IT departments slash spending in economic slowdown

Almost half of large enterprises have slashed their IT budgets this year, according to a report released today.

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Almost half of large enterprises have slashed their IT budgets this year, according to a report released today.

Forrester found that 43 percent of companies have already cut their IT budgets this year, while 24 percent have put discretionary spending on hold in response to the global economic slowdown.

The survey of nearly 1,000 IT managers across Europe and North America found differences between countries, industry sectors and areas of IT spending.

"This is not an across-the-board spending slowdown; the impact of the economy on IT budgets varies widely by industry and geography,” said Forrester Research analyst John McCarthy.

European IT departments fared better than their American counterparts. Only 31 percent of European respondents have cut their budgets, compared to 49 percent of North American firms. But Forrester noted that the survey was held in Q2 2008, prior to the deteriorating economic conditions in Europe.

When it came to industry sectors, financial services firms were hit hardest, with 49 percent of IT departments in the sector operating with reduced budgets. This compares to the media, entertainment, and leisure industry, where only 39 percent of respondents said they have had to reduce spending.

Technology firms with above average exposure to weaker sectors, for example Indian outsourcers specialising in financial services firms, will be more negatively impacted than those with diverse offerings, Forrester said. Similarly, vendors with a larger than average US client base will feel the pinch more than those vendors with a global customer base.

"With regard to the services sector, the slowdown has firms renegotiating rates, being more selective in choosing vendors, and examining spending plans more thoroughly, but they are still expecting to pay more for services," said McCarthy. "The demand for enterprise IT services has not dropped significantly."

In fact, 45 percent of firms plan to increase their use of applications outsourcing, while 43 percent of firms are increasing their use of infrastructure outsourcing. Forty-three percent of respondents said they are moving more work offshore.

The use of offshoring is also bucking the downturn trend, with 43 percent of companies stating they were looking to use this type of service. Only nine percent of firms use offshore resources wherever and whenever possible. But 14 percent said they were increasing the use of offshoring, 19 percent were conducting a pilot, and 22 percent are "actively tracking developments".

Despite this growth, satisfaction with outsourcing remains low. Overall firms say they are satisfied with their decision to use a third party, yet 52 percent say their biggest challenge with existing IT services and outsourcing relationships is that cost savings are lower than expected. Inconsistent or poor service quality (40 percent) and the inability of the vendor to respond rapidly to changing business needs (35 percent) were other common complaints, according to Forrester.

The full report, “The State Of IT Services: 2008”, is currently available for purchase on Forrester's website .

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