Outlook 2007: The IT Forecast

By Renee Oricchio

For 2007, it's no joke: The IT forecast really is fair to partly cloudy with a chance of showers -- depending on what the economy does.

"Generally, IT spending is affected by economic conditions," says Frank Scavo, president of Computer Economics, an Irvine, Calif.-based research company that specializes in information systems. The latest U.S. gross domestic product (GDP) report to come out was "below expectations," with growth at its slowest pace in three years, Scavo says. "If revenues are down, there's pressure on spending," he adds, "and that includes the IT department."

While sobering, the news isn't grim. IT spending is actually expected to go up next year -- 5%, in fact, according to a recent forecast by Forrester Research. However, it's a downward trend compared to 2006, which is expected to close out with a 6% increase in spending compared to 2005.

Despite a fairly flat economy, CIOs are apparently still feeling optimistic about the New Year.

"We're seeing an increase in optimism for 2007, just within the past quarter," says Andrew Bartels, vice president and research analyst at Forrester.

Bartels recently updated a survey of more than 100 CIOs from North American companies and found an uptick in both the "present conditions" index and the future "expectations" index.

Bartels attributes the bump in optimism to continued growth in consumer spending.

"While the latest GDP numbers were below expectations, consumer spending was actually up 3%," he says. "That means the economy, for now, is doing okay. And if the economy is doing okay, then IT growth will be okay."

Regardless of the size of these budgets, the more important question, perhaps, is how will they be divvied up and spent? Here's what to expect:

Outside Services
Outsourcing is expected to grow, while hiring full-time staff will remain flat at best. "IT managers tend to be more reluctant to increase staff than other IT spending," says Scavo. "Adding full-time staff is a commitment to future spending."

There are a number of new twists to the outsourcing trend:

• A more discriminating outsourcing strategy "Client organizations are getting better at understanding what they should outsource, and what they should keep in-house, as opposed to simply throwing everything over to an outsourcer and hoping they can handle it," says Geraldine Fox, global leader of the sourcing serving line for Compass Fact Based Consulting.
• Fewer mega deals, dramatic increases in modest-sized deals According to a recent study put out by researcher IDC, fewer outsourcing mega deals ($500 million plus) are being signed. However, there will continue to be a dramatic increase in deals valued at $250 million and less, especially in contracts with more of a global reach and those involving network and desktop outsourcing.
• More competition, cheaper outsourcing deals Also according to IDC, there is currently an explosion of new outsourcing vendors entering the market (especially from India) creating more competition for contracts and driving down prices. CIOs can expect to benefit from the bargain shopping.

Technologies: What's Hot, What's Not
Bartels, of Forrester, offers a further breakdown of what technologies will actually get the most attention and what will get the least:

• Strong growth: analytics, content management, software
• Steady growth: wireless, security
• Slowdown in growth: storage, servers, computer equipment

Agenda for 2007
As CIOs finalize their budgets and goals for next year, here are a few suggestions that experts say they should consider:

• Get maintenance and operating costs under control According to figures put out by Computer Economics, this is (for the average IT department regardless of company size) about 68% of the total budget. For most organizations, chances are there's plenty of room for streamlining. Scavo offers one popular example of how some IT departments are reining in expenses: "Virtualization and server consolidation are hot topics in the data center right now because they can lower maintenance costs on existing systems, freeing up money to supplement that other 32% of the budget -- new development."
• Invest in technologies for the business "Continue to invest in technologies that add to the efficiency of the overall business," says Bartels. These are expenditures that will not only pay for themselves, but add to the company's bottom line.
• Prepare for the next big thing: digital business architecture The much talked about next generation of technology, built around service-oriented architecture (SOA) software, promises to dovetail the most diverse IT platforms into one unified solution. These new technologies are expected to hit critical mass in the market as early as 2008. 2007 is the year for CIOs to do their homework and position their organizations for this next wave of innovation.

Beyond 2007: The Big Picture
In addition to shifting to a new generation of technologies, IT managers need to be poised for a fundamental shift in the role of IT itself within their own organizations.

"The footprint of IT in companies is getting bigger. Companies will be asking IT to do more, but in a more efficient way," says Scavo. "Smarter IT managers will need to look at how they can get more out of the budget they have, rather than go back to the well for more money."

Citing the looming specter of a fragile housing market, volatile oil markets, possible increases in interest rates, and a shaky dollar, Bartels adds, "The best projections on IT spending today are definitely at risk and subject to what the economy may do tomorrow." 

Renee Oricchio is a freelance writer in Norwalk, Conn. For the past 20 years, she has been writing and producing news segments about technology and business for CNN, MSNBC, Ziff-Davis, CNet and a variety of Silicon Valley-based local news outlets.