CIOs brace for economic downturn

A majority of technology leaders expect the U.S. economy to weaken in 2008, according to Goldman Sachs, which forecasts IT spending growth to decelerate this year as CIOs rethink technology purchases and vendor choices.

Goldman Sachs this week released results of its most recent survey of 100 managers with decision-making authority at multinational Fortune 1000 companies. Close to 70% of respondents said they expect economic conditions in 2008 to be weaker than those of 2007, and just 2% foresee the economy becoming stronger in the coming year. Because of these expectations, Goldman Sachs is adjusting its expectations for U.S. IT spending growth down from 7% in 2007 to 5% in 2008.

"Because post-bubble IT spenders have been generally quite cost-conscious, it would be surprising for spending growth to plummet dramatically," the report reads. "CIOs appear to be increasingly bearish on the current macro outlook, and we expect this to have a tightening effect on IT budgets, at least in the first half of the year."

About 30% of respondents said their IT budget is "under pressure" and decreasing in relation to company revenue and/or expenses and 65% indicated their budget was "keeping pace" with total company revenues and/or expenses. Goldman Sachs reports the tight link will bring increasing pressure to IT buyers to tighten budgets. "It is clear that shrinking revenue poses the biggest risk to IT budgets," the report reads.

The budget crunch could also impact vendor choice. According to the survey, 34% of respondents are less willing to purchase from best-of-breed vendors than in the past year or two and would consider consolidating spending around fewer vendors. Close to half said their outlook on vendors is unchanged, and 16% said they would be more willing to by from a greater number of best-of-breed vendors.

"Our panel's continued shift away from best-of-breed vendors is also symptomatic of a softening spending environment, where customers seek to purchase 'good enough' substitutes from larger solution providers," Goldman Sachs says.

Faced with cutting costs, more than one-third of survey respondents said they see hardware as the spending area with the greatest potential for cost reduction in the next 12 months. In particular, 42% said PC servers, 35% reported PCs and 28% put Unix servers on the list of hardware spend areas with the greatest opportunity for cost savings in 2008.

Fifteen percent of survey respondents reported software licensing could be decreased. Software-related projects seen as most likely to get delayed as budgets tighten this year include Microsoft Vista upgrades (43%), ERP software projects or upgrades (31%), Microsoft Office upgrades (26%), application integration/SOA projects (24%) and disaster-recovery/business-continuance planning (24%).

Twelve percent of survey respondents said they considered communications and network equipment an area for potential cuts, and just 6% said internal staffing had potential for cost reduction. Thirty-two percent said they would reduce third-party professional services if pressured to reduce expenditures.