Bouncing along a bottom; we still expect 4Q strength but likely more muted. Our total IT spending index stabilized somewhat in the latest reading, albeit close to contraction levels. More important, 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% from 7% in 2007, with risks rising for the seasonally stronger second half. 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. Finally, networking trends showed significant deterioration—a negative for Juniper, Riverbed, and Aruba Networks.

Software Subsector Analysis:
Security, compliance, storage remain relatively insulated areas in software

Although our panel continues to place software as a category likely to hold up better than areas such as hardware and professional services in the face of budget cuts (see Exhibit 4), we inquired further to reveal some additional granularity within different areas of software.

• Software spending initiatives ranking least likely to be pushed out include compliance/risk management, server virtualization, security, and data management. This is consistent with our checks that have tended to indicate that the above areas should be relatively insulated from budget reductions. We continue to expect relatively solid trends for storage and security vendors such as CommVault and Symantec, and virtualization leaders VMware and Citrix.

Vista and Office, ERP and SOA projects most at risk in a downturn

• The large-project nature of new ERP projects and integration/SOA projects is likely responsible for their respective high rankings as potentially delayed projects. Although they have longer-term ROI propositions by automating IT tasks, we also tend to view operations management projects as more "nice to have" and therefore also vulnerable to delay.
• The relatively high ranking of ERP remains somewhat troubling for leaders SAP and Oracle. We believe that Oracle is relatively more insulated because it tends to sell more "edge" applications with quicker implementations. SAP tends toward larger, more monolithic projects, with longer planning and implementation cycles. Both will have to shift to more tactical selling of smaller-ticket items such as business intelligence, middleware, identity management, governance risk, and compliance solutions, to name a few, to make up for some large-deal delays.
• Not surprisingly, Microsoft Vista upgrades remains atop the list of likely project push-outs in a slower environment, with the Vista adoption horizon already being longer-term in nature for most customers prior to the economic slowing. Microsoft Office seems to be closely linked here, ranking second. From a Microsoft perspective, this may not be as troubling as it looks since most enterprise customers are already paying maintenance to enable access to the next version, so not upgrading does not affect their spend with Microsoft per se.

On-demand deployments of partner relationship management, web conferencing, and customer relationship management (outside of salesforce automation) to lead SaaS adoption going forward

• Partner relationship management, web conferencing, and customer relationship management strongest contenders for SaaS delivery. Particularly strong momentum was notable for partner relationship management and human capital management, as 0% and 5% of respondents selected these apps as priority SaaS deployments in our March survey.
• Survey and GS scorecard dovetail well. We published a SaaS scorecard in our "Getting SaaS savvy—successful investing in on-demand" in November 2007. The Goldman Sachs SaaS Scorecard highlighted key characteristics that drive the success (or failure) of a SaaS application and was based on insights from conversations with CIOs, and SaaS, as well as on-premises companies. We scored a SaaS company's value proposition on the 10 criteria that we believe are the most important when judging its likelihood of success. Our survey dovetails well with this, with the areas noted above all exhibiting nine of the 10 characteristics we flag as most important. See Exhibit 12. Key companies in these three segments include Cisco (WebEx), Citrix (Citrix Online), BlueRoads (private), athenaheatlth, salesforce.com, Convio (private), and StarCite (ICG)). Our scorecard and the survey also predict an ongoing uptake in human capital management SaaS solutions (scored a 7 out of 10 in the Goldman Sachs scorecard). SuccessFactors has shown strength in performance and talent management.

Larger companies surprisingly dominate among vendors customers currently are using for SaaS deployments. Oracle, Microsoft, Cisco, and SAP all ranked in the top five, with pure-play SaaS vendors salesforce.com coming in fourth and Taleo tied for the fifth-place ranking. See Exhibit 13.

• This trend is expected to continue over the next 12 months. Oracle, Microsoft, SAP, and Cisco all ranked in the top five, with only one pure-play SaaS vendor (salesforce.com) also ranking among the top five. See Exhibit 14. When compared with our survey results from March, it appears as though Taleo is gaining momentum, as only 3% of respondents last time indicated that they were using or planning to use Taleo over the next 12 months, compared with 6% in this survey. See Exhibits 13 and 14.
• We expect industry consolidation in the medium term as larger vendors buy SaaS expertise. We point out that while smaller vendors may be playing up the nimble nature of their applications, customers are reaping the benefits of SaaS solutions, while also gaining from the security and scale of purchasing solutions from a larger vendor. Rather than putting large vendors out of business, we believe that many SaaS providers will take some market share, but will eventually be acquired as their growth rates slow and larger companies can mine customers for their recurring revenue.

Sarah Friar is a high technology analyst at Goldman Sachs. This is an excerpt from "IT Spending Survey: Caution evident, but some stability at low levels." To receive a copy of the full report, email Sarah at Sarah.Friar@gs.com.