Sunday, January 13, 2008

Technology spending in 2008

Analysts across the board are predicting lower technology spending in 2008 compared to the previous year. IDC expects technology spending in the US to grow by 3-4% (softer than 6.6% in 2007). Gartner projects US technology spending to grow by 5.7 % (compared to 6.1%).Forrester expects the U.S. market to grow 4.6 percent, down from 5.4 percent last year.

Other than the different specific numbers, the consensus is that technology spending in 2008 will be lower than 2007. The credit crisis, subprime ripple effects and rising oil prices have not helped matters. When credit tightens, the first thing that takes a hit is capital spending and technology spending. Star (technology research) analyst - Laura Conigliaro at Goldman Sachs advised her clients that IT spending is less than comforting.

However, there is consensus that vendors that focus on developing economies in 2008 will reap benefits. IT purchases among countries in the Asia-Pacific region is expect to hit $535 billion next year, up 14%, following a 19% rise in 2007, says Forrester. The United States remains the biggest buyer of IT by far, at a projected $533 billion this year. China, which spent $117 billion this year, will surpass Japan, which spent $173 billion, as the second-biggest consumer of IT within a few years, Forrester predicts.

The major areas that firms will spend money - maintenance and upgrades. Since spending is going to be softer, cost saving initiatives will be looked at positively. We could see increased outsourcing contracts based on cost reductions and strong ROI models. Server Virtualization (VMWare,etc) will be another area that companies will look to spend money – to run their data centers effectively.

There is debate on the impact on SaaS firms. SaaS firms argue that since they do not require massive capex, it should be popular in a soft economy. On the other hand, MGI Research states that SaaS vendors will be hit harder if the economy heads downward than vendors licensing software in the traditional mode. SaaS vendors have more infrastructure costs to bear, and businesses will lower the number of subscribed employees if a poor economy stretches beyond nine months, MGI predicts.

MGI states that in a declining economy, SaaS companies may take a triple hit as they will see their initial transaction sizes trimmed, upsell opportunities reduced or eliminated, and then there is a possibility that users will aim to reduce the number of subscribed seats. Not that on-premise software vendors have it easy. SaaS vendors have challenges due to the heavy infrastructure burden. Also, in an enterprise model, the user provides first level of support, but in a SaaS model, most (if not all) support is provided by the SaaS vendor.

Net/net – Technology spending will be lower in 2008. Whether it is an on-premise software or SaaS, both will face its own set of challenges. Vendors will need to be creative to make the most of the soft spending. Emerging areas like SOA and virtualization are good bets. There will be a lot of focus on cost savings (read outsourcing). Upgrades are another prime area. Firms would do well to look (expand) overseas instead of just looking within the United States. Expanding into growing economies like China and India would be beneficial (see my blog on the Chinese currency appreciation at

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