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Management Strategies

06:33 PM
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Analysts Forecast Positive IT Spending

Budgets are up compared to last year, most observers agree, but the question is what the money is being spent on.

Positive IT spending should continue through 2006, amid mounting unrest in the Middle East and skyrocketing oil prices, analysts said Friday.

A burst of violence in Israel and terrorist bombing in India this week sent oil prices to an all-time high, more than $76 per barrel, but tech-industry analysts remained relatively upbeat.

While analysts say IT budgets are higher this year than in prior, not all agree on how companies will spend the funds.

In the most recent Tech Trends tracking study released on Friday, AMR Research Inc. reveals 76 percent of the 200 U.S. executives participating in the survey plan to increase IT spending this year. The average budget is expected to increase by 19.5 percent, up from 5.9 percent in 2005.

AMR Research director Fenella Sirkisoon says the focus for companies will remain on physical infrastructure. "Once that's in place, companies will begin looking at software applications," she said. "They're not looking at the enterprise resource planning platforms, but rather performance management, such as data mining, which explains SAP's earnings numbers."

SAP AG, the world's bigger maker of business software, on Thursday posted disappointing license sales and operating earnings in the second quarter, sparking fears by some analysts that IT spending may be slowing.

Sales of new software licenses, which bring in the majority of maintenance and service deals, rose 8 percent to $790 million, half the 15 percent to 17 percent growth SAP targets in license sales for the entire year.

"IT spending typically doesn't have a direct relationship with world events unless companies have operations in that part of the world," said Frank Scavo, president at Computer Economics Inc., an Irvine, Calif. research firm. "IT capital spending and other investments, however, will be made in the light of future expectations."

Computer Economics' study called "IT Spending, Staffing, and Technology Trends" released earlier this month puts the median corporate IT spend in 2006 across all industry sectors in the U.S. and Canada at 2 percent of revenue.

The growth in IT spending as a percent of revenue means budgets are increasing faster than corporate sales. The study shows the median growth in IT spending on a dollar basis across all respondents this year is 4.1 percent, outpacing the 2005 U.S. GDP growth rate of 3.5 percent in 2005. That compares with growth last year in IT spending of 2.5 percent and zero percent in 2004.

Spending is up for hardware, software and outsourcing and services, but not as much for staff. "Companies are reluctant to commit to full-time staff," Scavo said. "It doesn't mean they are not hiring. It just means more money is going toward outsourcing and contractors."

Companies could pull back spending plans quickly in the light of uncertainly, and that's always a possibility, Scavo said.

Forrester Research Inc. analyst Michael Speyer says the outlook for IT spend by small and medium-size business (SMB) this year looks positive, with budgets expected to increase 7.2 percent, up from 4.8 percent seen in 2005.

The focus for SMBs turns to upgrading applications and securing infrastructures, as well as building on Internet and e-commerce projects. The Forrester analyst said 50 percent of the companies will increase spending on security and 42 percent on Web applications.

The Forrester Research study analyzes 2006 budget plans for small and medium-size businesses in North America and Europe. The study released in April, surveyed 1,291 technology executives at North American and European.

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