Report: IT Capital Spending Will Slow In 2007

Despite recent improvements in the economy, the outlook for IT spending in 2007 calls for slower growth, particularly as it relates to investments in hardware.

A recently released report by Forrester Research finds that overall tech spending will grow only 2 percent next year, compared with an estimated 6 percent this year and 7 percent in 2005. Capital spending, which Forrester is forecasting to be up 3 percent totaling $354 billion this year, will decline by 1 percent in 2007.

Channel partners see services as the key avenue for growth. According to the soon-to-be released 2007 VARBusiness State of The Market report, solution providers and integrators are budgeting for 25 percent growth, though services now accounts for 60 percent of their sales.

Several factors will contribute to the decline in capital IT spending, including lower costs for commodities and volatile energy costs, according to Forrester analyst Andrew Bartels.

"What we have been expecting is a slowing U.S. economy late this year or early next year, translating into not necessarily cutbacks, but a big slowdown in purchasing and spending next year," Bartels says.

While software sales will grow, computing hardware sales will essentially be flat, according to Forrester. Meanwhile, sales of communication gear, up 12 percent this year, is projected to decline in 2007, largely due to consolidation in the telecommunications market, which will leave fewer buyers, Bartels says.

That forecast is in stark contrast to what market leader Cisco Systems is telling Wall Street: that it expects growth for the 2007 fiscal year, which began Oct. 1, to be in the range of 15 to 20 percent.

The most recent Goldman Sachs CIO panel survey, released last month, shows that 67 percent of Cisco customers expect to increase their spending with the vendor.

"That's an all-time survey high," says Keith Goodwin, senior vice president of worldwide channels at Cisco. "That's just a proof point in the game is still coming to us."

However, the Goldman Sachs survey also raises a red flag that networking spending overall could be flat. While 65 percent said they will increase their network spending, that's a drop from 76 percent two months earlier.

Other factors will pressure capital spending, as well. Spending growth on security, while a key priority among all customers, may start to slow in 2007, Forrester's Bartels says.

"As a focus and priority, it's still strong, but as an investment it may slow down," he says, pointing out that Microsoft's presence will push licensing fees down. "You are seeing some price erosion."

On the software side, Forrester's Bartels says many customers will be preparing for the release of next-generation ERP suites from the likes of SAP and Oracle. Both companies are readying major updates, now presumed for the 2008 time frame, that will be based on a pure services-architecture.

While those release updates might suggest customers will be on the sidelines, Bartels points out that in order to be able to go to take those next steps, they will have to be up-to-date.

"If you want to migrate to those new releases, you have to have the latest versions so we expect to see people updating," Bartels says.

In terms of new application rollouts, those will be more spotty, with demand up for contract and project management and invoice presentment, while procurement will be more flat. "There are definitely pockets of demand but it will be fairly nichey," he says.

One area in software that most expect to be reasonably strong is infrastructure management, including virtualization platforms from EMC's VMware, Microsoft and others. Also many are expecting a strong uptick for Microsoft's new server software, notably SQL Server and SharePoint 2007.