In times of turmoil, the chief financial officers of the corporate sphere tighten their hold on the corporate purse. The first line item to get squeezed is usually advertising and marketing. Then hiring. Then spending on information technology. When things start looking up again, they usually loosen that hold, and the money starts flowing once more. At least that’s what usually happens. But when one crisis follows another like in the case of the first financial crisis of European debt, then the U.S. fiscal cliff—the CFOs of the world turned perpetually stingy. Technology companies, in particular, have been feeling the pain of that stinginess of late. But there’s relief in sight.
Corporate investment in technology is now farther below trend growth than it has been at any point in the last 50 years, despite the fact that American non-financial corporations are sitting on an enormous cash pile of nearly $1.5 trillion. In fact, as a percentage of GDP, corporate spending on technology peaked at 4.6 percent in 2000, but by last year, it had declined to 1995 levels at about 3.4 percent of GDP. But all that is about to change. Credit Suisse’s technology analysts are forecasting a boom in technology spending over the next four years as corporations finally open their wallets again to buy new software, servers and even the endangered species of the technology world – PCs.
And it’s not just Credit Suisse: According to data from Gartner, a technology industry research firm, growth in enterprise technology spending in 2014 will be more than double that of 2013—3.6 percent compared to this year’s 1.7 percent. And it will keep heading up, increasing 4.1 and 4.2 percent in 2015 and 2016, respectively.
The forecasts come in the context of a steadily improving economic bacdrop. U.S. economic growth has been steady, if not exactly impressive, and the EU announced its first positive GDP growth in six quarters this month. Corporations are certainly feeling more optimistic. A portion of the Philadelphia Federal Reserve’s Business Outlook Survey that tracks firms’ capital expenditure expectations over the next six months has been climbing since late last year. The Conference Board’s CEO confidence survey jumped 15 percent in the second quarter, and 60 percent of chief executives said they thought economic conditions would improve in the next six months. Credit Suisse expects the healthier global macroeconomic backdrop to encourage corporations to start spending in general – and not just on IT.
So what’s to say that corporations will spend on technology, rather than M&A or share buybacks or anything else? For one thing, they’ve said so. Periodically, the Credit Suisse Executive Panel polls 100 corporate executives about their spending plans for the next six months. Between last November, when the previous survey was taken, and July, the category that experienced the fastest growth in executives planning to increase spending was IT, beating out employee wages, machinery, travel and advertising.
There’s an urgent need to upgrade technologies, too, that will only serve to enhance that rebound. Credit Suisse has been saying for more than a year that new technologies are proliferating so quickly that corporations simply cannot afford to keep postponing investments. In an in-depth report last year called “The Apps Manifesto,” Credit Suisse Global Head of Software Philip Winslow wrote that the average lifespan of an application package is about 10 to 15 years. Existing corporate tech infrastructure is running up on the end of that cycle – and starting to show its age. “The underlying need for corporates to adapt to the newer trends in technology has been very high,” said Manish Nigam, Credit Suisse’s Head of Technology Research for Non-Japan Asia. “The last real investment cycle in tech happened in the run-up to the tech bubble in 2000. Since then, the technology world has changed substantially with smartphones, tablets, social networks and widespread mobile data connectivity changing the way businesses interact with consumers and their employees.”
Specifically, Nigam said, corporations need to invest in hardware to stay on top of the continuing move to cloud computing, which involves using shared servers, as well as centralized computing, in which the technology in all of a company’s offices are run from the same datacenter. Corporations also need to upgrade both hardware and software to adjust to a new reality in which employees are increasingly working from multiple devices, particularly mobile ones. “A vast amount of corporate infrastructure is still wire-based, whereas the demand for wireless access has increased significantly,” Nigam and his team wrote in a note at the beginning of this year called “Asia Technology Strategy: Another Year of Outperformance.” All of the above changes also point to increases in demand for both storage and enhanced digital security, Nigam said.
In a recent report entitled “Data Points Starting to Support the Corporate Spending Recovery Theme,” Nigam and his team said they expect the restart in spending growth to begin with software and IT services, which make up 59 percent of enterprise spending. Indeed, revenue growth has already been revived at the top five Indian IT companies – Infosys, Tata Consultancy Services, Cognizant, HCT Technology and Wipro – prompting earnings upgrades in the last quarter. Sales of computers, printers, servers and additional storage capacity will lag software and services, but they will pick up in time, possibly even boosting the fortunes of the beleaguered PC market. In fact, the precipitous decline in corporate PC sales is already showing signs of moderating. After declining 10 percent year-over-year in the first quarter of 2013, total commercial PC sales stayed flat on a quarter-over-quarter basis in the second quarter, implying that sales could be stabilizing. And PC companies are expecting even better performance in the remainder of this year. That’s not nearly enough hard data for investors to run out and invest in PC companies, Nigam said, but things are at least moving in the right direction.
And then there’s the technology cycle that used to captivate the markets more than any other, and which might have one last hurrah: the Windows upgrade. Nearly 35 percent of existing corporate PCs are still running on Windows XP, a 12-year-old operating system that Microsoft plans to stop supporting next April. Running an operating system that is no longer supported “may expose users and companies to several potential risks, including security and compliance risks,” Nigam and his team wrote in their note at the beginning of the year. The analysts said the expiring support for Windows XP could prompt a slow upgrade cycle possibly starting in late 2013, but more in 2014.
The beneficiaries of an uptick in tech spending won’t just be in India. Lenovo, a Chinese firm that is now the world’s top PC vendor, is another Asian tech company that should see a boost in sales if corporations start replacing hardware. Credit Suisse analysts noted that Lenovo already has a compelling story, given its strength in the global PC market and a fast-growing mobile phone business. Lenovo acquired IBM’s PC business in 2005, and the Credit Suisse analysts noted that the company could pick up even more exposure to the enterprise technology sector if it buys IBM’s server business, a deal many market-watchers have speculated about over the last few months. With so much exposure to the PCs that most companies still rely on, and the potential for a large server business acquisition, Lenovo is particularly well positioned to capitalize on any pickup in enterprise spending, Credit Suisse analysts said. American firms such as Oracle, NetSuite and SAP are also poised to gain from corporate investments in technologies that addresses the advent of cloud computing, the need for better analysis of big data and the proliferation of mobile devices.
The way large corporations have been spending on technology over the last decade, you’d never know that a huge burst of innovation and change had been taking place. But of course, it was. Now that the smoke of the last several years of crises has cleared, technology watchers are increasingly confident that corporate IT budgets will get back on track—and on trend—and at least for some tech companies, it’s going to be just like the old times again.