After keeping a tight rein on information technology spending for the past year, Real Facilities Inc. of Toronto has doubled its IT budget for 2002.

By the end of this year, the two-year-old company will have spent $600,000 to improve in-house communications and upgrade the proprietary software used by its commercial, industrial and retail clients to locate, lease and outfit their commercial premises, president Stan Krawitz says.

That compares with the $300,000 the 15-employee company spent on IT in 2001, when the economy was in the doldrums, says Mr. Krawitz, who adds that the hike in spending enables Real Facilities to use the Internet to provide seamless and secure real estate brokerage services 24 hours a day, seven days a week.

“We’re going on the offensive and our clients have embraced the fact that we provide one-stop shopping,” he says. The process is immeasurably better since we began increasing our investment in IT in May.”

Analysis and business consultants say increased spending by Real Facilities and other companies is a sign that the vise that has gripped IT budgets for more than a year is loosening.

“Since mid-July, many of our clients have dusted off projects that were shelved one and two years ago,” says Roberta Fox, president and senior partner of Fox Group Consulting in Markham, Ont.

“They’re asking us to review past work and strategies for validation and update. That usually means the purse strings on IT investments will be released in the next quarter, with spending continuing to grow in 2003.”

But while IT spending is projected to improve, it won’t be improving in traditional areas such as fibre optics and computer hardware, but rather in software. And industry watchers aren’t suggesting that investments in IT will reach the lofty heights of 18 months ago, when technology budgets were increasing by nearly 10 per cent year over year as the economy boomed on the back of the high-tech sector.

In the United States, a recent Forrester Research survey of companies with at least $500 million (U.S.) in revenue showed that a majority of respondents were modestly bullish in their IT spending plans. Of executives who said their budgets will change, more expected spending to increase by 10 per cent rather than fall by 10 per cent. According to Forrester’s semi-annual study of 1,001 senior business and technology managers, overall IT spending will increase by 2.3 per cent during 2002 compared with 2001.

International Data Corp. forecasts a brighter outlook for worldwide IT spending before the end of this year, a welcome improvement from 2001’s tragic fourth quarter. The Framingham, Mass.-based company’s latest forecast for IT spending predicts a 3.7 per cent increase in 2002 from 2001, for total expenditures of $981 billion. PDC predicts that IT spending in 2003 will top $1 trillion for the first time in the industry’s history.

In Canada, Lars Goransson, vice-president of research at IDC Canada, says spending growth in 2002 will be about 3 per cent, with most of the activity coming in the remainder of the year.

“We expect companies to bring a number of projects back on stream before year’s end, but it will be 2003 before any revenue is produced,” Mr. Goransson says. “There will be growth in spending, but it will be gradual, not the kind of really strong recovery we projected six months ago.”

Last year’s dismal results reflected events such as the Sept. 11 terrorist attacks in the United States and fallout from the crash of the dot-com and telecommunications markets. The disappointing year for the IT industry continued into mid-2002.

Mr. Goransson agrees that the bulk of positive spending growth will be in software and services. He says the software market tends to be driven by maintenance requirements, which means customers must continue to spend to maintain their installed software. Software spending will be driven by outsourcing and products in areas such as supply chain management.

“Customers will continue to purchase software because it helps save money by implementing new processes and new e-business solutions,” he says.

IDC Canada predicts that the services component of the IT industry, mainly outsourcing, will grow by 12 to 15 per cent year over year because services tend to be driven by continuing contractual commitments. Many customers must continue spending money to keep their systems up and running and their businesses operating, Mr. Goransson says.

On the downside, hardware spending in Canada is expected to show a 5 per-cent decline this year despite growing segments such as networking and storage, he adds. The worldwide IDC report says that with gradual economic recovery translating into improved business profits, global IT spending in 2003 will grow 9 per cent to exceed $1 trillion. That will push spending higher than during the tail-end of the dot-com boom in 2000. IDC estimates that Canadian customers in 2003 will spend $43 billion (Canadian) on IT, up from an estimated $40 billion for 2002.

John Reid, president of the 500-member Canadian Advanced Technology Alliance in Ottawa, cites three key reasons for recent increases in IT spending. First, he says the high-tech industry, like the auto industry, has a replacement cycle, and “right now, a lot of computer ware needs to be replaced.” Second, new technology is the quickest way for businesses to drive productivity. And third, most companies are finished laying off staff and restructuring.

“At this point, the dynamic is right,” Mr. Reid says. “Companies have gone through changes and we have to assume they are starting to move back into a growth cycle — not the bubble we saw in the past, but steady growth in the use and application of technology.”