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The rebound that never came

October 20, 2006

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.


If IT spending is not increasing, which spending does?
Many CEO's sarary has increased in the past a few years. Is that the only strategy for business to be competitive?

Posted by: Hu Dou [TypeKey Profile Page] at October 20, 2006 10:58 AM

Just a thought, Nick, but isn't it possible that IT spending has continued to decrease because the cost of storage, processors, bandwidth and other IT "raw materials" has continued to decline even as speeds and power increase -- allowing companies to spend less and still get more?

Posted by: mathewi [TypeKey Profile Page] at October 20, 2006 11:11 AM

More question: which spending should increase?

Posted by: Hu Dou [TypeKey Profile Page] at October 20, 2006 11:16 AM

Mathew, Of course, but that was also true during the long period when corporate IT expenditures were steadily increasing. It doesn't explain the reversal of that trend (or the way it contradicts the industry's assumptions). Nick

Posted by: Nick Carr [TypeKey Profile Page] at October 20, 2006 11:18 AM

Hmm. I think too much can be read into this "IT spend decreasing" thing, especially given that most of the spend (so we are informed) goes on maintenance of existing kit. Given that IT was over-sold in the 90's I'm not at all surprised that organisations are still able to reduce their licensing and support outlay as they become more efficient. Far more interesting perhaps is the spend on new projects, I don't have any figures on this but experience (conversations with budget holders) suggests that this is now increasing.

If this is the intersection of two trends, I would expect to see maintenance spend fall to a point at which it then stabilises and becomes a matter of churn. If we are to see an increase of spend overall, the question is how fast is maintenance spend falling, relative to new projects?

Equally however, it is the new project spend alone that will define how vibrant an industry we see over the next few years. I hope we don't return to fads and gravy trains, but equally, its good to feel good about one's sector.

Best, Jon

Posted by: Jon Collins [TypeKey Profile Page] at October 20, 2006 02:00 PM

P.S. Yes I understand that new spend is still down, but I'd bet this will not be the case this time next year...

Posted by: Jon Collins [TypeKey Profile Page] at October 20, 2006 02:33 PM

Four words: Windows Vista is late.

I agree with you about IT spending though: companies should spend less on IT, but they should spend what they save on IT training.

Just as English schools are full of laptops that most of the teachers don't know how to use properly, you'll usually find one of the most expensive desktops in a corporate building in the office of a senior "executive" who uses it to send massive Microsoft Office email attachments on huge open CC lists to people who rarely read a word he writes.

Posted by: PooterGeek [TypeKey Profile Page] at October 21, 2006 05:42 AM

It may be that companies are spending less money - but it doesn't follow that the strategic importance of IT is declining. I expect that the Info Week 500 still see IT as a means of gaining competitive advantage - but that doesn't mean spending billions on shelfware, consultants and ultraSparc workstations. It means building a cost-effective, flexible IT infrastructure and teaching people how to use it.

Posted by: Zoo Statesman [TypeKey Profile Page] at October 21, 2006 06:26 AM

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