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There are cautious predictions of a rise in IT budgets throughout 2005, but the IT director will have to spend shrewdly to get...

There are cautious predictions of a rise in IT budgets throughout 2005, but the IT director will have to spend shrewdly to get the most out of technology to benefit the business

After more than three years of cutbacks and budget freezes, IT spending appears to be making a steady recovery.

Computer Weekly's latest Kew IT expenditure survey reported that IT spending in the third quarter of this year has risen by 7.3%. But can IT directors be optimistic the recovery will continue, and what should their spending priorities be for next year?

Analysts have echoed the cautious optimism of the Kew survey. "IT spending will definitely increase next year - we are predicting by 3%," said analyst Manuel Mendez at Forrester Research.

"A third of more than 500 European companies we have just surveyed said 2005 would be a good year with higher IT budgets."

But 45% of the respondents in Forrester's survey saw budgets staying flat, which suggested there will be no return to the IT spending bonanza of the 1990s.

Roger Fulton, vice-president of research at Gartner, said, "Cost containment is in the bloodstream of every manager, both in business and IT. Cost control and reduction are at the top of the agenda."

Denise Plumpton, chairman of senior IT user group the Corporate IT Forum, added, "Our members feel there is no increase in IT spending and no loosening of the purse strings. Although budgets are not decreasing, there is still pressure to deliver more IT for the same money, especially where technology costs are decreasing, such as in storage."

So what will IT directors be spending their budgets on in 2005?

"The refresh cycle has been on hold and users have been stretching out the life of servers and PCs," said Fulton. "Now we will see hardware and software replacement, but IT directors will be careful how much they do."

Ian Jones, head of publishing at the National Computing Centre, said companies will continue upgrading to the Windows XP operating system.

"The upgrade to Windows XP will dominate and users will expect to have replaced almost all their Windows 9x and NT systems, with Windows 2000 left on only 20% of desktops. More than 60% of desktops will be running XP," he said.

Protection for IT systems and services will continue to absorb IT spend. More than half the heads of IT surveyed by Forrester said security was going to be critical or very important in 2005.

Plumpton agreed. "Security spend will increase more than a little next year. Companies are valuing intellectual property more and want data and electronic transactions to be safe."

Preparing IT systems to comply with corporate governance regulations - ranging from international accounting standards to the Sarbanes-Oxley Act - will be the biggest single black hole for IT money next year.

In June the chief technology officer of Barclays Bank revealed that spending on compliance was taking up 40% of his IT budget.

"Compliance is a huge tax on business and the finance sector is the first to take a visible hit," said Fulton. "One bank I know of had to spend its entire discretionary IT budget on governance."

Plumpton said IT budgets will be diverted to compliance projects, although the extent of this will vary according to sector. She added that IT needs to be involved with the finance department at an earlier stage of governance to contain the costs of compliance projects.

The popularity of portable devices and wireless technology for helping staff work out of the office will continue. However, the spread of mobile devices will also pose security headaches for companies.

Suppliers should not expect bumper profits next year. IT directors have learnt the lessons of recessionary spending and have become far more assertive with suppliers, said Plumpton.

One bargaining chip when negotiating with Microsoft is the potential to move to open source software. But Plumpton said that most users are still evaluating whether there is a clear business case for moving to Linux.

Users will be putting pressure on suppliers in other ways. "One trend next year will be a huge rationalisation of the number of suppliers a company does business with," said Mendez.

"Some firms deal with more than 100 IT suppliers, which is too complex and too costly. Next year we will see more than half of companies reducing the number of IT suppliers in favour of fewer, more strategic relationships."

There will also be a move to central IT sourcing, said Mendez, which will give users "more power in renegotiating software licences and service deals. This year, 19% of companies renegotiated more than 20% of their IT licences - next year that will be more than 24%. It will become very important to squeeze more from suppliers."

Users' key objective will be to move to utility licensing - paying for usage rather than seats or processing power.

"Less than a third of European companies have this, but more than half have said they want it because the current pricing model is costly to maintain, rigid and complex. But there will be a huge clash with suppliers. The likes of Oracle and SAP are very reluctant," said Mendez.

For IT directors, next year may see more money spent on IT, but most of it will have to be spent on security, governance and updating technology. Otherwise, the message is the same as during the recession: make every pound do the work of two.

Where the money will go in 2005

  • A refresh and update to hardware and software, such as replacing legacy systems and completing upgrades to XP
  • Increasing system security
  • Compliance with new regulations such as data protection and Sarbanes-Oxley
  • Increasing use of mobile devices
  • Renegotiating supplier deals to reduce costs.

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