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IT Spending Makes a (Modest) Comeback in 2010

While global macroeconomic conditions remain unsettled, ESG’s 2010 IT Spending Intentions Survey finds some cause for optimism for both IT users and vendors alike.  In ESG’s December 2009 survey of 515 IT managers at midmarket (100-999 employees) and enterprise-class (1,000 or more employees) organizations, 52% of respondents said that they expect their organization’s total IT spending to increase from 2009 to 2010 (see Figure 1).[1] Those organizations planning to increase IT spending project an average year-over-year budget increase of 5.3%.  Taking into account those organizations with flat or declining budgets, ESG’s respondent base as a whole expects an average spending increase of 1.7% in 2010, a modest increase to be sure, but a significant improvement over the often-precipitous IT spending declines of 2009 (in that respect, it is also noteworthy that just 1% of ESG’s respondents expect severe budget cuts of more than 10% in 2010).

2010 IT Spending Trends by Industry

As always, IT spending expectations vary significantly when analyzed by industry.  As shown in Figure 2, industries in which respondents are most likely to report increasing 2010 IT budgets include Health Care (67% of organizations surveyed will increase spending), Communications & Media (63%), Federal Government (55%), and Financial (55%).  Conversely, respondents from industries such as Education and State and Local Government have much more subdued expectations for 2010 IT spending.  Just 42% of IT managers in the Education vertical expect to increase spending in 2010 and some 32% believe that IT spending will continue to decrease this year.  Similarly, only 33% of State and Local Government respondents foresee a 2010 spending increase, with 31% planning additional IT budget cuts.

Figure 3 provides additional detail on 2010 IT spending intentions by displaying the average 2009 to 2010 percent IT budget change across all respondents in a given industry vertical.  Not surprisingly, two industries that have been IT spending bulwarks throughout this most recent recession—Federal Government and Health Care—claim two of the top three positions, with average budget increases of 3.1% and 2.4%, respectively.  More interesting,  however, is data that suggests the Financial industry may be poised to reclaim its perennial position as the IT spending king: After a dismal 2008 and 2009, IT managers at financial institutions surveyed by ESG report a 2010 IT spending increase of 3.2%, more than any other industry.  As we shall discuss in more detail shortly, respondents from other hard-hit industries such as Retail and Manufacturing also have a more optimistic outlook for 2010, with IT spending expected to increase 2% and 1.6%, respectively.  Among ESG’s respondents, IT managers at State and Local Government agencies were the only group to report a collective 2010 dip in IT spending, with an average .1% spending reduction expected.

As a side note, ESG also discovered that IT employment plans were closely correlated with overall IT spending expectations; i.e., the industries most likely to be planning to add IT jobs in 2010 are Health Care (50% will add new IT staff positions in 2010), Communications & Media (48%), Federal Government (48%), and Financial (47%) (see Figure 4).  State and Local Government (26%), Manufacturing (26%), and Education (24%) on the other hand, are much less likely to report expanding IT employment over the next 12 months.

2010 ESG VOIS Rankings

For IT vendors to be able to set appropriate expectations and properly allocate scarce sales and marketing resources to different industry sectors, it’s critical to understand the relative health of a given industry in a manner that combines specific IT spending data with macro-level industry trends.  For example, by overlaying ESG’s recent survey data regarding expected total IT budget change from 2009 to 2010 (by industry) on top of U.S. Department of Labor statistics showing each industry’s previous 12-month employment profile (i.e., percent of jobs gained or lost between December 2008 and December 2009), one can obtain a more holistic sense of current industry dynamics (see Figure 5).

Not surprisingly, strong—and continued—job growth and general industry expansion in the Federal Government and Health Care sectors is once again helping to fuel IT spending increases in those industries.  While the 12-month employment picture for the Financial industry—the industry with the highest expected year-over-year IT budget change—is not a particularly pretty one, the past 30 days actually saw a net increase in U.S. financial sector employment (the first such increase since June 2007).  It very well may be that this short-term trend combined with the financial markets’ improved 2010 performance, ongoing macroeconomic stabilization efforts, and the financial industry’s historical reliance on information technology will create a 2010 rebound in financial services IT spending.  While all of the other industries presented in Figure 5 (with the exception of Education) have a negative previous 12-month employment change, the rate of job losses in those industries is generally slowing.  This development—combined with cautious macroeconomic optimism and the fact that so many IT projects were cancelled and equipment refresh cycles postponed in 2009—helps to explain respondents’ expectations of 2010 IT spending increases in industries such as Retail, Manufacturing, Communications and Media, and Business Services.

