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Faint Pulse Detected in IT Spending Plans

The rate of expected decline in capital equipment and software purchases eases for the first time in a year, Goldman Sachs says.

Large-company spending on information technology, in a freefall since mid-2008, may be showing signs of bottoming out, Goldman Sachs said in a report released last week.

Total IT expenditures — including not only capital purchases but also salaries, services, depreciation, and occupancy — will continue to contract at an increasing rate during the next 12 months, a panel of 100 multinational Fortune 1,000 companies told Goldman in mid-April.

But the rate of spending decline on new equipment and software alone is expected to ease slightly, representing the first upward movement in either of Goldman’s two indices — tracking total IT spending and capital purchases — since June of last year. The firm conducts the survey every other month.

The indices are based on responses indicating either spending growth in the coming year, which receive a weighting of 100; no change (weighting 50); or decreased spending (weighting 0). Thus, an index value above 50 indicates expected growth, and a value below 50 points to a contraction.

The total spending index fell to 26 from 29.5, the level reported in February’s survey. But capital spending inched up from 25.5 to 26, “contributing to our view that our indices are likely nearing a bottom at very low levels,” the report’s authors wrote.

Low, indeed — the total spending index peaked at 80 in December 2005, and the capital spending index hit its zenith of 75 a year later. Amid the overall sharply downward trends recorded since then, there were a couple of brief and slight upticks of similar magnitude to the one registered for capital purchases in April. So any optimism that companies will soon be solidly back in the IT spending game should probably be cautious.

Goldman, though, suggested that spending levels almost can’t go any lower. The authors seemed skeptical of a survey result showing that 33% of panelists expected their spending to be lower in second-quarter 2009 than it was in the first quarter, double the number who thought spending will rise. “Given some signs of stabilization in the economy, it is difficult to imagine how [second-quarter] 2009 could be worse than the frigid conditions we were hearing about in January and February,” they wrote.

Despite the survey results, Goldman analysts allowed only that “it is possible” that “companies whose business turned out worse than expected” are further reducing their spending.

The analysts took further heart in their IT pricing index, which, like the capital spending index, showed a small bounce in the April survey despite remaining near a historic low level. They took that as “another reason for optimism that we may be nearing a bottoming in sentiment and spending conditions.”

Meanwhile, survey participants said the greatest potential for IT cost reductions is in the use of third-party services. Consultants are “showing significant signs of revenue drag from project delays,” said Goldman.

Next on the list of likely cost cuts was hardware equipment, even though, the report’s authors wrote, “a lot of the ‘fat’ has already been cut out over the past year.” This trend is manifesting largely in lengthening replacement cycles and higher utilization rates, they added.

 

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