Uncle Sam's Empty Wallet Could Crimp IT Spending
By Paul Kedrosky
01/16/2003 11:13
Intel INTC isn't the only spender whose tide lifts many technology companies' boats. It still goes largely unremarked upon, but the government is also a big information technology spender -- or at least it used to be.
The federal, state, and local levels of government accounted for a little more than 20% of U.S. IT spending last year. The federal government spent about $43 billion, and the state and local governments were only slightly behind, combining to spend about $40 billion.
Government spending made a horrible IT environment merely lousy. While corporations had shut down IT spending, governments were buying. And in some areas, especially security and services, they were even increasing spending in a spirited fashion. For example, federal IT outsourcing was $6 billion in 2002, and it's growing about 18% a year compounded. Security spending is growing even faster, albeit off a smaller base.
A Looming Crisis
Here's the problem: Corporate spending still hasn't recovered from its boom excesses, but the various levels of U.S. government are facing the biggest financial crisis in 50 years.
States are running up staggering deficits. California alone has a deficit of between $22 billion and $34 billion, depending on whose numbers you use. The city of New York faces a $2.5 billion budget gap for the current year alone.
These gaps have serious consequences for IT. Spending on IT was largely insulated from cuts last year, when prebudgeted spending meant that existing IT projects could just tick along merrily.
But this year's troubles mean that everything's up for grabs. In aggregate and excluding security and services, the federal, state and local budget problems could probably result in cuts of at least 15% in government IT spending this year and something similar in the next two.
It is already happening. Connecticut has a $600 million budget shortfall, and the state's chief information officer recently laid off 115 employees, 11% of his staff. Texas is telling vendors that it will only buy products with a two-year return on investment, and even then they should be prepared to be paid out of the money saved.
Even some of the more positive developments have narrow benefits. For example, while this year will see some growth in federal IT spending, most of that growth will come from one of two areas: services and security. Neither does much to tickle the usual crew of enterprise software companies.
Truth and Consequences
Let's concede right here that state and federal budget documents are more political documents than financial ones. But that said, the financial crisis has consequences. Government spending in the last decade largely outpaced inflation, and many states ran deficits during the boom years. Something has to give, and that's what is happening.
So what does all of this mean? It means that if corporate IT spending does not begin recovering soon, IT vendors face the worst of all worlds: a technology market with still-anemic corporate spending and newly shy government customers.
To be fair, the services shift is good news here for IBM IBM , Electronic Data Systems EDS and Computer Sciences CSC . The shift favors their skills as outsourcing vendors that can offer professional services to large government offices. But that snippet aside, the news is mostly bad, with the strength in security and services more than offset by cuts, skittishness and pay-as-you-profit pricing.
And that isn't the news that Microsoft MSFT , Siebel SEBL and the rest of the enterprise software crew were hoping for. This was supposed to be the year when the technology industry's ship came in on a rising tide of spending. |
