Global IT spending is expected to rise by four per cent in 2005, analyst Meta Group reports in its Worldwide Benchmark Database.

'IT executives are still optimistic about the potential for IT in business, arguing for further investment in systems and technology,' says Neil Barton, vice president of benchmarking and measurement at Meta.

But behind that general trend of increased investment lies a more complex picture.

'Technology executives tend to be over-optimistic about IT spending,' says Barton. 'This time last year they were expecting to spend six per cent, but only achieved half that by year-end.'

Expectations from the headline figures, therefore, should be checked, particularly when spending for the biggest companies - those with revenue in excess of $10bn (£5.3bn) - is projected to increase by just one per cent.

It would appear that big businesses are still paying for the IT follies of year 2000 and the dot com downturn.

'Large corporations are still digesting some of the over-investment of two or three years ago,' says Barton. 'Their projects are still focusing on consolidation and standardisation.'

But while blue-chip companies are slow to invest in new technology, small and medium-sized enterprises (SMEs) - those with annual revenue of less than $100m (£53m) - are expected to increase their spending on IT by 23 per cent. Smaller companies are one of the main factors driving potential global spending increases of up to four per cent in 2005.

In marked contrast with their larger counterparts, Barton says SMEs are more positive about investing.

'Smaller companies are now feeling more confident about their business future,' he says. 'Many SMEs managed their costs very closely during the bad years, and are now labouring with applications that are out of date and desktop fleets that can be four or even five years old.

'They are now being forced into investment cycles.'

While smaller companies are driving IT investment, spending - or at least technology replacement - seems to be important for most UK businesses.

UK IT budgets are expected to rise five per cent in 2004-05, compared with just two per cent in 2003-4. When these figures are compared with US spending trends, the continued investment in new technology by UK companies appears even more significant.

Budgets in the US are expected to increase by only one per cent. One possible explanation, says Barton, is the cyclical nature of IT investments.

'Technology trends tend to move from west to east, with leading European economies such as the UK nine to 12 months behind the US East Coast,' he says. 'That leaves the UK this year still in the growth cycle that has faded out in the US.

'This effect has been amplified by economic confidence in the UK, and fears among North American executives that the apparent confidence in the US last year was simply an election economy.'

But careful financial prudence can have its benefits. As the downturn hit, many companies reduced their investment in cash-intensive IT projects.

Some of these firms believe the time is now right to adjust their spending portfolios.

An increasing number of businesses are choosing to use cash saved during the downturn to transform (18 per cent) and expand (25 per cent) the company in 2005.

'Now that simply "having the latest technology" is no longer fashionable, longer lives are being squeezed out of infrastructure assets, and more money is being spent on development programmes aligned to business change,' says Barton.

But the business case for many of these projects is still largely based on cost reduction, such as the consolidation of back offices into shared service centres.

Daily operational spending is still being pushed down sharply, and well-defined projects, with 'bullet-proof' business cases, are receiving cash for capital investment.

As such, capital spending is on the rise, increasing from 25 per cent of IT spending in 2003 to 35 per cent in 2004.

'There may also be an effect here in which some businesses are becoming more canny in capitalising major development exercises, avoiding major cost hits in the development and implementation years,' says Barton.

So are companies becoming smarter at investing? Barton thinks so. He believes that the desire to find a growing source of profit is driving businesses' use of new technology.

'The growth area that is still receiving a lot of attention is applications built around web technologies, and these are often ways of capturing the same revenue through a different channel,' he says.

User view: UPS

'THE UK side of UPS's business will continue to be growth-oriented, and our systems implementations will reflect the usual message of customer assistance,' says Graham Nugent, European strategic IS manager at parcel delivery specialist UPS.

'This means better and quicker package information, and the rollout of both wireless scanning in our buildings, as well as the rollout of DIAD IV, the new wireless communication device, to our drivers.

'From an IT perspective, we will be working on several initiatives in 2005. We will be working in response to the demands of HM Customs & Excise, notably the redesign of the Single Administrative Document, as well as enhancing our local customs clearance system to automate more types of customs entry.

'We will also continue to improve our shipping systems in response to projected service changes. Typically we see new versions of these systems appearing on a biannual basis.'

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