After the boom in IT spending in the late 1990s, shrinking budgets and slashed workforces of the new century heralded a new mandate for the IT manager: Do more with less. The recovering economy may signal better times for the corporate bottom line, but don’t expect the frugal buying habits of the lean years to disappear quite as quickly.

Instead, companies will invest in cheaper, fast-commoditizing technologies like open-source software, blade servers, and voice-over-IP (VoIP), in addition to outsourcing functions that others can do more efficiently. A broad-based psychological shift has occurred and low-cost technology is rapidly becoming the new engine for driving competitive advantage.

It has been a dire past few years for corporate technology spending. According to research company Gartner, IT spending shrank 7.1 percent in 2002 and was flat in 2003. Smaller budgets meant new IT projects were shelved, forcing managers to make do with existing equipment and systems. Whole IT departments were downsized and operations were outsourced to India. Next year, Gartner believes IT spending will grow by a meager 5 percent, well below the double-digit growth of the late 1990s.

While IT execs have talked about “total cost of ownership” (TCO) for years, they will focus on low-cost computing more than ever in 2004. Even big name CEOs, who reaped profits from old IT buying habits, are crowing about the new low-cost reality. “Post-bubble TCO stands for ‘take costs out,’” proclaimed Scott McNealy, CEO of Sun Microsystems at a press conference in May. Mr. McNealy has a point: costs can be taken out. Gartner estimates that utilization of servers and disks in a typical company hovers around 20 percent, while the remaining 80 percent is wasted.

Next year, companies will continue to shift from costly Unix servers to clusters of low-cost Linux servers – a trend several years in the making. In 2001, Amazon.com cut its quarterly technology expenses by 25 percent, by moving its systems to Linux (as well as benefiting from price reductions for its data and telecommunication services). Today, a cluster of more than 10,000 Linux servers crunches Google’s more than 200 million searches per day. Of 360 large European enterprises recently surveyed by Gartner, more than half either used or planned to use Linux for their Web servers.

Companies will also continue to invest in blade servers – small, low-cost servers efficiently connected together in clusters. In the third quarter of 2003, the market for servers costing less than $25,000 grew by 9.5 percent over the previous year, while the market for enterprise servers priced more than $500,000 declined by 14 percent, according to research firm IDC.

Plenty of other technologies are rewriting the economic rules of IT. After years of technical shortcomings, VoIP is finally ready for widespread commercial use. These systems allow voice and data to share the same network, lowering overall costs. While VoIP systems will not overtake traditional phone systems anytime soon, maturing standards and new systems will accelerate their adoption.

Outsourcing – both to companies at home and abroad – will continue to appeal to cost-conscious CEOs and Wall Street analysts. By the end of 2004, 1 out of every 10 jobs with U.S.-based IT vendors and service producers will move to emerging markets, predicts Gartner. But security and privacy concerns will also intensify.

The trend of tech commoditization, off-the-shelf parts, and outsourcing has left some people asking, Does IT spending actually enhance a company’s profits? A survey of 291 U.S. companies by Forrester Research last year found that, indeed, the lowest spenders on IT as a percentage of revenues were in the lowest quartile of financial performance. However, the top-performing companies in the survey spent the next lowest amount on IT, suggesting no clear link between IT spending and financial performance.

The debate intensified this year, when Nicholas Carr roiled the tech community with his article, “IT Doesn’t Matter,” in the May issue of Harvard Business Review, which argued that the commoditization of IT means that it is no longer a source of competitive advantage. “The key to success for the vast majority of companies,” he wrote about IT, “is no longer to seek advantage aggressively but to manage costs and risks meticulously.”

Even if Mr. Carr is correct, demand for advanced systems and software will not disappear. Companies will continue to invest in software to integrate the systems better, and to mine huge databases to glean subtle insights about their customers. It also takes big multinational companies many years to move their most important applications from old mainframe computers to newer, cheaper systems. But in the coming year, there will be a much closer link between investments in new technologies and their actual benefit to businesses. The price versus performance equation will continue to be important – but the emphasis on the first “P” in that equation will be greater than ever.

PLAYERSDell, Hewlett Packard, IBM: As the top three Linux server suppliers, these companies benefit from the operating system’s continued growth.

Avaya, Cisco, Nortel Networks: These and other VoIP vendors benefit if they can convince companies that the technology is a real money saver.

Microsoft, Red Hat: Windows and Linux scrap it out in the server software market.

ALSO IN MOTIONMicro-payments: Apple’s iTunes service finally convinced people to pull out their credit cards for transactions under a dollar. Micro-payments, and companies that process them, herald a whole new way of making money on the Web.

Spam and viruses demand government oversight: Viruses, such as SoBig.F and Blaster, have caused billions of dollars of damage in 2003. Spam clogged countless inboxes. Next year, governments intensify their efforts to search and destroy.

Utility computing: A means of offering IT services “on tap,” where customers only pay for what they use. Although still at the promise stage, next year will see more efforts to develop standards and technologies that make it a reality.

Read all Top 10 Trends for 2004.