What's hot? What's not?

Can't wait to see year-end finance reports? Trend-tracking surveys offer a reliable spending forecast.

by Robert Ebisch

The U.S. IT industry grew at twice the rate of the national economy in 2003 at a time when the nation was still struggling out of the recession. Globally, the IT sector saw a similar increase. Just because the world economy rode into 2004 on a seemingly powerful recovery, should IT vendors anticipate drinking from a fire hose of sales volume?

Unfortunately, the answer is no, but they can anticipate a better sales scenario than they have seen for the past several years if the cautious optimism of IT executives turns out to be more than wishful thinking.

Surveys by some of the big research companies—Gartner, IDC, Forrester Research—have projected spending growth in the 4% to 8% range during 2004 as business needs and increasing corporate profitability begin to crack the log jam of spending freezes and postponed priorities.

In recent years, annual spending on business intelligence (BI) and data warehousing has been dropping, but a DM Review survey in 2003 found that BI budgeting for the coming 12 months had nearly doubled from 2002–03, after a 32% drop from 2001–02.

"Our industry has suffered a double-whammy hangover with regard to budgets," says Bill Inmon, partner, Inmon Associates, Inc. "The first hangover we had was Y2K. Then the second budget fiasco was the dot-com mess. It's no wonder that in the last couple of years corporations weren't anxious to spend a lot of money on IT."

Now, Inmon says, there's a new focus on the fundamentals, such as getting more customers, retaining more customers and increasing revenue. "We're starting to see people ask these fundamental questions and, based on those, spending accordingly," he says. "It's a backlash that's five or even 10 years overdue."

That renewed focus will vary depending on the different IT niches and the direction of the economy, of course, and not everyone sees IT spending springing back to life in 2004.

"I see a bounce back from untenable IT spending lows," says Melanie Hollands, president of Koala Capital, an Aspen, Colo.-based hedge fund focusing on trading/investing in technology stocks. "To use one metaphor, we've refilled the gas tank after running it down to fumes—but we aren't driving all that more than we were a year ago, and we're certainly not buying a new car."

It seems others would agree. A February Nucleus Research Inc. survey of Fortune 500 IT directors, concluded that in 2004 most companies will spend at about the same levels they'd spent in 2003, and even companies increasing their IT investments wouldn't do so by much.

"We find people more focused on measuring the value of the dollars they're spending before they commit," says Nucleus analyst Kathy Quirk. "When they are spending, they're focusing on projects that will provide better business operations, whether that's CRM, business intelligence or storage."

Beyond IT industry niches, spending trends will vary according to the industry, says Tom Pohlmann, vice president and research director at Forrester Research," he says. "We're seeing a consumer-led rebound in IT, so where we're seeing the rebound is in retail, insurance and consumer services. The old-line sectors like chemicals, utilities, manufacturing and raw materials producers are more likely to be cutting."

Here's a top-line look at some of today's top IT spending trends. What's right for your business will ultimately depend upon your specific needs.

The security–compliance fever
With the value of digital assets rapidly increasing and perceptions of risk to those assets growing faster still, security concerns are paramount. There's good reason: Everything from an unprecedented year of virus attacks and cyber threats to terrorist fears in the wake of September 11, 2001, fuels a desire to protect resources.

Increasing legislation requirements also drive IT spending. In the United States, the Sarbanes-Oxley Act of 2002, the Gramm-Leach-Bliley Act of 1999 and the Health Insurance Portability and Accountability Act of 1996 are all aimed at the security of information, both corporate and personal, and businesses are taking it seriously. In Europe, Basel II (and the soon-to-be-enacted Basel III) performs the same function.

Here are some top-line examples:

>	A Credit Suisse First Boston (CSFB) survey of CIOs in January 2004 found that security is "poised to gain a higher percentage of overall IT budgets."
>	A November 2003 Forrester Research poll of IT decision- makers ranked security and disaster recovery upgrades first among 16 categories of IT spending priority.
>	AMR Research estimates that Sarbanes-Oxley compliance spending will exceed $5 billion in the United States in 2004. In Europe, spending on Basel II compliance projects is expected to top $2 billion in 2005, according to Datamonitor.

Better security means spending on hardware as well as software, according to Adriaan Veldhuisen, Teradata senior product manager for Privacy and Security. "People are willing to spend much more money for a higher level of protection."

Integration feels the heat
CSFB's January survey placed systems integration (EAI and EII) as the No. 2 IT spending priority after security, perhaps not surprising since integration is a broad category that connects everything from customer relationship management (CRM) to security and storage. Additionally, Aberdeen Group recently learned that CIOs will continue to spend 40% to 60% of their annual budgets on integration.

If your company is one of many that have collectively invested billions of dollars in CRM systems, then you know it's still difficult for a large organization to get a consistent view of any customer over the entire enterprise. However, despite all of the options customers have for interfacing with companies, they still expect to have a single view of the company (and for the company to have a single view of them).

