IT spending has experienced a healthy three years of budget increases since the beginning of 2004, giving many IT execs plenty of reasons to celebrate. Annual growths in 2006 is expected to top 6%, and although projections for 2007 show a more conservative sentiment, spending increases are likely to continue with consensus estimates of 5% to 6% expected according to IDC and Forrester Research. This is far cry from the double digit annual increases of the dot-com era, so while it’s not time to party like its 1999, it is good news for IT stakeholders. With the New Year upon us, it is a great time to take stock of these IT spending trends and determine what impact they will have if any on 2007 plans.

Examining IT spending and effectiveness metrics on 21,000 companies in 37 different industry segments worldwide. , the results show that there are several significant findings to examine in relation to your own budgeting process, including:
1) Innovation spending is up sharply by 43% since 2003 and will likely continue to grow
2) IT efficiency has increased 10% allowing companies to do more with less
3) But when examined in relation to revenue growth, overall IT spending has lagged for the second year in a row declining to only 3.3% of revenue
4) Overall IT spending, even though lagging revenue growth, is driving superior corporate performance in the majority of industries, and has improved 67% from 2003.

Let us examine each of these four trends in detail and what they will mean for your organization in 2007.
Innovation is the focus, and it shows

Even though budgets have increased, many IT organizations struggle to obtain enough funding to implement as many new applications and functions as they would like and as business units demand. The good news is that increasing IT budgets and corporate initiatives to reduce operating costs have resulted in increased innovation investments, rising from a scant 10.2% of the average IT budget in 2003 to over 14.6% in 2005 – a whopping 43% increase. As a result of conscious efforts to innovate more, innovation spending increases far exceed budget increases over the past 4 years.

Keeping the lights on still consumes too much of the average budget, at around 60%, while migrations and upgrades to existing systems costs 26% of total budgets, but the rise in innovation investments is promising. And the effects are wide reaching in that innovation spending is up in 78% of all industries (29 of 37 total).

Across the 37 industries in the study group, innovation investments were up sharply in several segments including Aerospace and Defense firms, Specialty Manufacturing and Professional Services, Transportation and Utilities. Industries where increases in innovation were surprisingly low or flat included Financial Services / Banks which overall has the highest level of average innovation at 18% but with flat growth) and Insurance. Industries with drastically lower innovation rates included Telecommunications, Real Estate, Paper Manufacturing, and General Manufacturing.

The key for future spending on innovation is to demonstrate how the reallocation of budget towards these new project has yielded tangible value to the business, enabling even more to be budgeted for 2007 and beyond.

Doing more with Less: IT Efficiency is up Sharply

Overall, IT labor or outsourced equivalents consume the majority, 56% of the average IT budget. Being able to utilize these resources to best effect, particularly being able to manage more employees and knowledge worker per staff member provides greater IT efficiency, and enabling the resources to move from mundane tasks to value added innovation is important to improving IT effectiveness.

In over 70% of industries IT efficiency increased substantially, increasing the number of knowledge workers supported per IT FTE resource. On average, 45 knowledge workers can be managed per IT FTE, while 130 employees overall can be managed per IT FTE. This represents a 10% improvement in ratios and reallocation of labor costs over 2003 spending levels. Consolidation, standardization, virtualization and management tools all contributed to the efficiency and productivity increases.

This has resulted in a reduction of overall IT costs per employee to $4,818, while costs per knowledge worker have been reduced to $8,685 on average worldwide.

Industries with the best increases in IT staff efficiency include Financial Services and Banks, Food and Beverages, Healthcare, Insurance, Professional Services, Real Estate, Wholesale, Government and Education. Industries that did not see improvements and have declining management efficiencies (less knowledge workers managed per IT FTE) include Automotive and Vehicle Manufacturing, Construction, Steel Manufacturing and Transportation.

The key for 2007 is further improving IT productivity and efficiency, helping to reallocate more and more budget from keeping the lights on to address the backlog of business projects, improve service levels and drive innovation investments.

IT spending not keeping pace with revenue growth

IT spending has not kept pace with company’s revenue growth in many industries declining for the second year in row, from a peak of 3.9% of revenue in 2004, to only 3.3% in 2006. A slight majority, 56% of industries, saw their IT spending increase relative to increases in revenue, but the database average overall still saw a decline.

Industries with increases in IT spending relative to revenue included Financial Services and Banks, Healthcare, Insurance, Professional Services, Publishing and Printing, Telecommunications, Tobacco and Wholesale.

For 2007, CIOs need to prove the value of IT investments to the organization in order to gain a higher portion of the budget and maintain IT spending growth to drive additional business strategic advantage and revenue opportunities while improving business operating efficiency for greater bottom-line gains.

Modest Return on IT (ROIT) Performance Leaves Room for Improvement

Measuring IT spending is only part of the equation. Although IT may be getting more efficient, is it any more effective than before – or are cost cuts taking their toll?

The good news is that 56% of the industries had increased ROIT rankings (the ratio of Economic Value Add (EVA) to IT Spending), and performance improved some 67% from 2003.

As the economy grew all ships were buoyed by the rising tide. But at the same time, organizations were getting more from their IT investments, yielding a greater ratio between the net rewards (EVA) and the investment (total IT spending)

Industries with the largest ROIT gains include Aerospace and Defense, Entertainment Services, Healthcare, Technology, Hospitality, Specialty Manufacturers, Medical and Lab Equipment, Pharmaceuticals, Oil and Gas, Mining, Publishing and Printing, Tobacco, Retail and Wholesale. Many of these large performance gainers were in industries that benefited greatly from economic conditions (such as oil and gas), and/or were well correlated with increased innovation investments.

For 2007, IT executives need to continue to align IT investments to achieve key business goals and initiatives to assure that performance improvements continue.

The Bottom-Line

Our research proves that overall IT spending is growing steadily, but perhaps more conservatively than expected. It is clear that overall spend levels have not kept pace with revenue growth. Focus on consolidation, standardization, virtualization and management tools has led to continued IT efficiency gains, up over 10% from prior years, which have helped organizations do more with less and freeing up IT staff for higher impact, more innovative initiatives. As a result, innovation investments are up a whopping 43% as a percentage of overall spending, helping to drive continued business improvements and growth. The yield from IT spending, ROIT continues to improve, garnering the largest year over year gains since we began tallying this metric in 2003.

The IT spending trends into 2007 will be shaped by the overall macro-economic environment and sentiment. Current predictions are that the overall economic picture is unclear. This will constrain IT spending increases until the risks of a slowdown disappear. However, with the success of prior investments, the continued efficiency improvements and shifting of budgets to more innovation will continue unabated into 2007.