With the status of the US economy surrounded by question marks, what will be the impact of a recession, or at least a severe slowdown, on IT spending and budgets?
That was the question addressed at a recent session at the IDC Directions ’08 conference in California.
Stephen Minton, vice president of worldwide IT markets, discussed the possible scenarios facing IT this year and compared it to the last major economic slowdown in 2001-2002.
Back then, the US was hit with a double-whammy. First came the Dot Bomb implosion that led to a surplus of office space and slightly used server equipment. Then came the terrorist attacks of September 11, 2001, which made an already tough situation much worse.
In the current scenario, however, there are two significant differences. The slowdown is driven by overextended consumers who bought houses they couldn’t afford.
“This downturn is very different than 2001, which really was a business-led recession. That’s one reason why the tech sector’s situation was as bad as it was. What we’re looking at now is one primary industry, financial services,” said Mr Minton. Unfortunately, that’s also a big sector; it makes up 18 percent of the US economy and buys a lot of computing equipment, software and services, and there could be spillover. For instance, he cited weakness in retail, particularly high-end retail. The Sharper Image, a chain that recently went belly up and will close half its stores.
The other reason is that it is a consumer-led recession mostly affecting bad housing markets in some states, which has no direct impact on a Fortune 1000 firm buying new servers, for example. “So a lot of the business in IT market is relatively immune to the direct impact of a slowdown of consumer spending,” said Mr Minton, although given Intel’s recent quarterly warning concerning weakness in flash memory, that’s not an absolute situation.
IDC has lowered its forecasts for IT spending in the US and western Europe based on what they have seen in the decline of economic indicators, but they aren’t seeing spending go negative over the prior year like in 2002, when PC spending was 20 percent less than the prior year.
IDC forecasts around four percent growth in IT spending budgets in 2008, half of the eight percent growth in 2007. IT managers are more bearish about their ability to fund projects and are either slowing or delaying certain projects, said Minton. However, the rest of the world is doing fine. The four BRIC nations – Brazil, Russia, India, China – are expected to increase IT spending between 10 and 20 percent this year.
Multiple budgets
CIOs that IDC has spoken with say they are working with multiple budgets to cover a variety of scenarios, and many are re-evaluating their spending on a per-quarter basis. “This means things could go up if the economy proves more resilient, but things could also go down,” said Mr Minton.
The hardware most likely to be affected by a reduction in spending, not surprisingly, is PCs, followed by mobile devices — smart phones in particular. Storage is least likely to be cut, followed by networking hardware.
Software reductions are also anticipated, but at a much slower rate than hardware. Office and operating systems are most likely to get the chop, while security and compliance software is least likely to be cut.
Virtualisation isn’t being cut back at all. It remains a strong priority and represents a theme Minton noticed: CIOs are trying to protect data center projects. Endpoints can be allowed to lag but the servers are the last place where cuts are being seen.
