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How Will the Economy Impact the Enterprise Budget?

The first good news is that technology spending over the last 50 years has moved in a slow cyclical pattern as a percent of GDP. We hit bottom on the last cyclic move in 2002 and we've been moving up ever since, including last year and (it appears) so far this year. The current tech cycle should not peak out until the middle of the next decade.

The second good news is that even when the economy has gone into recession in the past, the recessions have not broken the cycle. If you chart the recessions on the same curve, as many recessions see IT spending rise as a percent of GDP as see it fall. The overall shape of the curve, in fact, isn't much impacted by recessions.

The first bad news is that even through spending as a percent of GDP may rise, absolute spending may stutter if GDP growth is slow enough. What the numbers really show is that there is only a proportional reduction in IT spending if GDP sinks; it doesn't change the overall flow of investment. That means that a protracted period of slow growth would end up cutting spending and likely cutting budgets.

The second bad news is that we broke the cycle with the NASDAQ crash of 2000 and the events of 9/11, and there is some indication that the former had a greater impact on spending than the latter did. Thus, we can see that the bursting of a major economic bubble for any reason can potentially cause a major shift. The current credit crisis in the US could be such a bursting of a bubble.

To break the tie between good and bad news we'll have to introduce some judgments. If we assume that the current IT spending cycle is driven by the SOA and mashup/orchestration processes (which is what enterprises tell me it is in surveys) then we can look for some insights in more subtle patterns of the IT tea leaves.

SOA and mashups are software tools, and in tech cycles of the past the driver technology of the cycle was a leading indicator of cycle behavior. Software tools are the current drive technology, and in fact software has been doing pretty well in what have been lumpy times. What would be a truly bad sign would be to see that IT giants with strong SOA positions were suddenly slumping. That would mean that the main driver technology for the current cycle was on hold, which would mean that the rest of the IT food chain-including systems and networks-would be deferred as well. If software continues to hold on, we can hope that the rest of the technology investment will continue without too much delay or reduction.

Enterprise IT management is telling me that while they are not turning cartwheels over their 2009 budget planning process, they are not being told to take root and become trees either. I don't know if it's just me, but these guys always see the glass as significantly more than half-empty in their assessments at this time of year. In fact, we see less than half the projected growth in the budget numbers we get in late summer as we see in the actual spending numbers by the end of the budget year. Apparently senior management routinely threatens budget starvation but usually relents.

If things go as my modeling suggests, we should have relatively little real problem with budgets for 2009 in most industries. Are there any warning signals we should look for to show this might not be coming about? Sure thing.

The big warning signal would be a sudden drop in US exports generated by a big jump in the dollar against our partners' currencies. Exports have been the big life preserver for many US companies, and if they drop off before demand picks up on the domestic side, it could mean the whole world will slow down economically, likely through much of 2009. So far, while the dollar has been up a bit, it's not running away.

The second warning signal would be a major IT vendor showing a big miss on their revenue forecast. HP recently posted good profits, which is a positive sign. Should IBM or Microsoft or Oracle suddenly lower their earnings guidance, it might be an indicator that tech spending is going to break out of its normal cyclical pattern-which means go south.

The final warning sign would be a sudden renewal of the credit problems. The big mortgage players Fannie Mae and Freddie Mac might be so unstable the government has to recapitalize them, which could wipe out more bank assets and create another credit scare. That would likely tip the economy back and signal an almost certain budget impact for 2009.

There's not much that network professionals can do about the overall economic situation, but they can ensure that their budget priorities for 2009 are set to support the items that are really driving their plans. The "in for a penny..." adage is a good one; management is more likely to continue to fund something they've taken a critical step to support. If you've bought the software, it's silly not to have anything to run it on or to communicate with. Focusing on projects that save money somewhere is also a good move, particularly if the savings can be accelerated into the next two years.

The big truth, though, is that worker productivity is the key priority for all the senior management I've surveyed. Productivity improvements should be the focus of budget presentations, with as much specific about the "how" and "when" as possible. So far, things are on track, but we still have another risky three months or so ahead.