IT Spending Set to Surge

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The season is upon us when many IT managers must develop their budget proposals for 2005. If you are one of those unfortunate souls, I have good news for you. This year, you will probably find it easier to get the additional funds you need than it has been at any time since the boom days of the late 1990s. That is because recent surveys of IT spending among small and medium-size businesses (SMBs) are all pointing up.

While the spending studies are reporting positive numbers, what is more remarkable is that the numbers in those studies are far more similar than they have been in the past. To understand what I mean, consider the following facts. According to a study by AMR Research, SMB firms in the United States will increase their IT spending by 6.6% in 2005. Another study by Gartner Group determined that on a worldwide basis, SMB technology spending will grow by 7.0% next year. Finally, a Forrester Research survey of over 1,000 SMB firms in North America concluded that 2004 IT spending will rise 6.6% over 2003 levels. While Forrester did not ask its study subjects about 2005 spending, its report indicates that a 6% to 7% increase for 2005 is quite realistic.

Drilling Down for Dollars

Among the three studies quoted above, the one from AMR Research is perhaps most relevant for MC Press readers. That is because AMR's study group is highly similar to the iSeries customer base in its demographic makeup: firms with 10 to 999 employees that are mainly in the manufacturing and distribution industries. With that in mind, let's drill down into the study to get some actionable information.

As the following table shows, the study participants varied widely in their plans for increasing IT spending. While the smallest firms reported modest increases, the largest firms--those with 250 to 999 employees--reported an average increase of more than 10%. In addition, process and discrete manufacturers reported stronger spending growth than retailers and firms in the services segment.

IT Spending Increases for 2005 Among SMB Firms
Company Industry
Average Increase
Company Size
Average Increase
Discrete Manufacturing
6.6%  
10 to 49 employees
3.4%  
Process Manufacturing
7.9%  
40 to 249 employees
7.0%  
Retail
3.5%  
259 to 999 employees
10.8%  
Services (including Wholesale Distribution)
6.1%  

   Source: AMR Research

As one might expect, the companies also reported different levels of IT spending as a percentage of corporate revenues. For 2004, discrete manufacturers reported that they will spend an average of 6.7% of their revenues on IT. By contrast, process manufacturers said that they will spend 5.6% of their revenues, retailers reported an 8.4% average, and services firms logged a 4.1% level. If these figures seem high, it may be because they include spending on telecommunications equipment and services. You should compensate for this inclusion if you are not in charge of the communications budget.

According to the AMR study, SMB firms are going to spend their additional IT dollars in several high-priority areas during 2005. One of those areas will be infrastructure--servers, storage devices, PCs, and networking gear. I can tell you from experience that there is a lot of aging infrastructure out there that SMB firms have been nursing through the economic downturn. That infrastructure has become slow and increasingly expensive to manage, and many firms are realizing that they could save money and get added functionality by revamping their systems. The AMR study also found strong interest in customer-focused solutions such as sales force automation, order management, and customer service systems.

Other studies indicate that companies continue to pour money into security technologies. In the latest IT poll by CIO magazine, for instance, over 58% of all study participants stated that they will increase spending on security software. No other spending category in the study earned a higher percentage. By the way, the study subjects also stated that they increased their IT budgets by 6.5% over the last year and intend to increase their budgets by 8.2% over the next 12 months. These averages were derived from the answers of both SMB firms and enterprises.

A Matter of Mixed Motives

There are several reasons why many SMB firms will ratchet up their IT budgets during 2005. On the one hand, many SMB executives believe that the economy is improving. Indeed, a recent study by Penn, Schoen and Berland Associates found that 62% of SMB leaders believe their business prospects are improving. The same study found that 66% of firms with 50 or more employees intend to hire more people over the next year.

On the other hand, many firms are being pressed by government regulations and the demands of their largest customers to implement new technologies. These compliance issues are forcing companies to make more real-time, accurate information available to the rest of the world just to stay in business. Doing that will be nearly impossible with the infrastructure and software that is in place at many firms today.

That is where IBM's new eServer i5 could make a difference for many firms. With its ability to consolidate and manage multiple servers, storage devices, and networks, the i5 offers tremendous value as an infrastructure simplification platform. Unfortunately, presenting the server's value proposition has never been a simple matter. I hope that IBM finds more effective ways to present that proposition in the coming months. There is a growing opportunity out there for the i5, and IBM should find ways to capitalize on it.

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 This email address is being protected from spambots. You need JavaScript enabled to view it..

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