Investment Upswing

The latest data from the Wendover-Global Insight IT Spending Index, which forecasts planned enterprise spending six to 12 months out, indicates spending will peak at record levels this year. The index average for the fourth quarter of 2003 was 25 percent higher than for the third quarter of the year, which in turn was up from the second quarter. It's the first time that new spending has exceeded the previous year's since the tech sector's implosion four years ago.

The index measures the intentions of IT decision-makers to spend, typically on new capital projects with purchases that will close within nine months. Wendover completes 133,000 surveys annually with IT decision-makers at 80,000 corporations throughout the United States and the United Kingdom, including every Fortune 500 company. The index is published monthly through a partnership of Wendover and Global Insight. They pegged the index at 100 points at its inception in late 1999.

Despite some dismal quarters since then, the past nine months of 2003 indicate a broad expansion of IT spending in the manufacturing and service sectors. New IT spending in construction and manufacturing is up from the third quarter of 2003 and from the same period a year ago. Increased IT spending in health care, utilities and real estate are all tracking at the same pace as overall economic growth in those respective sectors.

Solutions Outlook
Data-management products had the largest increase--up 303 percent between the ends of 2002 and 2003--the index's largest year-to-date gain. Of the companies planning to invest in data-management solutions, 82 percent are seeking a new solution while only 18 percent are looking to upgrade or replace an existing one. This suggests that improved economic conditions make companies more likely to increase investment. Of those looking for new solutions, just 15 percent are looking for an off-site solution while 85 percent are looking for an on-site one.

Data gathered during the past three years also show that, in general, the buying process is taking longer. Unfortunately, that's also the case with data management: 86 percent of those purchases will take place in six months or more, with only 14 percent planning to purchase within three months. Typically the focus for solution providers has been on customers that will close in the current quarter. Sales teams ignore at their peril the fact that the vast majority of customers buy in subsequent quarters. Of those interviewed, 31 percent plan to purchase in six to nine months and a full 35 percent estimate they will purchase in nine to 12 months. Also noteworthy: 20 percent will wait to spend on data-management projects for a year or more.

The network-equipment sector has been up and down through the recession. Last quarter, it stood at a record low of 30; this quarter it has bounced back to an index level of 100, an increase of 205 percent from the third quarter of 2003 and up from the fourth quarter of 2002.

Demand for outsourcing has been steadily declining for the past two years. This quarter is at a two-year high and represents the first positive sign that companies are looking to hire IT personnel: The need for IT personnel is up 149 percent this quarter, a 32 percent increase from last quarter.

Data warehousing has fared well in the past five years. However, it has plum-meted to an index level of 65--down from 106 in the third quarter of 2003--a 38 percent drop. Furthermore, it's down about 39 percent from the third quarter of 2002, indicating a clear market shift.

In the past 18 months, consulting has been hovering at an index level of 55 to 60. In the third quarter of 2003 it jumped to 82, but fell back at year-end to 52, down 38 percent. More telling is that the index level for consulting is down 9.1 percent from the fourth quarter of 2002.

CRM software is up 23 percent to 124 on the index, a gain of more than 100 percent since the fourth quarter of 2002, and one of the strongest gains in any category last year. In the fourth quarter of 2003, demand grew to an index level of 120--20 percent higher than when the index first started to track demand in the second quarter of 2001. At 120, CRM ranks fourth in demand against all other categories of IT investment, and has enjoyed the most consistent growth gains for the past five quarters.

Industry-Sector Outlook
Financial institutions showed the largest gain in planned IT investment in the fourth quarter of 2003. That sector's index level jumped to 70.6 last quarter--a 116 percent increase and a two-year high. And while in the fourth quarter of 2002 the index level of financial institutions was at 65.8, it was at 70.6 percent in 2003, a 7.1 percent increase.

Real estate has fared better than most industries in the past few years. Last quarter, the sector's index level rose to 105, measuring an increase of 61 percent from its previous level of 65. In fact, you would have to go back almost two years to see this level of planned investment by the real-estate industry.

Legal services broke the 100 barrier for the first time since the fourth quarter of 2002, the sector's second consecutive increase. In the third quarter of 2003, it reached an index level of 67; last quarter it reached 100--a 49 percent increase--but that's about the same level as it was in the fourth quarter of 2002.

The wholesale-goods-and-materials sector posted both strong quarterly and annual gains of about 25 percent and an index level of 79, a two-year high, representing two quarters of growth.

Retail is down 53 percent from a year ago, but has shown two consecutive quarters of higher planned investment. Retail increased to an index level of 63 for the fourth quarter of 2003, up from 58--a 7 percent increase.

The insurance industry finished the year at 43 on the index. This is the second-lowest index level for last quarter, compared with all other industries, and reflects a 12 percent decline for the quarter and a 15 percent decline for the year. This industry shows no sign of increasing capital investment in IT and may be one of the last industries to recover.

The biggest loser for the quarter and the year was the utility industry, down 44 percent for the quarter, and 57 percent for the year.

Larry Dillon ([email protected]) is CEO of Wendover.