Based on analysis of technology spending cycles over the past half century, a new report from Forrester Research, Inc. (NASDAQ: FORR) predicts a significant slowdown in US IT spending growth in 2007. Forrester projects that technology spending growth will shrink from 7 percent increases in 2005 and 2006 to a 2 percent increase in 2007, before rebounding to near double-digit growth by the close of the decade.

Forrester’s analysis revealed that business investment in new computers, communications equipment, and software is driven by two factors: 1) changes in overall economic growth, and 2) the state of new technology introduction or adoption. During the current period of digesting and adopting Internet technologies, which started in 2001, overall tech spending averages the 7 percent trend growth in nominal US GDP. However, Forrester anticipates that nominal US GDP will slow in the next two to three years — most likely, in late 2006 or 2007 — when consumers take a pause in spending due to concerns about rising interest rates, high energy prices, and a potential drop in the housing market. Forrester’s analysis shows that when GDP growth stalls, IT spending slows even more, with cutbacks in equipment investment leading to decreases in spending on services and staffing.

“Technology spending is currently very brittle. Without a ‘must-have technology,’ most businesses are only investing in technologies with tangible ROI. That means they will respond quickly if corporate revenues and earnings start to slow in an economic slowdown, which seems likely at some point in the next couple of years,” said Andrew Bartels, vice president at Forrester Research. “The good news is that we see this as just a slowdown in spending. The other piece of good news is that we are witnessing the emergence and maturing of a new generation of technologies. As companies start to find ways of using these technologies to drive big improvements in business results, the rush to emulate their success will lead to a rapid rise in technology spending after 2008.”

“We recommend that firms that want to get a jump on competitors should be investing in these emerging new technologies, many of which, like Voice over IP or server virtualization, have real savings value today,” Bartels said. “However, companies should recognize that most of the next generation of technology is still maturing, so there are risks as well as rewards. Moreover, economic uncertainty and a potential slowdown will make most CEOs unwilling to make big investments until 2008-2009.”

Based on its models, Forrester predicts that investment in information technologies and spending on IT services will fluctuate around the following compound annual growth rate through the remainder of the decade:

  • Computer equipment sets the pace with CAGR of 9 percent through 2008. Attractive price/performance propositions from new servers, PCs, and storage hardware will maintain strong growth into early 2006, but new investment will slip in late 2006 and 2007, before rebounding in 2008. Spending will rise to 11 percent in 2009-2010.
  • Software spending holds steady at around 6 percent. There are no major new products from vendor heavyweights to stimulate software spending until the launch of Microsoft’s new Vista operating system in late 2006 and the release of new SOA-based application suites from Oracle and SAP in 2008.
  • IT services spending recovery falls in 2007. The revival in IT consulting and systems integration that began in 2005 will slump to 1 percent by 2008. However, growth will rebound to 13 percent by 2009-2010 as companies seek consulting to help navigate new technologies.
  • IT outsourcing will reach saturation. Firms will continue to outsource ongoing new development work, individual applications, and telecom networks. Growth will slow in 2007-2009 to 6 percent as the number of outsource prospects shrinks with adoption.

Technology Investment Follows Eight To 10-Year Cycles

Over the past 60 years Forrester has identified three distinct investment cycles in the technology economy that alternate between growth and innovation, and digestion. We are currently in a period of digestion that began in 2001 when companies started absorbing the Internet technologies from the previous expansion. If past patterns hold, Forrester estimates that the next cycle of technology innovation and growth will begin in 2008-2009 as new technologies will reach a tipping point of maturity. This will result in an increase in spending to 9 percent CAGR in 2008-2010.

Forrester has identified the following trends as drivers of the next wave of investment:

  • Digital business architecture. A new IT architecture stack that includes cheap, virtualized hardware and network resources (Organic IT) at the bottom, shared software and services (SOA) in the middle, and business intelligence and interaction platforms at the top.
  • Extended Internet. The X Internet connects information systems to physical assets, products, and devices. It represents a new architecture and new applications for the Internet, ranging from RFID and telematics to mobile networking and biometrics.
  • Innovation Networks. A new business model for R&D and software development that enables companies to best match their demand for innovation with worldwide sources of talent and capital.
  • Social computing. Search engines, blogs, and viral marketing allow companies to take advantage of a new social structure to develop new products, communicate with customers, and manage their employees and business partnerships.

The research mentioned in this release, “Expect A Tech Slowdown Before The Next Boom,” and “The Seeds Of The Next Big Thing,” which elaborates on the above technology themes, are available to WholeView 2™ clients and can be found at