Merrill sees 3 percent IT spending spur

Corporate spending on technology is expected to inch ahead 3 percent in 2002, Merrill Lynch said, as companies refocus their priorities amid ever-tightening budgets and a heightened emphasis on security.

Technology spending will continue to be shaped by the effects of the Sept. 11 terrorist attacks and will be limited to a more select cadre of vendors this year, according to Merrill's survey of 75 chief information officers in the United States and 35 in Europe.

The 3 percent growth target for 2002 is an improvement over last year's 1 percent decline in IT spending, but it is still only an initial forecast. At the outset of 2001, Merrill's survey indicated that CIOs expected IT spending to grow 9 percent for the year.

"We can't recall a year that changed so dramatically," Merrill Lynch analyst Steven Milunovich said in a report on the survey Wednesday. Most CIOs revised their budgets at least twice in 2001, and the deepest spending cuts were made in staffing, consulting and hardware, Merrill said.

The effects of Sept. 11, which caused CIOs to be much more pessimistic about spending, will continue to reverberate in 2002, according to the survey. Security ranked as the top priority for the coming year, and disaster recovery ranked third.

The resetting of priorities that came after the terrorist attacks on the World Trade Center and the Pentagon "might crowd out some mainstream spending," Milunovich said.

Other top areas for spending in 2002 are likely to include ERP (enterprise resource management), Web development, Windows 2000 and storage. A Morgan Stanley survey in December showed similar results.

A trend expected to continue in 2002 is the contrast between U.S. and European IT budgets; Europeans are much more optimistic, expecting 4 percent growth, whereas U.S. IT managers expect just 2 percent growth.

CIOs also indicated that they are becoming choosier about the sources of their technology. IBM, Microsoft, Dell Computer and Cisco Systems are all expected to fare well in 2002, while EMC, BEA Systems, Computer Associates, Brocade and Siebel Systems are expected to be weaker.

"Users migrate to big, safe vendors in times of uncertainty," Milunovitch said.

Budgets will also continue to be determined more by CEOs and CFOs than CIOs. Fifty-two percent of CIOs said they expected management to keep a tight leash on spending.

While CIOs are conservative about 2002, forecasts for 2003 are optimistic. European CIOs expect their budget to grow 12.1 percent in 2003, and U.S. CIOs expect growth of 6.8 percent.

Among other significant findings of the survey:

Companies are becoming more skeptical about the productivity boom, which is supposedly the result of increasing use of technology in the workplace. "Although most top management are still believers in the productivity argument, the number of skeptics has risen," said Milunovich. Fifty-eight percent of respondents said they believed in the productivity benefits of technology, while 42 percent were skeptical.

Only 32 percent of respondents said 2002 would be a big PC upgrade year.

When a pickup in spending arrives, 46 percent said they would spend on software first. Forty-four percent said they would spend on hardware first, and 10 percent plan to spend on both simultaneously.

Respondents had some negative comments about some of the bigger vendors, even though that's where most plan to do their spending. HP was criticized for its "hardware quality" and a general "confusion" surrounding its products. With IBM, respondents said they were "spending less on hardware on maintenance," Compaq inspired a "lack of confidence," and EMC's prices were "too high." Microsoft was considered a "necessary evil." CIOs also said they don't like Microsoft's licensing.

"Windows is finally threatening Unix," according to Milunovich, though only at the low end and midrange, he added.

CIOs were extremely positive on spending with Microsoft, but surprisingly negative about Siebel. Not one U.S. respondents planned to spend less with the software giant this year. On average, 91 percent of CIOs said they would spend more with Microsoft.

In contrast, only 6 percent of CIOs plan to spend more with Siebel.

While 31 percent of CIOs said they would spend more with Sun Microsystems, 31 percent also said they would spend less. "Neutral isn't terrible but suggests the company's momentum is fading," said Milunovich, who attributed increased competition from Windows and Linux.

EMC and Brocade fared poorly considering the high emphasis on storage spending. Thirty-six percent of CIOs plan to spend less with EMC, while only 23 percent plan to spend more. For BEA, 37 percent plan to spend less, and only 9 percent plan to spend more.