IT Faces Shrinking-Pie SyndromeIT Faces Shrinking-Pie Syndrome

The percentage of revenue that companies are spending on IT is going up. The problem: Because revenue is declining at many companies, the actual dollars devoted to IT are virtually unchanged--and may actually be decreasing.

information Research's recently released Outlook for 2002 study shows that the average percentage of total revenue that the IT budget represents has grown from 8.3% a year ago to 9.3%. However, although technology spending as a percentage of revenue is trending upward, information Research believes that due to a drop in earnings, total IT spending will remain flat or show only a slight increase. Any gains in IT's share of the overall total-revenue pie are largely counteracted by the fact that the pie at many companies is smaller than it was a year ago.

IT spending as a percentage of revenue at most companies has been between 9% and 10% for the last three quarters. But depending on company size and industry, there's little or no change in the actual dollars spent on IT.

For example, consider a company that had $5 billion in annual revenue in 2000. According to information Research's Outlook for 2001 study, a company this size budgeted an average of 6.4% of annual revenue, or about $320 million, for IT investments in 2001. On average, companies are projecting an 18.7% drop in earnings for calendar year 2001, compared with 2000, according to Thomson Financial/ First Call. Thus, the $5 billion company is projected to bring in only $4.1 billion in revenue for 2001. According to the Outlook for 2002 study, a company of this size is planning to earmark an average of 8.1% of annual revenue for IT investments in the coming year, which would amount to $329 million.

While a boost in IT spending from 6.4% to 8.1% may seem like a large increase in year-to-year spending--about 26%--actual spending is projected to grow only $9 million, or 3%, in real dollars. In this case, IT spending is rising, but not nearly as quickly as represented in a simple percentage shift. For other companies, the percentage of revenue spent on IT is rising as well, but when declining revenue is factored in, IT spending is actually lower than it was a year ago.

Does your company plan to increase its technology spending in real dollars in 2002 compared with 2001? Please let us know at the E-mail address below.

Lisa Smith
Managing Editor, Research
[email protected]

Guarded Optimism

After a year of budget cuts and project delays, business-technology executives are somewhat optimistic about their IT budget levels and IT project plans in 2002. According to information Research's Outlook for 2002 study, more than a third of executives are positive about their company's IT budget and spending plans through the next few months. This is down significantly from last year but likely stems from the fact that many business-technology executives are doubtful about near-term business prospects.

As many industries struggle to cope with the recession, this pessimism is expected to continue through the first quarter.