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Is tech in more trouble than we think?

When the financial crisis first struck, it appeared that IT shops were prepared to weather the storm and that IT spending might hold up despite the downward economy. But a lot has happened since then.

Several more banks have faltered or been acquired. The stock market has continued to ricochet around, enough to destroy the confidence of all but its wealthiest masters. And layoffs keep coming across many industries, including the technology realm -- with no end in sight.

[ Learnmore about how the financial crisis is affecting IT and the high-tech industry, plus what IT can do to help, in InfoWorld's special report. ]

IT, both corporate departments and the industry itself, has survived tough economic conditions before, notably the dot-com crash of 2001. Perhaps that's why IT shops are already battening down the hatches.

Preparing for the storm

Steve Minton, vice president of worldwide IT markets at IDC, says, "Companies are in the mindset of not spending in the next 3 months and increasing only 1 or 2 percent in the next 12 months. That's quite a change from last year when it was between 7 and 8 percent."

Gartner, in a report issued earlier this month, stated that even though the bailout of banks spares IT from a worst-case scenario, they're still turning budgets downward while heading toward 2009.

The bank fallout itself is not to be overlooked. Gauging only from the hardships of Bear Sterns, Lehman Brothers, and Merrill Lynch, Robert Iati, a partner and global head of consulting of the Tabb Group, a research and advisory firm that focuses on financial markets, sees "investment banks spending about US$4.5 billion, or 20 percent, less on IT in 2009 than in 2008." That's more than just a big number. "Investment banks represent the engine of cutting-edge enterprise technologies," Iati adds.

Critical to enterprise technology advancements they may be, but Wall Street firms, banks, and other financial services organizations are not the only ones yanking dollars out of the IT spending pool -- or abandoning and mothballing projects.

"We do see people throw away even great ideas in tight times," says Mark Raskino, a Gartner fellow and vice president for emerging technologies and trends.

As gloomy as it looks, the tech sector is not returning to the days of the dot-com bust. "We're not seeing a replay of the big tech bust of 2001-2002," says Andrew Bartels, a principal analyst at Forrester Research. "But we do see a slowdown."

Innovation may take a hit

There are implications to companies spending less on IT. That reality might not hit the largest tech vendors -- the ones still reporting profits and sitting on large cash reserves -- hard enough to break any bones, but smaller companies will certainly feel the sting of less spending.

"There will be a lot of disruption to the progress of the industry because the pipeline of startups that fuels innovation will be challenged by the credit crisis," Gartner's Raskino explains.

That, in turn, inhibits the fresh new ideas that IT shops can choose to achieve their goals. "Less competition alone will harm overall IT innovation and the future of IT," says Andre Preoteasa, director of IT at Castle Brands, the alcoholic beverage producer and importer.

André Gold, former head of IT security at financial services firm ING, explains that "the startup market has changed over the last five years, so it's not as sexy or profitable as it once was for new companies to come to market, IPO, and make wealthy or wealthier the VCs and entrepreneurs who seeded and founded the company."

That said, though, Gold contends that the model is not broken and remains valuable to IT shops. "I have gone to small-cap companies and startups for superior [intellectual property] at a reduced rate," Gold explains. "If the company has good [intellectual property], I have no shame in putting my checkbook behind that because they're likely to be acquired, and by a vendor I already have a relationship with."

Just don't expect IT budgets to spring back quickly. Gartner's Raskino expects this turbulence to continue through next year. "There's no chance that it will all be sorted out by Christmas and all will be well on January 1," he says.

Tabb Group's Iati looks out even further: "We're in for a period where it will probably take five years to reach the tech spend we had in 2007."