same group stated that their IT budgets for the past 12 months had only increased by 2.8% over the previous 12 months. Since the study includes IT staff costs, much of that meager increase was applied toward staff salaries rather than hardware, software, or services. Indeed, the study subjects stated that their compensation costs rose 2.7% during the period. Since staff compensation is usually 50% to 60% of most IT budgets, a few quick calculations indicate that the study subjects' companies increased budgets for hardware, software, and services by around 2.9% over the last year. If the same group gets a 6.4% increase over the next 12 months, they will have considerably larger budgets to spend on new and enhanced systems.
As a veteran of many budget battles, I never rely on a single set of figures. I can always get a more accurate statistical picture with a lower margin of error from multiple studies. To get that picture, I studied the results from the last six months of CIO magazine polls, each of which was conducted with a different group of IT managers. As the following table shows, managers in each monthly poll have consistently indicated that budget increases for the next 12 months should be better than those received over the last 12 months.
CIO Magazine: IT Budget Increases Reported in Monthly Polls
|
Poll Date
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Average Percent Increase in IT Budgets--Past 12 Months Versus Previous 12 Months
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Average Percent Increase in IT Budgets--Next 12 Months Versus Past 12 Months
|
|
March 2003
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2.4%
|
6.1%
|
|
April 2003
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0.6%
|
4.2%
|
|
May 2003
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0.7%
|
3.3%
|
|
June 2003
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1.7%
|
5.6%
|
|
July 2003
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1.3%
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4.5%
|
|
August 2003
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2.8%
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6.4%
|
|
Average
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1.6%
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5.0%
|
By studying this table, it becomes clear that the 6.4% increase reported in the August 2003 poll is probably higher than the figure we would get if we could poll all IT managers. A more defensible figure would be the 5.0% increase we get by "averaging the averages."
How much of this increase will go to hardware, software, and services versus staff compensation? Considering the current state of IT compensation, I believe that most companies will continue to ask for more productivity from their existing employees rather than hire additional staff. I'm also projecting that salaries and benefits for existing employees will rise between 3% and 4% during 2004. If the average company increases its IT compensation by 3.5% and increases its total IT budget by 5.0%, then budgets for hardware, software, and services should grow by an average of 6.8%. This assumes that the average company allocates 55% of its IT budget to staff costs.
Of course, even if your company boosts your budget for hardware, software, and services by 6.8%, that does mean you will get to spend 6.8% more next year. After all, most companies have been spending less than budgeted levels over the last three years because they have been unable to hit revenue and profit targets. If you're a medium-size business, however, your circumstances may be changing. According to recent studies by Gartner Group, medium-size businesses are currently spending at or very near their IT budget levels.
To get this information, Gartner Group polls IT managers every week to determine the percentage of their IT budgets that they are currently spending as well as the percentage they anticipate spending a year from now. During the third quarter of this year, small companies and enterprises reported that on average, they are only spending 72% and 85% of their IT budgets, respectively. By contrast, the medium-size businesses in the poll are spending 97% of their IT budgets. Indeed, spending by medium-size businesses on software, IT services, and networking equipment has edged over 100% of budget during the third quarter.
If these trends continue, there is good reason to believe that IT spending among medium-size businesses--many of which are iSeries customers--will bounce back nicely during 2004. Indeed, such companies may end up leading the way into a new cycle of investment in modernized, Web-enabled IT systems.
Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology. You can reach him at
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