"We see (our) customers spending a lot more on obtaining an integrated system view, where their users present themselves once to an environment and authenticate once and then don't have to re-issue their password to move from mainframe applications to Teradata applications to network or e-mail or Internet applications," says Teradata's Veldhuisen.

A February Westbridge Technology survey indicated a "strong demand among enterprises for solutions that feature integrated Web-services management and security functionality." Most IT organizations surveyed were already using Web services internally, and 48% plan to use it externally.

"Companies spend money on system integration and spend money on educating their system administrators to work in an integrated environment, and all that goes to make it more secure and easier for their end users," says Veldhuisen. Yet Forrester Research sees integration software spending rising just 6% in 2004. Even so, authors of the CSFB study believe that "packaged integration software will be a significant beneficiary of looser purse strings in 2004."

The warming of cold storage
Storage placed third—after security and integration—among 13 IT categories in a CSFB IT executive survey in January 2004, and its prioritization had increased by the largest percentage of all categories (14%) since the previous survey in September 2003. CSFB said storage should remain "a key area of IT investment in 2004, driven by spending on compliance, high availability and consolidation projects."

Chris Sessing, equity research analyst at Crowell, Weedon & Co., also rates storage as a strong area, especially with increasing storage requirements from business enterprise software applications such as CRM and supply chain management. Government regulations surrounding privacy and regulation issues also push storage, he adds. "In our business—the financial industry—we have to store a lot of information for years to protect ourselves, and you have disaster recovery issues. After September 11, companies with critical resources want to replicate all that at an offsite location."

While regulations require storing historical data, many companies simply want to be able to capture, access and analyze the massive amounts of data generated through e-mail, operational transactions, video and audio files—even Word documents. CIOs want to leverage that information to make better business decisions, and IT managers are scrambling to identify and purchase the most cost-effective, easy-to-manage storage solutions.

Allen Robinson, Delafield Hambrecht, Inc.'s director of research, is seeing an increased focus on what he calls "intelligent" storage. "Some of the storage companies that are doing well are the ones that boost their margin by rolling a lot of intelligent software into the storage process and allowing companies to scale and add to their storage in a flexible way."

Business continuity is hot
A Gartner survey of 620 CIOs showed business continuity as a top-three priority. But even so, disaster-preparedness is not where it should be among leading companies, despite the risks associated with downtime—as high as $6 million an hour in some industries, according to Gartner. Some blame this lack of preparation on budgetary constraints, but that should ease as the economy improves.

Economic pressures aside, the events of 9/11 and last August's Northeast U.S. electrical blackout reinforce the need for business continuity preparedness. IDC expects worldwide spending on security and business continuity to grow twice as fast as IT spending in the coming years, reaching more than $116 billion by 2007.

IDC credits this trend to two factors: uncertainty about the severity of risk posed by security threats and ongoing budget austerity. However, John F. Gantz, IDC's chief research officer and senior vice president, stated in a recent press release that "any skepticism about the potential consequences of a security breach is fading fast as enterprises seek to improve their ability to manage organizational risk."

The temperature rises on RFID
One major impact on storage requirements, of course, will be radio frequency identification (RFID) technology. IDC predicts that RFID growth in 2004 will "be slower than previously expected because of concerns over tag reliability, signal interference and a lack of standards."

Yet Nucleus' Quirk says RFID is an unavoidable investment for some, thanks to RFID-compliance deadlines looming from the Department of Defense, Wal-Mart and other retail giants. "Some organizations will have no choice but to devote some of their 2004 budget to getting their infrastructure RFID-ready."

They may also have to set aside some part of the budget for infrastructure upgrades and data analysis tools. In a February 16, 2004, Information Week article, author Rick Whiting writes, "If businesses don't start planning for which technologies they'll use to collect and manage the data RFID chips and readers generate—or consider whether their ... applications can scale to handle the additional information—the result could be a chaotic data overload."

According to the Sand Hill Group, a San Francisco software and solutions consultancy, people will underestimate the quantity of data that will be generated. "It will have to be addressed with hardware, software applications, systems management, retrieval, archival redundancy, quick availability, etc.," says Sand Hill Group Managing Director M.R. Rangaswami.

BI sizzles
Just having data isn't enough. You have to be able to analyze the data to make informed business decisions. Business intelligence (data analysis) software continues to stand out compared to other categories, says Forrester's Pohlmann, and it's a category in which CIOs can expect increased spending. "When we asked these companies (what they see as a priority), finance applications top the list at about 27% ... and BI came in second at 26%."

IDC expects the market for financial and business performance management analytic applications to grow at a rate of 10.3% annually from 2002 to 2007. BI and analytics are the means by which companies will try maximize existing systems, and as business goals become more significant in driving IT projects, "customers will look to add analytics applications, business intelligence and CRM software to address business strategies."

CRM sees mild warming
In August 2002, British Airways began using Teradata CRM Version 4.0 to better manage its relationships with online customers and members of its frequent flyer program. The airline shifted nearly all of its communications with these groups to e-mail, saving on postage and processing costs. It also has been able to produce more marketing campaigns in less time with fewer resources and more precision.

