Forrester Says IT Budgets Will Be Up 7% in 2005

by Timothy Prickett Morgan

One of the main staples of the IT consultancy business is polling C-level executives about their plans for IT spending so that these very same consultancies can sell predictions of IT spending back to those same execs. It's a nice piece of business if you can get it, and Forrester Research, which bought GIGA Group a few years ago, has been making as much noise as Gartner and IDC in calling IT spending up or down for the coming years.

Forrester is putting out snippets of its IT spending outlook for 2004 through 2008, and says that spending on IT products and services in 2005 will be up 7 percent over 2004's spending levels, and says further that spending levels will continue at roughly the same pace through 2008. Forrester says that this rate is only slightly higher than the overall growth rate that it predicts for the U.S. economy.

According to Forrester's third quarter confidence poll of 195 chief information officers in North America, these execs are optimistic and the majority of them plan to increase their 2005 budgets by an average of 6.4 percent. Forrester found that the majority of CIOs believe their industry is performing strongly, the first time in three calendar quarters that this has been the case. Moreover, 71 percent of the CIOs polled said that three quarters hence they expect their industries and companies to be doing even better, with only 5 percent expecting a decline in their industry. This time last year, 34 percent of CIOs were spending above their budgeted run rate, and this year 39 percent are.

Forrester says that it has built a sophisticated model of IT spending that covers the past six decades, that shows that every new technology causes a spending boom that lasts eight to 10 years. These boom times are followed by diminished spending as the new technology matures and companies learn how to "digest" it. The company says that a period of digestion (one might call it indigestion, to be honest) started in 2001 and that we are halfway through that digestion phase.

Based on this model, Forrester says that computer hardware spending will grow by 9 percent on average between 2004 and 2008, peaking at 14 percent in 2005 and leveling off. Forrester cited blade servers, Linux, and improvements in price/performance for various types of computers will drive sales. On the network equipment front, Forrester figures that spending will grow by 16 percent in 2004 but will slow to a rate of 4 percent in 2005 and will continue to decline beyond that. Network equipment suppliers will be bolstered initially by renewed spending among telecommunications companies, and beyond that the need to upgrade aging LAN gear and to add network security appliances will drive sales in the future.

On the software front, Forrester says that spending will only increase by 3 percent in 2005 but will eventually recover partially, to a 7 percent growth rate. The big winners next year in terms of growth will be systems management software, storage software, and security applications. In 2006 and later, sales of tools and applications for creating Web services and the related services-oriented architectures will be key drivers. Forrester is predicting that spending on IT services will increase by only 3 percent in 2005 and will average only 4 percent across all types of services in the United States between 2004 and 2008. While sales of large enterprise applications (which need lots of services for implementation) and Internet consulting have slowed, Forrester reckons that companies will use hired guns to attack open source technologies, RFID, and business process management software implementation in the coming years.