Forecasts: IT budgets set to grow

The leading high-tech industry watchers forecast that 2004 will see the most significant increase in IT spending in more than three years, but don’t go looking for double-digit growth projections.

“The tech recession is over, but it’s not gone,” says Andrew Bartels, a vice president at Forrester Research. “We’re looking at much more measured, much more return-based investment decisions than in the past.”

IDC is the most optimistic, with an estimate of 6% to 8% IT budget growth for 2004, and Forrester figures budgets will rise about 4% on average. In October, Gartner reported that IT budgets were expected to increase by about 5% next year. Merrill Lynch and Goldman Sachs surveys of IT customers show 1% to 3% increases.

Yet the research groups say purse strings could loosen if the economy gets off to a good start next year.

“It’s normal practice to enter the new year with cautious estimates,” says Bartels, whose firm’s survey of 820 North American companies found that about one-third of them plan to spend more on IT next year than this year.

Expect to see much of the money spent on data center improvements, such as in server and storage upgrades, virtualization software, security and disaster recovery, analysts say.

“Three years of IT spending on ice means aging infrastructure,” says Frank Gens, IDC senior vice president. “An improving corporate profits picture will see some refreshing of basic IT infrastructure.”

Server and client hardware replacements are overdue, analysts say. Server blades are set to catch on in greater numbers. Sales of blades, which grew only 1% through the third quarter vs. the first three quarters of last year, but IDC expects full-year sales will increase 6% over last year.

As for computers and peripheral equipment, Forrester found that IT users plan to spend about $84 billion in 2004, up 9% from the $77 billion spent on PCs in 2003.

On the software side, Linux will continue to give Windows a bigger push, especially as IBM and other Linux backers roll out more products, analysts say. An SG Cowen survey of more than 500 IT users found that 70% of Linux users planned to increase their use of Linux in the data center, while only 39% of Windows users planned to increase workloads and 10% actually planned to decrease Windows deployments.

“In the past, Linux growth was at the sake of Unix. In 2004, it will become more of a threat to Windows,” says Laurie McCabe, a vice president at Summit Strategies. “Microsoft is betting that customers will use what is there instead of seeking competitive solutions.”

In updating their operating systems or moving to new ones, customers are expected to push for more flexible licensing. Many are still sore over Microsoft’s recent licensing changes. But 40% in Forrester’s study said Windows upgrades will be a priority next year.

McCabe says software vendors will adopt pay-for-use models that adapt to a dynamic computing environment. For example, customers could deploy a database and an application server on a four-processor machine but later scale it to eight processors on demand and be charged accordingly.

Gartner says server and storage virtualization software, programs that let computing resources be used more efficiently to run applications and operating systems, will gain more converts.

“Good economy or bad economy, anything that you as an IT operations director can do to make your environment more efficient has tremendous payback, and so there is tremendous interest in looking at new processes [and] at new vendors with innovative solutions,” says Mike Chuba, vice president and research director at Gartner.

Forrester says 2004 also could be the year in which more companies buy into technologies such as wireless LAN and voice-over-IP. Still, investment in network equipment is expected to rise only modestly:

Forrester found in its survey that spending on communications equipment is planned to be about $88 billion, up 2% from this year’s total.