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IT execs cautious in budget forecasts

Feb 09, 20044 mins

IT executives are beginning to take sales calls from technology vendors again, evidenced by a number of large vendors that cited increases in corporate spending as a major contributor to their improved results in the latest round of financial reports.

Cisco, IBM, Intel, Microsoft and Nortel, among others, have attributed their positive financial statements at least in part to corporate spending levels they haven’t seen in the last few years.

Increased corporate demand for Microsoft’s desktop and server products helped push the company’s revenue to $10.2 billion for the quarter that ended Dec. 31, company executives say. That figure was a 19% increase from revenue for the corresponding quarter in 2002. At Cisco, which last week reported $5.4 billion in revenue for the quarter that ended Jan. 24, the company’s enterprise equipment business saw consecutive quarters of year-over-year increases for the first time in two years, officials say.

While not as enthusiastic as some vendors, many IT executives say they’re seeing increases in their budgets this year and are hopeful the trend will continue. They attribute this optimism to the stabilizing of the U.S. economy and to a better business climate in their own organizations. Having suffered through budget cutbacks and staff layoffs over the past few years, these executives say they’re ready to get out of maintenance mode and begin some much-needed spending.

“We have delayed as long as we can some of our life-cycle replacements, such as Cisco routers,” says David Swartz, CIO of George Washington University in Washington, D.C., who saw a 3% to 4% increase in his budget for fiscal 2004, which ends June 30, and expects the same type of growth for fiscal 2005.

“One way folks deal with budget crunches is they don’t replace things as often as they’d like; now people are releasing some pent-up demand because they’re feeling more comfortable. No one I know is seeing significant [budget] increases, but in general they’re ratcheting back up,” he says.

Based on a survey of 100 IT managers in Fortune 1000 companies conducted by Goldman Sachs in December, IT budgets will grow by only 1% to 2% on average this year. However, the investment banker’s research arm says technology capital spending will grow faster than overall technology budgets, which include additional expenses such as services and staff. Almost one-third of the respondents said they expect their technology spending levels to increase during the first half of this year. Enterprise software, including databases and security, storage and CRM applications, were listed among top priorities.

But can this newfound confidence last long enough to have a positive effect on the industry, leading to job creation and significantly fatter IT budgets? Even Cisco CEO John Chambers, saying that corporate confidence in the economy climbed last quarter, expressed uncertainty over how long it will last.

“People are very careful about taking risks in today’s environment. . . . It’s been three years of false starts,” he says, noting corporations remain cautious about capital expenditures and hiring. “It’s a little bit more cautious environment than we’ve traditionally seen in a recovery,” he says.

He added that during the last two weeks of January Cisco saw fewer orders than expected.

GW’s Swartz says the hiring freeze his department has been under for the past two years has lifted, and most of the critical positions have been filled, although no new jobs are being created. The department’s salary freeze also has ended, but returning to the 10% increase levels of a few years ago is still a pipe dream, he adds.

At Corestaff Support Services, a temporary and permanent staffing company, the IT budget for 2004 is expected to be up 20% to 30% over last year’s, says Donald Murphy, manager of technology support. While this is a refreshing change from the 50% to 60% budget cuts the IT department has had to live with for the previous two years, the increase still isn’t enough to justify hiring. “We’re still pretty tight with hiring; you don’t want to be too flexible with that” because it can make an employer seem irresponsible, he says.

However, Murphy’s department has begun bringing in new equipment. The company purchased IronPort’s gateway appliance for fighting spam – a move that Murphy says already has won his CIO kudos from the executive staff – and looks forward to upgrading its Citrix servers that support the company’s 500 users.

Despite this expected budget increase, Murphy – who hasn’t ruled out the possibility that more IT dollars might be a temporary phenomenon – says his department will continue to watch spending and focus on efficiency. “Now that we have an expanded budget, after coming out of these last two years we’re going to be a lot more careful where we spend our money,” he says.

Stephen Lawson, a correspondent with IDG News Service’s San Francisco bureau, contributed to this story.