IT Spending Slowdown Looms, With Pockets of Strength - Report

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The IT spending increase in 2007 could turn into a slowdown next year, but pockets of strength could include server virtualization and other hot-button offerings, according to a new survey by analysts at Goldman Sachs.

Spending on server virtualization, business intelligence and security are expected to stay brisk, but cost-cutting is becoming more of an imperative for IT managers, as it jumped to seventh place from eighteenth place on a list of top ten priorities in the Goldman Sachs survey. This suggests a slowdown in spending fueled by an overall reduction in capital spending, analysts wrote. "Although most budgets will not be backed until November or later, our first inquiry on 2008 intentions indicates an anticipation of decelerating spending growth," Goldman Sachs survey concluded. The survey panel consisted of 100 managers with decision-making capability from multinational Fortune 1000 companies.

The survey found IBM's expansion into high-end servers is piggybacking on the success of the virtualization trend, while competitor Hewlett-Packard posted a surprisingly strong showing after a spell of overall lackluster performance. Out of 100 companies surveyed, 38 percent listed PC blade servers as the preferred hardware platform for server virtualization. While SAN-based storage is the earliest beneficiary of the server virtualization trend, the survey suggests growth in NAS-based storage needs particularly benefits companies like NetApp.

Product marketing specialist for AMAX Information Technologies James Huang says expanding into new markets like virtualization is an option for solution providers worried about the IT budget crunch. "For a system builder like us, we have to find other venues to get into the channel," he says. "Venturing into the virtualization market will offer us a huge new market opportunity.

Oracle and SAP stand to gain from the trend in large enterprise application deployment, with nearly 40 percent of survey respondents currently deploying upgrades. This is another avenue AMAX is taking to keep business steady. "We're having to expand facilities in order to meet demand for appliance security solutions," Huang says. Expansion into the business intelligence space may offer another solution. Business intelligence purchase intent continues to hover around record levels and SaaS (Sales-as-a-Service), while still nascent, looks to post increased adoption by large enterprises. This suggests a maturation of the SaaS market, which is currently driven primarily by small/medium-sized businesses (SMBs).

Goldman Sachs said it predicts growth in IT spending in the service sector will remain stable, backed by continued CIO interest in IT outsourcing and a strong appetite for discretionary IT projects. However, the survey suggests IT outsourcing growth will slow in traditionally strong areas and will be bolstered by business process outsourcing (BPO). A slight dip was reported in offshore interest, which was attributed to the seasonality of the survey. The Indian IT Services sector, in fact, is currently expected to maintain its position as the industry leader, posting a growth rate of 30 percent for 2007 and a projected growth rate of 35 percent for 2008.

The survey also found interest in data center consolidation and VOIP technology fell, while upgrades to Microsoft's maligned Vista software remain sluggish. A lackluster interest in open source software implementation kept growth slow in that industry. Overall, while certain trends will indeed bolster solution providers able to stay ahead of the curve, survey results suggest a widespread, if not severe, slowdown in IT spending in the coming year. Not everyone accepts the gloomy picture, however.

Todd Swank, director of marketing for system builder Nor-Tech, doesn't buy into what he calls "doom and gloom" prophesizing. "Every year a new downer of a report comes out," he said. "But there's always going to be a new technology that everyone needs and wants." Like Huang said, it's up to forward-thinking firms to keep up the pressure to innovate. "For the companies who stay innovative, there are always new opportunities," Swank said.

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