Jobs and hardware sales hit as companies cut spending

The long-awaited slowdown in IT spending finally hit Europe last month, with 40% of companies cutting-back or freezing technology...

The long-awaited slowdown in IT spending finally hit Europe last month, with 40% of companies cutting-back or freezing technology budgets, according to a survey of IT chiefs.

Hiring new staff, purchasing hardware and the use of consultants have been the first victims of the cut backs, the Techstrat survey by Merrill Lynch revealed.

Discretionary spending is under review and even important projects are being rolled out more slowly, according to 15 European and 50 US and chief information officers.

"About one third have frozen their IT spending, which helps to explain the speed and depth of the demand decline," said the report. "Users suggest they can freeze for up to six months.

"Having adequate staff is imperative but adding people right now is not, and many companies are trimming second tier-players. Similarly, consultants are cut first."

Spending on infrastructure, such as maintenance activities and delivering mission-critical capabilities by improving the network or storage, and e-commerce are likely to be protected from the spending cuts.

With reduced budgets, three-quarters of IT directors are pushing for cheaper supplies and 80% of suppliers are willing to drop their prices. One CIO reported that a software supplier had reduced its prices by 50%.

"Users are bringing more vendors in for bidding, getting tougher in negotiations, and even looking at used equipment," the report said.

The tightening financial situation has also made directors more cautious when choosing suppliers, with 85% admitting that they are now more likely to go with big name suppliers.

"Users, especially the Europeans, get more conservative in a downturn and favour top vendors. IT managers don't want to take the risk of getting fired."

Suggestions that the slowdown is just a short-term adjustment to earlier outlays on Y2K and the Internet, rather than a repose to an economic weakness, were denied by 85% of those surveyed. And 90% have no plans compensate for the current slow spending with an end-of-year splurge.

"The good news is that the economy, not previous overspending, is the main cause of the slowdown," said the report. "Also, long-term budget growth is pegged at a healthy 10%."

Fung-Yee Tang, a senior IT markets research analyst with IDC, said it would be difficult for companies to freeze their spending or to make huge reductions in budgets because of the business advantages offered by new packages.

"Companies are making their IT work as hard as possible because things are replaced so often," she said.

Contrary to the findings of survey Tang thinks there could be an increase in IT spending among companies that have waited for Y2K issues to be finalised before deciding to replace their systems.

"Businesses spending in 2000 was a lot slower than expected, and I think we will see an increase within the next year from those companies that have delayed replacing their hardware," said Tang.

David Brown

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