In order to help guide IT vendors’ sales and marketing efforts, ESG combines these types of primary and secondary data into a model that can be used to identify high-priority industry verticals for the coming year.  This model incorporates the following considerations:

• Overall industry health: Defined as a given industry’s actual previous 12-month net employment change (in this case, the most recent data available spans December 2008 to December 2009).
• Short-term industry health: Defined as the net employment change in a given industry over the last 30 days (note that the most recently available data was for the period between November 2009 and December 2009).  This provides insight into recent industry trends that could impact short-term sales activity.
• 2010 IT spending expectations: Defined as the average 2009 to 2010 year-over-year expected IT budget change for that industry, as reported by respondents to ESG’s 2010 IT Spending Intentions Survey.
• Overall level of IT spending: Defined as the percent of organizations within a given industry with an IT budget of at least US$50 million, this data was collected as part of ESG’s 2010 IT Spending Intentions Survey.

ESG ranked ten different industry sectors using these criteria and then added up the combined rankings in order to calculate the 2010 Vertical Opportunity Index Score (VOIS) for each industry.  The results of this analysis are displayed in Table 1.  As shown in the table, industries fall into roughly three categories for the purposes of overall 2010 IT spending expectations and related prioritization by IT vendors: best bets (Health Care, Federal Government, Financial); proceed with caution (Education, Communications and Media, Retail); and trouble spots (Business Services, State and Local Government, Transportation and Logistics, Manufacturing).

Additional insight into ESG’s rankings – including a comparison vis-à-vis last year’s rankings, commentary on each industry’s specific IT and business priorities, and the quarter in which respondents expect to spend the majority of   their 2010 IT capital budgets (determined via ESG’s survey) – can be found in Table 2 below.

Among the highlights of this year’s rankings:

• Health Care and Federal Government hold on to the top two spots. A relatively strong employment situation and ongoing IT spending means that ESG’s 2009 VOIS rankings winners retain their titles in 2010.  An improved short-term employment outlook gives Health Care a slight edge in this year’s rankings.  Information security continues to dominate the Federal sector agenda.
• Financial bounces back. As previously discussed, an improving employment outlook, increased IT spending expectations, and a traditional reliance on IT raise Financial to the third position in the 2010 rankings.  Managing data growth is financial respondents’ top 2010 IT priority, which bodes well for storage systems, data protection, data reduction, and resource management vendors.
• Retail, Business Services, and Manufacturing show signs of life. These three industries ranked at the bottom of last year’s rankings.  While a devastating employment situation keeps Manufacturing in the cellar position this year, IT spending is expected to increase in 2010, after 2009 declines.  Year-over-year spending increases are also expected among Retail and Business Services respondents, two of the three industries that actually move up in this year’s rankings compared to 2009.  One area of increased spending in all three industries?  New server hardware.  43% of Manufacturing respondents expect to increase server hardware spending from 2009 to 2010, compared to just 23% the previous year.  Even more dramatic rebounds are expected for Business Services (58% will increase server spending in 2010, compared to 31% the previous year) and Retail (62% will increase server spending, up from just 28% in 2009).
• State and Local Government is 2010’s biggest loser. Ranked third in ESG’s 2009 VOIS rankings, State and Local Government plummets to eighth out of 10 in this year’s installment.  The full bite of the recession is now being felt in declining tax revenues at the state and local level, leading to increased budget pressures and mounting job losses (over 100,000 in the past 12 months and 10,000 in the past 30 days).  Nearly half (47%) of the respondents surveyed by ESG still characterize their IT organizations to be in cost reduction mode.  State and Local Government agencies are also more likely than any other industry to have an IT hiring freeze in effect.  The good news for IT vendors?  ESG’s data reveals that this is creating a critical lack of skills in areas such as virtualization, which in turn presents a compelling services opportunity for equipment vendors, VARs, and systems integrators.

The Bigger Truth

While the IT industry – and of course, the economy at large – is by no means fully recovered from the financial meltdown and subsequent economic collapse of 2008 and 2009, ESG’s 2010 IT Spending Intentions Survey finds that IT buyers will loosen their purse strings and generally increase IT spending in 2010.  ESG’s 2010 VOIS rankings find that industries such as Health Care, Federal Government, and Financial represent the most promising IT market opportunities in 2010, although technology-specific opportunities will avail themselves in all verticals.  ESG recommends that its VOIS rankings—and additional supporting data on customers’ specific business and IT initiatives—be used by sales and marketing executives at IT vendor clients to refocus their teams on creating compelling offerings and campaigns that effectively target high-priority industry verticals.