IT budgets at highest levels since 1997: Computer Economics report 6 July, 2006 By Liam Lahey

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The two percent ratio is an increase from 1.7 per cent in 2005, and above the 1.9 per cent figure from 2004. In fact, this year's ratio is the highest that this metric has reached since 1997, during the build-up to Y2K, when it reached 2.2 per cent, officials said.

Effectively, the growth in IT spending as a percent of revenue means that IT budgets are increasing faster than corporate sales.

The median growth in IT spending on a dollar basis across all respondents this year is 4.1 per cent. According to the study, in 2006, strong economic growth would continue to fuel investment by industry and government in IT as the U.S. Bureau of Economic Analysis reported the U.S. gross domestic product (GDP) rose by 3.5 per cent in 2005, and in the first quarter of 2006, it rose 5.6 per cent, the fastest growth since the third quarter of 2003.

"Companies simply have more money to spend this year," said Frank Scavo, president of Irvine, Calif.-based Computer Economics. "But we see most of the new spending going toward hardware, software, and outsourcing, with not as much toward adding to the IT staff.

"This is the highest increase we've seen since 1997. IT spending budgets at that time was strong because of Y2K and all the e-business build outs that were happening at that time."

Scavo pointed out that, although there are more companies adding IT staff than cutting headcount, the median increase in IT staff this year is only two percent, about half the rate of the increase in IT spending.

"Companies, large companies in particular, are reluctant to hire full-time staff when they don't have to," Scavo told eChannelLine. "I think there's still a Y2K hangover and the cut-backs made earlier in the decade are still painful . . . large companies are reluctant to hire IT staff a lot of times as they have turned to contractors or outsourcing and that represents a variable approach to staffing."

The so-called contingency workforce approach Scavo spoke of holds broad implications for the IT sector, he said, as such a methodology is indicative of a larger trend in society.

"It does indeed depend on which side of the fence you sit," he said. "Careers have become a series of assignments rather than the old days of getting a job at the age of 20 and you've a job for life."

That said, the study stated the IT labor pool remains "tight". The demand for IT personnel is somewhat exceeding supply this year. During the technology downturn of the early part of this decade, many senior personnel that were laid off left the IT field for good.

Moreover, computer science programs are not drawing the great number of new students that they did in the late 1990s, the report read. Also of concern, the "graying" of the IT workforce is apparent, especially in organizations that rely on older technologies, such as mainframes and proprietary midrange systems. As these senior personnel retire, their departure will leave a gap and it will be some time before adequate replacements can achieve the same level of knowledge or productivity.

The study found that IT spending growth is strongest in business services, where it shows a 9.7 percent increase over last year, followed by healthcare, pharmaceuticals and medical devices, retail, and banking and finance organizations. Weakest growth, though still positive, is seen in the process manufacturing, utilities-energy, and wholesale distribution sectors.

"It's not negative growth, though we have seen that in past years. There is still a positive budget growth in those sectors and that speaks to the strength of IT spending," he said. "It could be those particular sectors, such as process manufacturing, have already peaked or are peaking thus there's a more moderate growth rate projected."

Other notable findings in the CE survey:

*Outsourcing is as far more organizations increase their use of outsourcing than are decreasing. For example, 26 per cent of all organizations plan to increase their outsourcing of software development, while only five percent plan to decrease their use.

* Windows now accounts for, on average, over 56 per cent of the processing workload in all data centers. UNIX, mainframe operating systems, and IBM's OS/400 are next in the percentage mix, but far behind Windows with 17 per cent. Linux averages only four percent of the processing workload across all data centers. Netware and other miscellaneous operating systems are even less popular with 3.4 per cent.