An Empirical Analysis of Software and Hardware Spending

An Empirical Analysis of Software and Hardware Spending

By Haim Mendelson, Vijay Gurbaxani
1990Working Paper No. 1119

The growth in information systems budgets and in their primary components, hardware and software effort, are analyzed empirically. It is demonstrated that while a large component of the growth is due to technology related factors, these expenditures, and in particular, hardware spending, are sensitive to the growth rate of the economy and fluctuate around the technology driven growth path due to general business conditions. The validity of the popular belief that software effort (including both software development and maintenance) represents a growing proportion of information systems expenditures is tested versus the competing view that software effort and hardware expenditures consume relatively constant budget shares. It is shown that after controlling for macroeconomic effects, hardware and software expenditures grow exponentially at the same rate. The analysis also suggests that in the aggregate, it is primarily the hardware outlays that adjust in response to unexpected business conditions.