IT Spending's Future Is In Agility And EfficiencyIT Spending's Future Is In Agility And Efficiency

A new normality in America's IT economy has business-technology pros driving efficiencies with limited dollars. CIOs and other business leaders reined in IT spending during the recession of the early 2000s. Now, what had been an exception over the past 30 years—curtailed IT spending—is becoming the norm.

"IT budgets aren't simply declining or leveling off," says Howard Rubin, senior VP at the IT advisory firm Meta Group. "Rather, companies are shifting from a pure cost-cut mode to a model that emphasizes agility and efficiency."

Meta this week issued its annual worldwide IT trends and benchmark report, which predicts a tepid IT economy, with businesses increasing tech spending by a puny 3% this year, half of what Meta had projected earlier. Next year, it sees IT spending growth being marginally better, rising 5%. Lackluster growth is IT's new "steady state," Rubin says.

Among Meta's other findings: Companies are expected to cut spending on labor to 31% of their IT budgets in 2005, from 36% this year. Conversely, they'll increase spending on outsourcing nonstrategic activities, such as infrastructure and application maintenance, to a quarter of their budgets next year, from a fifth in 2004. Along those lines, market researcher IDC predicts that spending on IT services will expand at a nearly 7% compound yearly rate in the next five years.

Meta researchers also see a leveling off or decrease in spending on all technologies, save two: security and Web-app development. During the tech boom, companies threw money at technology, and during the recession, they cut spending across the board, Rubin says. "The new IT reality is being driven by efficiency." Historically, larger companies spent more on IT than smaller ones. But in the coming year, Meta reckons the opposite will happen. Companies with annual revenue of less than $100 million are expected to raise IT spending by 23% in 2005, and megacorporations, those with revenue topping $10 billion, will sustain current spending levels.

Further evidence that the IT economy is braking came this week from the Federal Reserve Board, which reported that computer and peripheral equipment production rose last quarter at a seasonally adjusted annual rate of 14%. Six months earlier, IT equipment production soared at twice that pace. And the capacity rate at which U.S. factories churn out computers remains stagnant. The Fed estimates computer vendors used only three-quarters of their factory capacity last quarter, virtually unchanged for the past year, but about 4 percentage points below the average rate of the past three decades.