Thanks to benefits like these, CRM spending will see the greatest growth rate in IT spending, according to a January CSFB survey. CRM drives customer satisfaction and loyalty, and the "personalized" service it offers helps differentiate companies, especially in the service industry.

"One of the key priorities of business audiences when we asked, ‘What do you expect most out of your IT organization?' was ‘We want it to acquire and retain customers,'" says Forrester's Pohlmann. "Despite the fact that many argue IT has not lived up to its promise in that area, customer acquisition and retention are key."

When Forrester's November 2003 survey asked, "Which IT skill sets are lacking in our organization to the point where it threatens success in 2004?" the top choice among IT decision makers was "speed and customer responsiveness." And a February poll of 1,400 CIOs by Robert Half Technology indicated customer support as the top reason for hiring new IT staff, after simple business growth.

In fact, AMR Research's Tech Trends Survey in January identified customer service as the central focus of 2004, "with 48% of respondents claiming that customer-driven issues such as loyalty and retention will have the greatest influence on IT investments" in the next 12 months.

Convergence gets a sunny day
Networking is a common spending priority for IT directors, in part because it allows businesses to be more agile and efficient. "We see several segments of the networking industry that should do well," says Sessing. "Security is one. Convergence is another big spending area, moving voice onto data networks—voice over IP or IP telephony. You really need the networking to facilitate a lot of these services, especially as the bandwidth demands continue to grow."

Mobile and wireless tools will get more attention from IT buyers in 2004, and according to CIO magazine's October survey of IT executives, "respondents expect the number of wireless users in their organization to more than double in the next 12 months."

In health care, for example, equipping physicians, nurses and medical technicians with wireless devices is key, says Sally Stanton, vice president of category markets with Ingram Micro Inc. "From the nurse's perspective, they work long shifts and at the end of the shift a lot of them have to catch up on paperwork. But if they're equipped with a PDA that has a portable bar-scanning device connected back to the hospital database, they can scan the patient's chart and the medication they're getting, and it's already updated in the patient record."

Wireless technologies such as instant messaging will impact storage requirements as well, says Sand Hill's Rangaswami. "A lot of storage and data will need to be properly structured or indexed and quickly accessible," he says. "Spending would be in archiving, storage, intelligent retrieval and analysis of this data. There will definitely be some money spent on that."

Expected highs
Clearly, this list of IT spending trends is far from complete. However, it touches on the top data warehousing and decision-support trends identified by leading analysts and consultants. No matter how you choose to spend your IT dollars, you can know that any business goal is within reach with a strong enterprise-wide architecture. T

Technology expert offers a hint of things to come

Glover Ferguson
Chief Scientist for Accenture

Data storage may not be at the top of IT spending plans this year, but Wal-Mart made a big impact on data-storage needs when it required certain suppliers to use radio frequency identification (RFID) tags on their shipments. Only after all Wal-Mart-compliant companies invest in RFID and storage will they begin looking for additional applications to recoup their costs, says Glover Ferguson, chief scientist for Accenture.

"The democratization of technology has moved from mainframes through PCs to an explosion across the Internet," Ferguson says. "The next step will be to take technology from every human to every thing, making objects intelligent about their location, identity and other characteristics. The (RFID) sensor will be the next major follow-on."

The challenge will be to enable data to be represented in a common language so it can be easily combined with common underlying architectures—as XML does for Web services, Ferguson says.

"Imagine what will happen when hundreds of millions of people have camera phones," says Ferguson. "At first, teenagers will take photos of each other. But suddenly, call centers designed to communicate with people verbally will now have to deal with video and audio stream. Police calls will not only be, 'Hey, there was a hit and run,' but 'Here's a picture of the car as it's running.' That's an example of the new types of information that will be part of our warehouse of data."

With increases in the amounts and types of data, as well as more highly powered processors, the word "petabyte" (1,024TB) will become more widely used.

"Now you have all these new data types and processing power reflecting everything from the physical world to squishier things like my intentions and preferences as a customer, my relationships with my family. The final step is, 'where will the insights come from?'"

So far, more has been invested in building data warehouses than in extracting value from them. Over the next five to six years, Ferguson says, the new battle lines for competitive advantage will come not just from the data people have but from what they do with it.

Companies will have to be receptive on a regular basis to hypotheses harvested from employee observations: Do computers really sell better when you put them on the left side of the store? Does a credit card report of a crib purchase indicate a first child and the corresponding host of targeted marketing opportunities?

Companies will also need the software tools and the modeling and extraction tools to test such hypotheses —in addition to the people who know how to use those tools. Instead of operators, they'll be looking for statisticians, "probability geeks," people with backgrounds in mathematical modeling and simulation.

"These people have always been around in capital markets, but I believe you'll see them working in more and more parts of the enterprise, where a lot of the data isn't just financial but operational," Ferguson says.

	Regulation nation
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	Data storage evolution
	RFID fallout
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Robert Ebisch has written for USA Today, Science News, The Washington Post, Consumers Digest and Wireless Review.