In-Depth

Companies Stingy About IT Spending, Gartner Reports

If there’s an economic recovery afoot, IT budgets haven’t benefited

• By Stephen Swoyer
• July 25, 2006

If there’s an economic recovery afoot, IT budgets haven’t benefited from it. That’s the conclusion of new research from market watcher Gartner Inc., which found that IT budgets typically react less positively to revenue increases—even while they’re disproportionately affected by revenue declines.

For example, Gartner researchers say, even organizations that grew their revenues by 10 percent or more did not expand their IT budgets much beyond five percent. Gartner’s study is based on an analysis of almost 900 companies in 20 industries and sectors worldwide.

“This analysis confirms that organizations are not increasing their investment in IT at the same rate as the business is growing,” said Jed Rubin, director of consulting at Gartner, in a statement. “The results also show the extent by which IT investment is reduced within organizations experiencing revenue decline.”

Not surprisingly, information technology companies are more apt to boost their IT spending when they’ve experienced a corresponding increase in revenues. Non-IT organizations—such as banks, financial services companies, and government agencies—show altogether less fluctuation in their IT budgets.

One reason for this, Gartner researchers say, is that IT spending—which is more closely aligned with revenue performance—is often the result of greater communication between IT and business leaders. Such organizations typically have more frequent budget-review cycles. Not surprisingly, organizations with longer budget review cycles—such as government agencies—can’t always respond to changing conditions as quickly.

Government isn’t the stingiest spender in Gartner’s research. Manufacturing firms typically increase their IT spending only fractionally in response to revenue increases: for a five percent increase in revenue, the manufacturing firms in Gartner’s sample increased their IT budgets by just 0.86 percent. Those that realized 10 percent increases in revenue increased their IT budgets by 3.59 percent.

While Manufacturing is stingiest when times are good, utilities are stingiest when the revenue drops. The average utility company slashed its IT budget by 8.24 percent in response to a 10 percent decline in revenues, and by 5.21 percent in response to a 5 percent decline.

The lesson, Gartner researchers say, is that firms should consider using budget benchmarks—such as, conveniently, Gartner’s own—to compare their IT budgets with those of companies in their own verticals as well as organizations as a whole.

“In order to justify future IT investment plans to senior executives in growing organizations, CIOs should consider using competitive benchmarks and key business indicators such as employee growth and operational spending as a basis of fact for the discussion,” Rubin said. “In organizations that are not growing, or undergoing restructuring, CIOs can use this competitive benchmark data to anticipate and set realistic expectations for the reduction in IT investment within the business, rather than waste time and resources exploring the ways to meet the unrealistic demands of executives.”