IT budget cuts in 2009 will not be limited to the financial services sector, according to new global research from Datamonitor. But although the financial services sector arguably the biggest culprit and casualty (federal bail-outs notwithstanding) of today’s grim economic climate will see IT budgets reduced next year as expected, few financial services institutions (FSIs) will actually make more significant cuts in 2009 than they did in 2008. This is mitigated, however, by fewer FSIs planning IT budget increases next year. Moreover, even greater IT budget cuts will likely be seen in the global manufacturing and retail markets, according to Datamonitor’s new survey of more than 3,400 IT decision makers worldwide during the first half of 2008.
At a top level, most IT budgets (45%) across all enterprises worldwide will remain unchanged next year. Yet IT decision makers are being asked by their corporate boards and shareholders to simultaneously increase efficiency and lower costs. Datamonitor believes this is a Herculean challenge when faced with flat growth in IT budgets. The result is that IT vendors will be expected to deliver greater functionality and increased features and/or value for the same level of expense.
The news is not all bad. According to the survey, a slightly higher number (46%) of enterprises are actually planning for resource increases, indicating that IT budgets will not be hollowed out. However, the proportion of enterprises planning to significantly increase their IT budgets will fall for the third consecutive year in 2009. This suggests that growth in the IT market may slow next year. Of most concern to IT vendors is that 13.5% of enterprises anticipate IT budget cuts next year. While this is down from 15% from our survey results at the same time last year, Datamonitor feels this data is optimistic since it was conducted just before the most recent market events.
Among the shrinking IT budget set, manufacturing and retail are key vertical markets that are clearly being affected by the world’s credit crunch and rising commodity prices. As was the case last year, more companies in these sectors will cut their budgets next year than in financial services. This may be explained by the high cost of borrowing, a lack of access to capital and higher commodity prices in the manufacturing and retail industries.
In many instances, IT expenditure is linked to financial performance and forecasts, and enterprises assign a proportion of their revenues to IT expenditure as a way to manage costs and appease shareholders. Retailers, however, are a special case. During the past few years, retailers have been steadily cutting back IT budgets as a percentage of revenue, from 5% four years ago to 1.5% in 2008. Next year, slightly more retailers (37%) plan to increase their IT budgets than they did this year. Similarly, slightly fewer (17%) are expecting IT budget cuts next year.
Interestingly, fewer manufacturers and retailers are planning for decreases next year compared to last year. At the same time, a marginally higher number of manufacturers expect to slightly increase their IT budget next year. This may signal a growing importance of IT’s role in streamlining operations and generating cost savings in manufacturing, perhaps with technologies such as RFID and computerized machinery. This is not necessarily the case among retailers, in which slightly fewer companies plan for significant IT budget increases next year.
Despite the small gains in lower budget cuts and slightly higher budget increases, Datamonitor’s research points to a muted outlook for vendors that target manufacturing and retail customers. They should be prepared for enterprises delaying renewals and upgrades of hardware and software. Indeed, most vendors, regardless of their target sectors, should expect IT decision makers across the board to generally be less willing to invest in new technologies in 2009 without a proven return on investment (RoI). All vendors should frame their technologies and solutions around RoI metrics, rather than focus on whiz-bang technical elements. Increasing customer satisfaction and raising efficiency are the key business priorities for IT investment.
This is particularly the case for IT decision makers in the financial sector. The financial services industry is suffering from a crisis of confidence caused by a spate of write-downs, write-offs and concerns over liquidity. Financial returns on any and all investments will be key both to FSIs’ fiscal health and to shareholder confidence. A likely explanation of why more IT decision makers in FSIs, as well as the majority of those across all sectors, are planning unchanged or increased IT budgets in 2009, than compared to this year, is that enterprises view IT as a way to maximize existing capital and other investments, and to gain an advantage in what is an increasingly competitive global market. Of course, the reality of whether those budgets will actually be increased or cut remains to be seen. For sure, there was a fall in budget increases in 2008 as a result of the global economic uncertainty created in 2007.
Even if more IT budgets do increase next year, it will not be a case of enterprises seeking to spend their way out of a depressed global economy, because the anticipated change is slight, a mere 2%. Financial reports from many enterprises reveal a widespread expectation that future revenues will be dented by falling levels of demand in the global economy, and IT budgets will generally reflect this. Datamonitor research shows that enterprises with a presence in emerging markets and a diverse portfolio of offerings feel the most confident about their 2009 IT outlook.
