Tech Spending Shortfall Is Not Temporary

These events are part of a systematic change in the spending habits of large and small companies: They have discovered that there are many tools on hand to lower their cost of IT spending while increasing their capabilities. One ramification of this is that U.S. corporate technology spending growth this year will lag U.S. GDP growth by 1 percent or more.

Large buyers of technology are leading the way

Smart companies such as Motorola, Verizon, Federal Express, Harrahs, and Merrill Lynch have discovered that total IT spending can be cut by upwards of 50 percent while maintaining, and in many cases increasing, service levels and the delivery of technology-derived competitive advantage to their respective companies. Case studies of these companies and others can be found in the book Technology Paradise Lost: Why Companies Will Spend Less to Get More From Information Technology.

Such a change in spending patterns is having a large impact on technology vendors, which, in order to increase revenue, will need to provide greater value with a guaranteed return at lower cost. The beginnings of such changes can be seen with the high revenue growth and margins of Indian offshore companies as well as IBM, which is in the process of moving from its hardware and services legacy business model to one of services and process automation. Many software companies are finding that their growth is being constrained by these factors and increasing buying preferences for low-priced software, open source software, and the desire to outsource key business processes and technology infrastructure. The increase of billion-dollar outsourcing contracts is one outgrowth of this trend. The emergence of salesforce.com and its rapid growth is yet another indication of the spending change in the air.

Recommendations

In the past, a technology change or discontinuity caused many technology companies to be acquired. Today, a business model change and discontinuity in corporate technology spending will do the same unless sellers fundamentally change the way they approach the market and deliver value to technology buyers. Here are some suggestions:

• Advice to buyers of technology: Even though many companies are looking to expand the impact of technology within their respective organizations, they must do so without budget increases. In fact, many companies should continue to look toward a flat or decreasing IT budget for the next three years. World-class leaders in IT spending have shown that budgets can be cut 20 percent to 50 percent without a negative impact on business processes. Areas to consider for reductions include strategic labor sourcing via offshoring, hardware consolidation, software asset management and maintenance renegotiation, and application rationalization.
• Advice to sellers of technology: While some niche companies may continue to claim a premium for their products and services, sellers of nearly all types of technology need to plan on decreasing prices and readjust their business models accordingly. Cuts and smarter spending in marketing, sales, and Research and Development (R&D) must be considered. General and Administrative (G&A) expenses should be held to 10 percent of revenue or below. Sellers should either consider charging buyers for extended sales cycles and efforts in markets that are being pummeled by price pressures or change the nature of selling deals requiring a six-to-nine-month closing cycle.