Continue in 2 seconds

Capital Investment and its Impact on IT Spending 2006-2007 from Saugatuck

  • March 24 2006, 1:00am EST

As the world economy continues to improve, more and more firms have amassed large cash positions on their balance sheets. Saugatuck Technology recently convened a roundtable discussion in mid-February with its team and several leading investment research analysts and venture investors to understand whether or not this will create a windfall for IT investment in 2006 and beyond.

After the sharp downturn in IT spending that began in 2001, IT spending has quietly recovered and resumed its upward climb versus other forms of capital spending. IT spend is again approaching 50 percent of business capital investment. While this reflects stronger economic fundamentals, it begs the question as to when and where large multinationals will release and target the massive cash positions accumulated on their balance sheets over the past few years.

Given the continued and exhaustive news coverage concerning the buildup of significant corporate cash hoards, one might expect that IT investment would be poised for a resumption of strong growth - at least in those industries showing particularly large cash reserves. This roundtable set forth to discuss whether capital spending is going to rank highly in the uses of corporate cash versus other ways that it can be deployed, and how would that impact IT spending 2006-2007?

Key take-aways from the roundtable include:

  • Since 2003, multinationals worldwide have had an unusually strong propensity for retaining corporate cash, building up substantial war chests.
  • While stakeholder and shareholder priorities have taken precedence over business reinvestment in the form of buybacks and dividend payments in 2003-2004 - we have started to see a return to more significant business reinvestment in 2005-2006, both in the form of M&A and capital investment for a wide range of projects and initiatives.
  • Over the past 18 months, IT spending has quietly returned to pre-2000 levels, with overall IT budget growth expected to track GDP at approximately 3 to 4 percent in 2006.
  • However, Saugatuck believes that this figure is masking a stronger underlying spending environment, driven by productivity gains and real cost savings (from such things as streamlining data center operations, lower prices, and increased choice) that are being recycled to help fund new project initiatives.
  • While clearly not a return to the runaway spending of the late 1990s, these recyclable operational gains appear to be averaging 1.5 percent or more per year, and in some cases substantially higher - with IT CapEx likely to grow 13 percent in 2006, up from a 10 percent in 2005.
  • While this moderately positive IT spending scenario by itself is not going to drive any economic shifts, the good news is that IT's share of business capital spending in the US is again approaching 50 percent as it did in 2000.
  • In fact, almost the entire post-bubble downturn in IT spending can be explained by the broader pressure on macro CapEx - and not just by issues specific to the tech sector.
  • There is a growing belief in the minds of most senior business executives that some technology project spending can drive real efficiency and productivity gains, as well as process improvements - which is driving a continuing (gradual) recovery in IT spending.
  • As it concerns key areas of IT investment, there is little indication of any return to big, foundational investments in IT through 2006 and into 2007. Instead, we expect a continued focus on tactically strategic investments in IT - small-scale investments that provide short-term ROI in business improvement, while enabling longer-term business growth and change.
  • Software enhancements, investments in security, BI/CPM and SOA, CRM and ERP upgrades, and of course integration of data, applications, and systems, will be the typical IT investment strategy.
  • At the same time, IT hardware and core software prices continue to fall, driven by the increasing commoditization of IT products and services (including the impact of open source), and users are regaining the power of choice.
  • We'll see continued outsourcing growth, especially offshoring of basic software development and BPO - and a significant transition to horizontally and vertically-focused software-as-a-service offerings, especially for SMBs.

Overall, the purse strings may be loosened, but we won't expect to see a return to an oversized IT investment scenario in the near future.
For more information, please visit

Register or login for access to this item and much more

All Information Management content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access