New research from Forrester Research, Inc. (Nasdaq: FORR) predicts that spending on IT goods, services, and staff will grow 7 percent in 2005 and continue at a similar pace through 2008 — only slightly faster than overall economic growth. This finding is consistent with the cyclical nature of IT spending, where periods of digestion and refinement follow periods of heavy technology investment. The majority of the respondents to Forrester’s Q3 CIO Confidence Poll plan to increase 2005 IT budgets at a similar growth rate, an average of 6.4 percent.

Forrester polled 195 CIOs at North American companies in its third quarterly review of CIOs’ confidence in the health of their industries and IT spending. Overall, IT optimism is up quarter over quarter, with the number of CIOs citing a very strong business climate tripling.

  • For the first time in three quarters, a majority of the polled CIOs feel that the climate for their industry is operating in at least the strong category.
  • Seventy-one percent of respondents expect even better performance three business quarters from now, compared with only 5 percent anticipating a decline.
  • Thirty-nine percent of CIOs are spending above their budgeted run rate on IT — up from 34 percent this past quarter.

Still In A State Of Technology Digestion

Forrester’s analysis of business investments in IT over the past six decades reveals that eight- to 10-year periods of significant IT spending growth occur after the introduction of a major new technology. These phases are followed by equal periods in which firms reduce their rate of new investment to focus on ROI and process change that drive business value from the new technology. Forrester estimates that the US is halfway through the current cycle of technology digestion, which started in 2001.

Based on its proprietary models, Forrester predicts that investment in information technology and spending on IT services by US companies and governments will increase at the following CAGR during the next four years:

  • Computer hardware spending will hit its stride at 9 percent. Using a three-year depreciation model, growth in computer hardware expenses will peak in 2005 at 14 percent and then level off. Improved price/performance, the spread of Linux and other open source software, and the growing adoption of blade servers will drive near-term growth.
  • Network equipment will grow modestly at an average of 4 percent. Although spending on new equipment by communications carriers and enterprises will grow by 16 percent in 2004, it will slow to a moderate 4 percent in 2005. The need to replace aging LAN equipment and investments in network security appliances will drive demand from enterprises, while carriers will cut investments.
  • Software spending eventually will recover with 7 percent growth. In 2005, software spending will grow only 3 percent, with systems management, storage software, and security applications showing the largest increases. Forrester sees spending picking up in 2006 and beyond as applications based on services-oriented architectures (SOA), composite applications, and Web services become more mainstream.
  • IT consulting and integrations spending will post modest growth at 4 percent. This sector took a hit from slowed demand for large enterprise applications, Internet consulting, and the absence of a new “killer app.” These same factors will limit growth in 2005 to 3 percent. Future growth will come from companies backfilling projects with consultants rather than new hires and the need for consulting on emerging technologies like RFID, open source, and business process management software.

While the next four years will remain relatively quiet in terms of major technology innovations and surges in new investments, the foundation for the next big wave of transforming technologies is taking shape, our research identifies Organic IT, the X Internet, Web services, and SOA for applications as the key elements of the next technology wave.

The research mentioned in this release, “CIO Confidence Poll: Q3 2004” and “IT Spending Outlook: 2004 To 2008 And Beyond,” is available to Forrester WholeView 2™ clients and can be found at