Forrester: IT Spending To Grow 7 Percent In 2005

New research from Forrester predicts that spending on IT goods, services and staff will grow 7 percent in 2005 and continue at a similar pace through 2008 -- only slightly faster than overall economic growth. This finding is consistent with the cyclical nature of IT spending, where periods of digestion and refinement follow periods of heavy technology investment.

The majority of the respondents to Forrester's Q3 CIO confidence poll plan to increase 2005 IT budgets at a similar growth rate, an average of 6.4 percent. Overall, IT optimism is up quarter over quarter, with the number of CIOs citing a very strong business climate tripling.

For the first time in three quarters, a majority of the polled CIOs feel that the climate for their industry is operating in at least the strong category. Seventy-one percent of respondents expect even better performance three business quarters from now, compared with only 5 percent anticipating a decline.

Thirty-nine percent of CIOs are spending above their budgeted run rate on IT -- up from 34 percent this past quarter.

Technology Digestion

According to Forrester, business investments in IT over the past six decades reveals that eight- to 10-year periods of significant IT spending growth occur after the introduction of a major new technology. These phases are followed by equal periods in which firms reduce their rate of new investment to focus on ROI and process change that drive business value from the new technology.

Forrester estimates that the US is halfway through the current cycle of technology digestion, which started in 2001. Forrester also predicts that investment in information technology and spending on IT services by companies will increase during the next four years.

Computer hardware spending will hit its stride at 9 percent. Using a three-year depreciation model, growth in computer hardware expenses will peak in 2005 at 14 percent and then level off. The spread of Linux and other open-source software, plus the growing adoption of blade servers, will drive near-term growth according to Forrester.

Networking and Other IT Investments

Network equipment, according to the Forrester report, will grow modestly at an average of 4 percent. Although spending on new equipment by communications carriers and large companies will grow by 16 percent in 2004, it will slow to a moderate 4 percent in 2005. The need to replace aging LAN equipment and investments in network security appliances will drive demand from enterprises, while carriers will cut investments.

According to Forrester, software spending eventually will recover with 7 percent growth. In 2005, software spending will grow only 3 percent, with systems management, storage software, and security applications showing the largest increases. Forrester sees spending picking up in 2006 and beyond as applications based on services-oriented architectures, composite applications and Web services become more mainstream.

While the next four years will remain relatively quiet in terms of major technology innovations and surges in new investments, said Forrester, the foundation for the next big wave of transforming technologies is taking shape.