2006 Was Good -- Here's To A Great 2007
We live in exciting times. This issue pulls from the last quarter of Forrester's research, with a focus on spending in 2006, forecasts for 2007, and a few technology predictions made by Forrester analysts for 2007.

A Surprise In The US, While European Growth Continues
US GDP data for Q2 2006 contained a surprise for the tech market: The US Department of Commerce made major downward revisions to its estimates for US business investment in information technology goods for 2004 and 2005. Andrew Bartels documented the impact of this on our forecasts in "US IT Spending Summary: Q2 2006." He carried it forward in his Q3 update, when he detected a slight acceleration, and raised our IT outlook for 2007. With colleague Andrew Parker, Andy noted in "European Enterprise IT Spending: 2006 to 2007" that while the collective GDP of Western and Central European countries is greater than that of the US, total European IT spending still lags the US -- $565 billion in 2006 (448 billion euros) versus $721 billion.

On the other hand, growth in European IT spending is starting to match or exceed the US. In US dollars, European IT spending will grow by 5.1% in 2006 -- almost as high as the US growth of 5.8%. Andrew and Andy extended that work in "European IT Spending 2006: Country-By-Country," showing that the UK is now the largest market overall, although Italy leads in telecom equipment and Germany in IT consulting and outsourcing. The smaller markets are growing faster than the larger ones.

Forecast: $1.55 Trillion In IT Goods And Services In 2007
Despite the positive short-term outlook, caution is still the word of the day. Forrester has pointed to a current period of technology refinement and digestion with companies concentrating on adapting to the prior wave of technology innovation and eschewing aggressive investments. During these periods, business investment in IT is beholden to the fluctuations of the economy as a whole. Based on historical trends, the current period should end around 2008, and it is becoming clearer that Web 2.0 software-driven computing will likely lead the next charge. Software investment has been growing steadily over the past several years -- business investment has gained each quarter since 2002. But, it is still far too early to declare the dark days over. As the economy goes, so goes the tech sector, at least for the foreseeable future, and vendor strategists would be wise to keep this in mind.

The Forrester/ITAA US Tech Sector Index posted its best performance in five and a half years in Q3. The index rose 3.2 points compared with Q2 2006 and 6.7 points compared with Q3 2005.

Global purchases of IT goods and services will reach $1.55 trillion in 2007, growing by 5% following 8% increases in both 2005 and 2006. A slowing US economy will pull down growth in IT purchases in the US, Asia Pacific, and the rest of the Americas. Total global spending on technology goods, services, and staff -- the global IT operating budget -- will reach $2.13 trillion in 2007, up 6% from $2.02 trillion in 2006. The lag effect of depreciation from prior IT investments keeps IT operating budgets growing despite slower growth in new purchases in 2007. IT budgets will be larger for 32% of recently surveyed executives at 700 North American enterprises, especially at firms with more than 20,000 employees. The remaining majority expects to hold steady. Only 10% overall expect budget decreases.

Forrester recommends that IT benchmark what is needed to maintain and operate the IT organization, systems, and equipment as a percentage of revenues. Our 2006 estimates for this benchmark metric are included in "US IT Spending Benchmarks For 2006." Putting it in the right context is critical, and the report provides step-by-step guidance for doing so.

What About Pricing? Hold On -- Bumpy Ride Ahead
Want to take advantage of new multicore servers? Bring a pricing analyst and a stack of product catalogs when it's time to buy software. Each major vendor has its own formula for dealing with multicore. Middleware vendors favor schemes that may raise current prices. Worse, they reserve the right to change the relative value of a processor core in the future, as industry-standard ratings don't exist. Multicore software licensing is the main new factor driving up the complexity of enterprise software pricing, but widespread use of virtualization techniques will soon make matters worse. IT sourcing pros must create new models and tools, such as the one included in this document, to ensure the best balance among software feature/function, IT cost predictability, and cost efficiency.

IT Management Takes On Business Relationships, Moves From Relationship Management To Demand Management
IT execs that we surveyed picked alignment, governance, and communicating value as their top concerns. Still important are cross-unit business initiatives, migration to shared services, and the exploration of business process management (BPM) technologies as a way to formalize the management of business processes. IT will transform relationship management into IT demand management (IT DM), a standalone group reporting directly to the CIO and with a seat on the business units it represents. IT DM will synchronize the balancing of business' demand with IT's delivery through six project management office (PMO) processes: portfolio, pricing, performance, program, project, and positioning management.

IT DM will work with both business and its IT peers through an ongoing and iterative process that aggregates demand for IT services, represents the resources requested -- and their costs -- to the business, and helps optimize the deployment of IT resources over time.

New Videos Available
Watch video excerpts from Forrester's Technology Leadership Forum 2006. Highlights include speeches by George Colony ("IT To BT"), Laurie Orlov ("Boosting IT's Role In The Enterprise"), Julie Giera ("IT's Future As A Service"), and Alex Cullen ("Business-Focused Architecture"). Also check out the Q&A excerpts from guest speakers Steven A. Mills, senior VP and group executive of IBM software, and Nandan M. Nilekani, CEO of Infosys.

From The Editor
Thanks for reading -- see you next time, when we'll look at some technologies to watch in 2007.

Merv Adrian
Senior Vice President
mervadrian@forrester.com

Research Referenced In This Issue Business Software Platform Vendor Profile: Oracle (40161) Enterprise IT Infrastructure 2006 Adoption (40401) European Enterprise IT Spending: 2006 To 2007 (40083) European IT Spending 2006: Country-By-Country (40128) First Glimpse At 2007 North American IT Budgets (40386) Forrester/ITAA US Tech Sector Index: Q3 2006 (40958) From Relationship To Demand Management (40371) Global IT Spending And Investment Forecast, 2006 To 2007 (40451) IT Execs Boost Focus On Business In 2007 (40572) IT Operations And Systems Management: The Next Five Years (40404) Microsoft's 2007 Collaboration Platform (40109) Motorola And Symbol: One Step Closer To Seamless Mobility (40523) Oracle Makes Serious Move In Data Heterogeneity By Acquiring Sunopsis (40579) The State Of Enterprise Infrastructure In Europe 2006 (40600) The State Of Enterprise Software Adoption (38964) Trends 2006-07: Application Server Platforms (40383) US IT Spending Benchmarks For 2006 (40453) US IT Spending Summary: Q2 2006 (40181) US IT Spending Summary: Q3 2006 (40455) What IT Sourcing Pros Need To Know About Multicore Software Pricing (40601)

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