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Sunday, August 08, 2004

The changing landscape of IT spending via News.com

The Mckinsey study says,"IT customers are buying again, but not as extravagantly as they did during the boom. Tech companies must adapt to ensure their long-term survival".Improvements in the general economy have clearly loosened up IT budgets, which are growing at 3.4 percent a year on average for Fortune 500 companies.capital spending on technology may raise by as much as 12 to 13 percent this year.Most Fortune 500 companies use accrual-based accounting, which depreciates IT assets over three to five years, to budget for IT. This depreciation is now rolling off the books, making room for new spending during the next two or three years—until budgets are filled by this round of purchases.Technology companies must understand the nature of this limited opportunity and make tactical shifts in their sales models, product offerings, and long-term acquisition plans. Hardware is in demand, and companies that make it should use the extra revenue to extend their reach into higher-margin software and service businesses or to extend their lead in hardware markets. Packaged application software, by contrast, isn't high on the shopping lists of most CIOs. Other Key findings:
a.Technology companies need to improve their operational efficiency. For many years, they relied on revenue growth to save them from the need to become more efficient.
b.Capital spending for hardware jumped by 14 percent in 2003, and the momentum—driven by the need to update aging infrastructures—has continued in 2004.
C.Although IT customers also want to improve their software, they are wary of big-bang packaged applications—purchases that are just now rolling off accrual budgets.
d.Custom software that closely adheres to a company's existing processes (and therefore requires little or no process change) is popular, and so is software developed for a specific industry.
e.Integration—a higher priority now than it was during the boom—is generating demand for enterprise-application-integration (EAI) technologies. Web services are gaining traction faster than anticipated, especially in small telecom and other companies at the forefront of IT innovation. Roughly half of the CIOs spoken with have been (or are thinking about) investing in integration broker software, often combined with Web services. Adoption is strongest among telecom and financial-services companies, whose technical complexity makes the software especially attractive.
f.Many CIOs reported that their companies undertook no auditing or follow-up to determine whether IT projects failed or succeeded.
g. For the various IT sector players, the opportunties are
1.Hardware providers. The bulk of the spending increases will probably be captured by hardware companies, which should use this window to set up lucrative maintenance and service contracts that could ensure strong revenue streams in the years ahead. Demand for hardware is strong but balanced by new price pressures.
2.IT services firms - Opportunities abound to integrate systems and make them more reliable and resilient in the face of sabotage or intrusion. Service providers can stay in the game by helping companies to navigate among integration strategies such as EAI software, Web services, and broker software. Indian IT services companies should consider acquisitions that would rectify their deficiencies in the sales channel.
3.Software vendors - Providers of packaged applications probably won't benefit from the current spending increases, and the dollars they do capture will likely be for smaller modules rather than the large packages that underlie their business models.

The article concludes by saying,"Technology companies now have a rare opportunity. They should make the most of it. The confluence of better economic times with old purchases now rolling off the books gives customers a chance to update their old infrastructure—and should deliver fresh revenues to hardware vendors, IT services providers, and some software developers. Smart high-tech companies will use the influx to reinvent themselves for tougher times ahead".

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