Money may be too tight to mention right now, but IT spend is set to
pick up soon. John Riley reports
IT directors and managers are beginning to feel the pinch,
especially in large companies, as IT budget growth falls towards
its lowest point for nearly a decade. That is a key finding from
the spring report on UK IT expenditure from Computer Weekly and Kew
Associates, published this month. However, although IT spend growth
is set to fall to 6.9% this year, down from 8.4% in 2001, the total
pot that users will spend on hardware, software, services and staff
in the UK this year will be the highest ever, at £64.5bn.
The good news for users is that this fall - the fourth continuous
one since the bumper Y2K budgets of 1999 - has probably bottomed
out and we can look forward to growth in IT spend above 9% from
next year onwards.
Compared with their counterparts in other departments, IT directors
can spend a disproportionate amount of their companies' cash. The
survey reveals that IT spend growth is currently running about 3.5
times gross domestic product (GDP) growth. However, with the
general business downturn IT is getting more flak and confidence is
falling as perception grows that IT is not helping business
strategy. IT budget holders are trying to address this, which is
borne out by the huge emphasis that those surveyed in November now
place on tying IT to business needs, and trying to obtain value for
money.
Average spend per employee
A key measure of IT
expenditure is average spend. Average spend on IT per employee,
that key overall measure in many companies, was £2,480 last year,
up from £2,320 in 2000. That figure is set to rise to £2,615 this
year and £2,870 next year. However, spend per employee varies
dramatically according to vertical sector.
For the whole of 2001, companies overall in the UK spent on average
£2,480 per employee on all aspects of IT spend, including staff.
The energy and water supply industries spend most on IT per head,
at £13,273 compared to banking and finance at £12,279. Respondents
expect those figures to rise to £15,327 and £12,737 respectively.
The construction industry spends least - just £649 a head last year
rising just £53 to £702 this year.
The survey finds that the general perception of gloom for the IT
industry is not entirely justified. That perception is fuelled, for
example, by reports such as Merrill Lynch's influential survey
which quizzes a small number of the largest European organisations.
However, when broken down by size of company, the overall picture
is brighter, as small and medium-sized businesses (SMEs) with fewer
than 500 employees are growing their IT investment consistently
more quickly than large ones. By the last quarter of 2001, large
companies had stalled their IT spend growth down to 3.7%, down from
6.1% the previous quarter, as they paused to focus a lot of time on
re-engineering. By contrast, SMEs are proving more flexible, with
their budgets still running at 10.7% growth last quarter, albeit
down from 14.3% in the equivalent quarter last year.
Pot of spend
A striking correlation between IT growth
and GDP growth every quarter since the mid 1990s indicates that
boards are in full control of their organisations' spend on IT.
Only under exceptional circumstances, such as the Y2K phenomenon,
or the dotcom-induced mania, will they sanction new money for IT as
the graph (above right) shows.
IT managers are being given a fixed pot and they have to prioritise
their spend. Suppliers do not influence the overall size of that
pot, but any demands for extra money they make for no true extra
business benefit will affect the overall product and service mix
that users buy. That is why, in 2001, Microsoft's arbitrary changes
to its licensing structure and its forced timetable for compliance,
caused such shock waves through the industry.
For budget growth in 2002, the best sector to be in is the public
sector. This is the only major sector experiencing a double-figure
growth in IT spend (at 12.3%). That is due to the money the
Government is putting into improving public services via, for
example, the various e-government initiatives. Growth here is
driven by the Government, not technology. Consequently suppliers,
some of whom know little about the public sector, are beating a
path to IT directors' doors there.
By contrast, IT departments in the production industries and the
services sectors are having to make do with budget growth of about
6%, which should turn budget holders in non-IT corporate
departments green with envy.
Suppliers - hardware and software
Across all
industries, companies typically spend £605 per employee on
hardware, £348 on software and £667 on services. That figure rises
and falls significantly according to sector. For example, it ranges
from £4,776 per worker paid on IT services in the energy and water
supply industries to just £141 in the construction sector.
