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Goldman Sachs: IT spending slips, virtualization rises

The investment specialist doesn't see much sunshine in the information technology forecast, unless you're in the virtualization business.

Goldman Sachs IT Spending Indexes Goldman Sachs

Goldman Sachs has bad news for most of the IT economy: IT spending will slip from 7 percent growth to 5 percent growth in 2008. While not yet recessionary, the outlook is dipping dangerously close to that, as its indexes in its latest IT spending report show:

Expectations of budget growth remain down significantly on a year-over-year basis, with many CIOs limiting their purchases to projects with a high and fast ROI. We continue to believe that 2008 IT spending will decelerate to 5 percent from 7 percent in 2007....Demand for discretionary IT projects dropped to its lowest point in the history of our survey, with caution beginning to spread to the offshore providers.

CIOs have emphasized to us that they are buying on a need versus want basis, are often downsizing deals to fit with current budget constraints.... In fact, contrary to general tightening in spending, purchases with an especially compelling ROI are being accelerated in the current environment.

The sky isn't falling, but it's going to scrape a few vendors' heads in a worsening IT economy. No wonder venture capitalists are bemoaning their exit options and returns.

But not everyone is going to get pummeled. In terms of spending priorities for 2008-09, server virtualization and server consolidation were ranked No. 1 and No. 2, respectively, with cost cutting hitting No. 3 and grid computing and on-demand computing rounding out the very bottom of the list. (In addition to open-source software, which is not surprising because people shouldn't necessarily be proactively "buying open source" so much as buying open-source virtualization, applications, etc.)

In short, no one is clamoring to spend money on buzzwords.

On open source, Goldman Sachs writes:

Although our latest checks suggest some maturation of the enterprise Linux market as well as reduced buzz around open-source offerings in other areas of the software stack, we view open-source software as an area that should see relative strength in an environment of cost reduction. For example, we believe that Red Hat is starting to see some progress in converting proprietary application server users to the open-source JBoss platform at a significantly lower cost.

Again, this just means that people aren't buying open source for open source's sake. They're buying into larger open-source offerings that happen to deliver the flexiblity, cost savings, and so on that CIOs increasingly require.

Total IT Spending Goldman Sachs

On the cost-cutting front, drilling into the data yields an important metric: 10 percent of respondents are going beyond trying to slim down licensing costs to cut software maintenance. Given that more and more revenue for Oracle and others is from maintenance, this is cause for alarm.

Several categories of IT spending - ERP software and database software, most particularly - have slipped in priority since Goldman Sachs' report in 2007. Microsoft's Vista spending? It remains in the gutter.