Credit crunch morphs into tech crunch as downturn continues to bite

19 Sep 2008

The majority of enterprises globally are planning to cut back on increases in IT spending. A leading analyst has warned that the recent downturn in IT budgets may last longer than originally envisaged, as the world digests the implications of the credit crunch.

Datamonitor, which also owns the Butler Group, has claimed that the downward trend in IT spending is not solely due to the current economic climate, but has in fact been evident over the past couple of years.

“Vendors should be wary in assuming that the recent downturn in IT budgets is a short-lived phenomenon” said Daniel Okubo, technology analyst with Datamonitor and the report’s author.

“For the past couple of years, enterprises have been cutting back IT budget increases as they adopt a more cautious viewpoint of the global economy. More recently, the financial services market – as seen by the recent collapse of Lehman Brothers – is suffering from a crisis in confidence caused by a spate of write-downs and concerns over liquidity.”

However, the one sector in IT that will continue to enjoy increased spending in 2009 will be the healthcare sector.

An analysis of over 8,000 IT decision-makers found that the number of enterprises planning to significantly increase their IT budget has fallen.

Okubu said this suggests there are deeper concerns in the IT market than just the recent economic problems, and the economic downturn is just masking the trend of falling IT budget increases.

Over 50pc of respondents stated that they expect to keep their IT budget the same in 2009 as it was in 2008. Some 37pc of the respondents expect to see their IT budget increase in 2009 and 13pc are anticipating IT budget cuts.

This appears to be a mixed message for technology vendors and service providers. It indicates that, on the whole, enterprises are not planning to decrease their IT expenditure despite the current economic climate.

However, when the results from previous surveys conducted by Datamonitor in 2006 and 2007 are analysed, there was a noticeable downward trend in the proportion of enterprises planning to significantly increase (by 6pc or more) their IT budget, from 20pc in 2006 to under 10pc in 2009.

Okubu said this suggests growth in the amount spent by enterprises on IT is on the decline, which would indicate that growth in the IT market overall is going to slow down.

“These results should be a warning sign for vendors,” said Okubo. “An analysis of forward-looking statements in enterprises’ annual reports reveals deep concerns over future prospects as domestic demand in developed economies falls.”

Despite this, there are still enterprises planning to significantly increase their IT expenditure in 2009. Therefore, it is still possible for vendors to experience solid growth if they target the right vertical markets with the correct market strategy.

While the retail and manufacturing industries are suffering from high interest rates, falling domestic demand, inflation and higher commodity prices, the healthcare industry is planning significant spending increases in 2009, with 57pc of respondents in the industry saying they plan to expand IT expenditure.

In western Europe, the US and Japan, the aging ‘baby boom’ generation is starting to increase demand on the health services, leading to rising costs for national and private health systems. In an attempt to address this, the healthcare industry is currently investing in new technologies which will enable it to cut costs in the long run and provide more efficient care.

“In a global economy, it is important to realise how vertical markets are performing because, at times, an analysis at a country level can be misleading. Simply because some IT departments in a given country are planning budget decreases, it is incorrect to assume sll industries within that country are suffering.

“Vendors that understand the nuances in domestic economies will be best positioned to exploit growth opportunities,” Okubu concluded.

By John Kennedy

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years