Forrester: IT budgets getting slashed

The weak economy is affecting IT spending at nearly half of large enterprises in North America and Europe, but demand for services remains strong, according to a Forrester Research poll of about 950 senior IT managers.

Forty-three percent of companies have slashed their overall IT budgets this year and 24 percent have put off discretionary spending. Twenty-eight percent reported no impact.

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"People are moving forward with things like upgrades to their ERP. Things haven't completely dried up," said Forrester analyst John McCarthy. "[But] I tell you one thing -- this doesn't bode well for those Vista upgrades. That's one of those discretionary things where people are going to say, we don't need that headache."

Forrester's data shows the situation to be significantly worse in North America, where 49 percent of companies said they have cut their IT budgets, compared to 31 percent in Europe. However, McCarthy noted that since the study was conducted in late May and early June, economic conditions in Europe have further deteriorated.

In terms of vertical markets, the financial services sector was particularly hard hit, with 49 percent reporting IT budget reductions, compared to 39 percent of the media, entertainment, and leisure industry organizations polled.

"The vertical stuff tells the story about what's going on in the economy," McCarthy said.

Around 2002, the IT sector "was ground zero for the slowdown" and this time around it has centered on the financial, real estate and automotive vertical markets, he said. But areas like industrial equipment manufacturing are doing well because of factors like the infrastructure buildup in China, according to McCarthy.

Meanwhile, only 16 percent of respondents have cut services spending. Forty-three percent plan to outsource more infrastructure, 45 percent intend to do additional application outsourcing and 43 percent are going to push more work offshore.

However, 70 percent said they will probably try to negotiate lower rates with their providers and 40 percent cited inconsistent or poor service quality.

"I think what it tells is the story of the large 'Battlestar Galactica' deals," McCarthy said. "People aren't happy with them. They're hard to govern, a lot of times they're done out of desperation. [Enterprises] are making big changes in how they manage these big deals. Part of the problem may be the vendor, but it's also how you manage the vendor."