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Spending on internal IT staff remains the largest part of IT budgets, but CIOs expect to shift more resources from staff to consultants and integrators in 2007, according to the quarterly CIO User Survey released Jan. 9 by Merrill Lynch.

CIOs expect to spend an average of 11 percent of their IT budget on external service providers in 2007, up from nine percent in the same survey one quarter prior, according to the survey.

Conversely, CIOs spent 37 percent of their budget on staff in 2006, down from 42 percent in 2005.

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Spending on internal IT staff, however, still remains the largest part of IT budgets, according to the report. Still, it has come down from 42 percent in 2005 to 37 percent in 2006.

Seventy-two percent reported allocating more for the channel in 2007, up from 46 percent in the third quarter of 2006 and 58 percent 12 months earlier, as spending on IT services represents an increasing part of overall IT budgets.

Offshore outsourcing is on the rise, but CIOs’ top choices of vendors for projects included ACN, IBM as well as Indian vendors for these types of projects. Systems integration remained the top IT spending priority for CIOs, with consulting holding the second place.

CIOs indicated a substantial increase in the pricing for IT outsourcing in the report, up to 2.7 percent from 2.0 percent the previous quarter. A 2 percent increase in the allocation for offshore vendors was expected to increase to 2.8 percent, should pricing trends remain positive. In the previous four surveys, the allocation for offshore outsourcing had been only 1.1 percent.

Despite the fact that projects with an offshore component decreased from 44 percent to 36 percent between the Q3 and Q4 2006 reports, the report predicted that offshoring of IT service will continue to grow rapidly, noting that demand remains strong and expectations of cost savings are high.

Indian vendors such as Infosys and Satyam continue to stand to benefit the most from this expansion.

IT spending as a whole is expected to grow 4.2 percent in 2007, according to the report. IT spending finished 2006 up 3.4 percent, but slower than the increase of 4.4 percent in 2005, however CIOs at that time had expected growth of only 3 percent, the study notes, leaving the 3.4 percent final number more on-target.

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