Business Tech

A recent survey suggests that CIOs are loosening the purse strings on IT spending. IT vendors may want to hold off their celebrations, though, because much of the spending appears to be headed for deflationary forces like cloud computing, virtualization, and their kissing cousin, open source.

An economic rebound never looked so dire.

That's unless you're an IT buyer, of course, suggests a new report from Goldman Sachs. In this week's report, titled "A Paradigm Shift for IT: The Cloud," Goldman Sachs said it expects that pent-up IT dollars will flow in the short term to building out next-generation data centers (e.g., cloud computing). But in the long term, less money is expected to find its way into fewer wallets:

After the initial build-out, Cloud Computing could drive some headwinds for the IT industry, as a result of two factors. First, we see virtualization as a deflationary technology. Second, we see IT spending consolidating in the hands of fewer buyers--the Cloud providers, hosting vendors, and large enterprises. These factors will likely dampen IT spending growth due to greater utilization and buyer pricing power.

Even short-term build-outs may prove disappointing, however, as Goldman Sachs expects large enterprises to grow existing virtualization and automation technology adoption in the rollout of private clouds, shifting slowly to an embrace of public clouds over time. The chart below gives some idea as to when cloud computing will hit its stride:

Who wins in this scenario?

According to the report, Red Hat stands to benefit from the cloud-computing craze. ("Red Hat is well positioned for the emerging Cloud Computing ecosystem, largely due to its open source background and current ubiquitous deployments in data centers, including enterprises, as well as in Cloud providers such as Amazon," the report states.)

But the real beneficiaries will be...the same old crew. "[K]ey suppliers for internal Clouds are likely to be those that have the most complete portfolio of hardware, software, and services," including IBM, Hewlett-Packard, Cisco Systems, EMC, and Oracle.

New boss...same as the old boss.

The other beneficiaries are the start-ups that provide critical components of cloud computing, with an emphasis on management tools. Here we may see open-source companies benefit, including Reductive Labs (Puppet project), Cloudera, and the two rising private cloud companies, VMOps and Eucalyptus, among others.

While open source doesn't factor heavily into this particular Goldman Sachs analysis, the firm has before called out open source's role in wringing more value out of fewer IT dollars. Open source is a primary driver of the global reset in IT spending expectations.

With less money flowing into the pockets of fewer vendors, we can expect to see both increased consolidation and fierce competition for the IT spending that remains. Those vendors that can help CIOs do more with less stand to benefit from this shift to low-cost, high-value computing.

And those that can't? Well, let's just say they may pine for the good old days of the global recession.

This was originally posted at ZDNet's Between the Lines.

The technology earnings season kicks off in earnest on Tuesday when Intel reports its second-quarter results, but the outlook for the sector may sound like a broken record: visibility is low, and IT budgets fluctuate with everything from CEO mood swings to the stock market.

A handful of companies--Dell, Infosys, Red Hat, Oracle, and Lawson--have already riffed on technology budgets amid a volatile economic picture. The common thread: IT budgets are just as jumpy as your friendly neighborhood stock, but there are signs of stabilization.

Goldman Sachs expects an 8 percent decline of global IT spending, followed by a 2 percent gain in 2010. Other research outlets, such as Forrester and Gartner, have been cutting their spending projections but remain more optimistic than Goldman Sachs. To say these projections are moving targets is quite the understatement. Why? Executives appear to be changing their minds each week.

Here's a quick tour of the current state of IT spending and what you are likely to hear in the next few weeks:

Dell CFO Brian Gladden said the IT picture has stabilized, but gross margins will be pinched by business demand, component costs, and pricing pressure. Nevertheless, Dell continues "to believe that customers are deferring IT purchases," Gladden said.

Infosys CEO S. Gopalakrishnan said on the company's fiscal first-quarter earnings conference call:

When we discuss with our clients, they were actually probably more upbeat a couple of weeks back. In the last two weeks, sentiment may have become a little bit negative. They also tell us that recovery will be sometime in 2010, beyond this fiscal (year) for us.

Clearly, the ability of clients to forecast and control their own revenues--that's what drives it. It's all driven from the CEO downward. If the CEO sees revenue drop by 20 percent, there is an immediate cut on expenses by 20 percent. This is in the United States, of course. In Europe, the way they handle these things is slightly different. So, it is CEO-down; it is their ability to forecast their revenues, it is the growth or the impact on their own business, so it's really driven top-down, and the IT departments and various business functions react to that, actually.

We've had clients tell us that in March, April, etc., their ability to forecast was one of the lowest in recent memory. They had absolutely no way to forecast their revenues. In May-June, we got the feedback saying that we're feeling slightly better, but in the last two weeks, there is some slight tentativeness again. So this is the uncertainty we are faced with today, and nobody is able to give the comfort level.

That take was echoed by other technology executives. Red Hat CFO Charlie Peters said on the company's first-quarter conference call:

At this point, I would say we have not seen any recovery, and we're not trying to call the timing of the recovery, the timing on the basis that the economic environment is going to stay fairly similar to what it is for the balance of the year.

I would say this: like others that have recently reported, we see a longer sales cycle and in some cases additional levels of approval in sale cycle. But that's kind of the way it's been for the last couple quarters. Our expectation is, that's going to continue for at least a few more quarters.

Red Hat CEO Jim Whitehurst said budgets are still tight and everyone is waiting to see a bottom before moving.

And then there's Lawson CEO Harry Debes. He has "no idea" if the feds' stimulus package will do any good. Like the other executives, Debes is hearing the same song and dance from customers. Debes' money quote:

We have customers that have laid off 30 percent to 40 percent of their staff in the last 12 months. I certainly don't feel good about asking them to spend $2 million or $3 million at this time. I think we want to work with those customers because we want them for the longer term.

Oracle Co-president Charles Phillips, who happens to work at one of the companies weathering the downturn best, acknowledges that "it's hard to call the environment."

The larger question amid all of this uncertainty is this: If tech budgets are shifting by the week, how can enterprises innovate over the long run?