In early 2003, in my article “IT Doesn’t Matter,” I had the temerity to suggest that companies should “spend less” on information technology, treating it as a cost of doing business rather than a means of gaining competitive advantage. The suggestion was roundly attacked by the tech industry, which reacted to the article with a kind of collective conniption fit. At the time, you’ll remember, IT spending was in the doldrums, with companies nursing their hangovers from the great IT investment binge of the 90s. The general assumption, among IT vendors in particular, was that the softness in spending was just a blip, that buyers would soon start ratcheting up their outlays again. “This is a cyclical event,” Tom Siebel confidently told the Wall Street Journal. A rebound was just around the corner.
Well, more than three years have passed, Tom Siebel’s company is kaput, and the rebound remains around the corner. It’s become clear that the slowdown in IT spending is not a passing cyclical event but a secular trend, a reflection of a basic change in the way companies view information technology. That fact was underscored last month when Information Week published the latest edition of its annual survey of IT spending among the “InformationWeek 500” – the companies that it identifies as being the most innovative users of IT. The survey reveals not only that IT budgets haven’t jumped since 2003, but that in fact they’ve continued to erode. Between 2003 and 2006, IT spending as a percentage of revenue has on average fallen from 3.66% to 3.21%. Of the 21 industry sectors tracked by Industry Week, only 5 saw in an increase in IT spending as a percentage of sales over the last three years. In absolute terms, IT expenditures have dropped as well, from an average of $353 million in 2003 to $304 million today. Of those shrinking budgets, moreover, the percentage devoted to purchases of new hardware and software slipped from 37% in 2003 to 34.5% today.
Remember, these are the most innovative users of technology, the ones that set the pace for everyone else.
What’s perhaps most revealing about the Info Week study is the trend it reveals in IT spending among IT vendors themselves. They’ve actually been reducing their IT outlays as a percentage of revenue even more aggressively than the average. The most innovative tech companies spent 4.4% of sales on IT in 2003, 4.0% in 2004, 3.5% in 2005, and just 3% in 2006. As the magazine reports, “The IT industry has been engaged in a multipronged attack on improving operational efficiencies. Not surprisingly, it’s a leader in the use of relatively new technologies such as multicore processors, server blades, and virtualization software to create more cost-effective deployment strategies.” The clear implication is that, as other companies begin to capitalize on these same advances, they, too, should be able to achieve even greater reductions in the amount of money they devote to information technology.
Earlier this month, Silicon.com asked a group of UK CIOs whether thay agreed with my contention that companies should be spending less on IT. Two-thirds of them thought I was right. One termed the idea “just common sense for businesses.” It’s not the first time that heresy has turned into dogma.