Discussions with CIOs About 2010 IT Budgets

There is a lot of optimism among private and public IT vendors about the growth of IT budgets during 2010.  Private discussions I had with CIOs in our network lead me to believe that during 2010 IT budgets will increase by an average of only 1-3%.  Moreover, this increase won’t be uniform across all industries and geographies.  Government, financial services, and healthcare are three industries that are expected to have higher budget increases.  IT budgets in Asia/Pacific, Latin America and US will increase but not in Europe. Therefore, while we are guardedly optimistic about 2010, we advise our portfolio companies, particularly those serving industries that are not expected to increase their IT budgets, to still be thoughtful in their spending since IT budgets won’t approximate those of 2007 or early 2008.

The relatively small budget increases won’t leave room for many new IT initiatives.  Though everybody is expecting 2010 to be the first year of a multiyear hardware upgrade cycle, the feedback I have received from CIOs indicates that software will fare better than hardware.  Within software the high priorities include:

• Applications, including internet applications, BI and business analytics.
• Security, including cybersecurity, and compliance.
• Server virtualization. 

This budget climate continues to favor the adoption, particularly by large companies, of SaaS applications and, to a certain extent, cloud computing infrastructures.  CIOs indicate that companies are interested in buying solutions in “smaller chunks.”  A note of caution: the industries with the biggest budget increases have not been aggressive adopters of SaaS and cloud computing.  As a result, I expect that the majority of application software deployments will continue to be on premise.  SMBs are still facing a tough economic climate, particularly because credit remains constrained, so their 2010 IT spending will be tight.   SaaS vendors will, most likely, increase their focus on larger customers which could have implications on sales process changes and increased costs.

Some of the facts fueling the observations above:

1. The economic outlook and confidence are improving.  More countries are reporting that are out of the recession and countries like China, India, Brazil, Australia are reporting solid quarterly growth.
2. Public companies are starting to report decent 4Q09 results, the recent stock sellout notwithstanding.
3. IT spending surveys reported by Gartner and Morgan Stanley over the last week indicate that IT spending priorities are moving from cost control initiatives to business growth initiatives

But,

1. Credit markets remain constrained.

2. US unemployment remains stuck at 10%.

3. Consumer spending is still tentative.