Enterprise IT budget increases signal continued recovery of the global IT market

IT budgets have grown in 2006 and further growth is expected in 2007

A new report by independent market analyst Datamonitor (DTM.L) Understanding IT budget trends reveals IT budgets have grown in 2006 and that the outlook for 2007 is also optimistic. According to the firm, whilst increases are not proving even across the board - with variations by geography and type of expenditure - relatively stable economic conditions are having a positive effect on enterprises IT investments in the US and Western Europe.

Through interviews with 200 IT decision makers in  enterprises in Western Europe and the US, Datamonitors report Understanding IT budget trends, the first of a series to come from Datamonitors Technology Trends* service, provides insight into the evolution of enterprise IT budgets in Western Europe and North America. The report highlights areas of positive and negative growth in IT spending and analyses the reasons behind these trends.

 The net effect of enterprises budget changes is positive

 The overall trend from the survey is that IT budgets have increased in 2006, with enterprises forecasts suggesting slight increases to IT budgets in 2007. 43% of the surveyed enterprises state that they see their IT budget increasing in 2007, compared to the 32% whose budget increased from 2005 to 2006. Encouragingly for vendors, the percentage of enterprises that see their IT budget decreasing is likely to reduce, from 21% in 2006 to 17% in 2007. The net effect of current and forecasted budget changes is therefore positive.

IT budget growth is stronger in the US in comparison to European markets

In comparison to enterprises in European markets, a higher percentage of US enterprises have seen their IT budget increase in 2006 (64% in total). US enterprises are also the most optimistic when it comes to anticipated IT budget changes in 2007, with 72% expecting to increase their IT spending next year. Stable economic figures (GDP growth was 3.3 per cent in 2005) coupled with an open-minded approach towards new technologies is translating well into increased IT spending.

According to Datamonitor, the fact that economic growth is weaker in the European markets surveyed (GDP growth averaged 1.9 per cent in 2005 across the UK, France, Germany, Italy, Spain, Benelux and the Nordics) is clearly influencing enterprises IT expenditure.

A weaker economic environment causes uncertainty, can potentially delay investments in IT, and makes enterprises more hesitant to adopt the latest technologies, says Tim Gower, Lead Analyst within Datamonitors Technology Trends Service and author of the report. However, with stronger economic growth forecast in 2006, this is likely to reduce the degree of caution in IT budget setting in Western Europe, making the enterprise environment marginally less challenging for technology vendors.

Hardware and software account for almost two thirds of enterprises IT spending

Datamonitors survey findings also indicate that spending on hardware (34%) and software (29%) dominates IT managers budgets. Although IT departments clearly allocate proportions of their budgets to IT services, communications and consulting, these areas are significantly smaller in comparison. Despite enterprise IT spending relating to the broad area of services attracting significant attention, the reality is that the majority of enterprises external IT spending still remains product focused.

Hardware expenditure is the only element of the IT budget set to decrease

Projected increases to IT budgets in 2007 mask some interesting differences in expenditure by type of investment. Enterprises plan to increase their spending on software (2.4%) and services (1.7%) most markedly, with communications and consulting services likely to generate slightly above average growth (both 1.2%). Hardware spending, on the other hand, is forecast to decline very marginally (-0.2%). Hardware-based technology solutions tend to be fully established within enterprises and the technology is mature and proven. With many hardware products facing downward price commoditization, enterprises are aware that their replacement initiatives can potentially be met at lower price points than previously.

Raising efficiency and cutting costs are enterprises primary IT objectives

Enterprises view raising efficiency and cost cutting as primary objectives for their IT investment strategies in 2006. Since the technology downturn earlier in the decade, meeting these objectives has been central to most enterprise IT managers strategies and vendors have been aware of the need to position their solutions accordingly.

Interestingly, the desire to increase company revenues is certainly now beginning to increase in importance. Should the economic outlook continue to remain relatively stable, Datamonitor would expect this objective to increase relative to efficiency and cost cutting measures. The need to achieve regulatory compliance has also become considerably more prominent in recent months. This factor is now central to many IT managers spending priorities, particularly in vertical markets such as financial services.

 Gower concludes:

 The initial findings from Datamonitors Technology Trends service relating to IT budgets suggest a relatively optimistic outlook for IT solutions vendors. More favorable economic conditions have ensured that, on average, enterprises are planning to increase their IT spending in 2007, with an enhanced focus in particular on software and IT services.

Although the in-house IT department remains the primary port of call, enterprises are spending close to three quarters of their IT budgets with third parties. Solutions that help enterprises cut costs, enhance efficiencies and achieve or maintain regulatory compliance will generate the most interest and vendors and services providers should always look to meet these requirements with their offerings.