Editor's take: How low can IT budgets go?
Technology companies are tipped to feel the pinch of the credit crunch as write-downs among investment banking behemoths continue.
The tech budgets in the financial services industry are massive. They account for nearly a quarter (23%) of all the $432bn spent on hardware, software and tech services in the US, so any belt-tightening inevitably sends shock waves through the IT sector.
As sub-prime shadows continue to darken future prospects, fears are beginning to emerge about possible staff cuts and future earnings, both at banks and at the IT firms supplying them.
"We think that information technology spending could slow down quite a bit in the next 12 months, based on what's happened in the last month," Stephen Minton, vice-president for worldwide IT markets research at tech researcher IDC, told Business Week.
Pessimists should already be able to sniff out a few harbingers of doom. On 7 November, for example, Cisco CEO John Chambers reported a bleaker than expected outlook for the rest of the year and a sharp decrease in IT spending by banks, which sent its stock tumbling by 10%. Oracle, Apple, IBM, Dell and Network Appliance also suffered.
But to really send shivers down your spine, it's worth casting your mind back to 2003, when IT spending collapsed following the tech stock crash, 9/11 and the Enron and Worldcom scandals. Sell-side firms in the US cut IT spending by 25%, according to research from Kimsey Consulting.
There's no guarantee that history will repeat itself, and the credit crunch certainly can't yet be compared to those crises. However, this time around, firms expected to take the hardest hit will be those with a Java focus and therefore reliance on financial services firms - IBM, Dell and Sun Microsystems most notably.
Meanwhile, IT outsourcing firm Capgemini, which serves over 900 financial services clients, announced 600 jobs were to be sliced, which amounts to 20% of its workforce. This one can't be pinned on banks though, as the cuts were blamed on the loss of an HM Revenue and Customs contract.
The good news is that there's no need to brace yourself for a crunch just yet. Minton reckons if financial services do trim their IT budgets it will mean that total spending would grow by 3-4% rather than the predicted 6% - more a question of a gentle slowing in spending than slamming it into reverse.