There is good news for hardware and software suppliers who have
endured a desperate 2001 as overall growth in user spend in these
areas has plummeted. Users want to spend more of their pot here
rather than in IT services. So far, hardware suppliers have been
particularly badly hit, with overall growth plunging from 5.0% in
2000 to 2.8% last year. Spend on desktop PCs was in actual decline
(down 4.1%). To judge from the quarterly data from the survey, mid
2001 was the nadir for hardware suppliers with second quarter
growth at just 0.8%. Growth picked up in the last quarter of 2001
and users say they want to more than treble their spend growth on
hardware (to 8.7%) in 2002.
Software growth fell heavily last year (from 12.6% to 8.8%), with
custom software and development tools feeling the brunt. The
outlook is healthy with steady growth over the next two years.
However, in both areas, suppliers can expect hard bargaining from
users who are having to think constantly about value to the bottom
line for their purchases.
Services
The intention by users to boost prioritisation
of their pot of spend towards hardware and software will be at the
expense of IT services where growth will brake dramatically this
year - from 11.4% to 4.1%.
In particular the thrust towards outsourcing, which enjoyed more
than 18% growth in 2001, may not continue as vigorously, according
to the 2,500 respondents to the survey in November. This contrasts
significantly with Gartner Group's contention that outsourcing will
see strong growth this year. British users are consistently telling
us the opposite, although in practice it may not be that easy to
disengage from outsourcing contracts, and the size of the
outsourcing market is dependent on large contracts.
The decision by Zurich Financial Services, for example, not to
outsource at the end of 2001, will probably be more typical than
the mammoth outsourcing planned by Consignia.
According to the users surveyed, growth areas for services include
education and training (22% last year - but forecast to go down to
9% this year) and online information services (22% growth last year
- with just a 12% growth forecast this year).
Staffing
Pressure from the slowing economy and close
attention to costs is resulting in caution in developing new
systems for new areas. Contracting spend fell by more than 8% last
year. Permanent IT staff in user companies had a good year -
staffing budgets were 9.3% up overall on 2000. However, there was a
sharp fall in the fourth quarter, which suggests business is
beginning to cut back on permanent staff.
Other trends
By November 2001, long-term budget
expectations for spend in certain areas had shifted significantly
from May. Users revised their expectations for spend on e-commerce
downwards to 2003 by 11%, and on IT security by 3%, while they
raised their intentions to spend more on customer relationship
management (10% more than expected by 2003).
Although IT budget holders are now more intent on creating value
for the business, the report reveals fundamental mismatches between
what the board expects from IT and what IT delivers.
Key drivers for corporate user IT spend decisions
- "Market conditions driving down costs. IT expected not only to
drive costs down but also bear their part of cost cutting" (Energy
and water supply)
- "Board room still concerned about value of IT expenditure"
(Energy and water supply)
- "Staff and user service still the most important factors. IT
security becoming ever more important" (Metals, minerals, chemicals
manufacture)
- "In manufacturing, it is the state of business and whether
sufficient profits are made to make investment possible" (Metals,
minerals, chemicals manufacture)
- "Lack of perceived value by board" (Metal goods, engineering,
vehicles)
- "IT expenditure is only feasible if profit targets are met"
(Metal goods, engineering, vehicles)
- "Customer demand for lower cost, higher quality and faster
turnaround" (Other manufacturing)
- "Reliability, value for money, licensing" (Other
manufacturing)
- "Construction industry lags behind, only about 40% of companies
have e-mail. So e-commerce will be some time coming"
(Construction)
- "Standardisation of back-office and desktop"
(Construction)
- "Need better and more reliable storage mechanisms" (Retailing,
wholesaling, hotels, catering)
- "Cost exposure, operating system turnover, processing speed
escalation, compatibility" (Retailing, wholesaling, hotels,
catering)
- "Political uncertainty in passenger rail industry holding back
investment" (Transport and communication)
- "Driven by customer demands - no demand for CRM - we are not in
the ERP marketplace" (Transport and communication)
- "Constrained by higher level group standards and requirements"
(Banking and finance)
- "Cost cutting - security improvements" (Banking and
finance)
- "Moving to thin client environment in next six months"
(Insurance)
- "Significant staff cutbacks this year due to finance industry
recession" (Insurance)
- "Trying to make a paperless office" (Business services)
- "Key drivers over the next year will be workflow/process
control, on-line information services and security" (Business
services)
- "Weak euro means very poor margins, hence cost pressure"
(Business services)
- "Unless dramatic software evolves, no major changes or
purchases within three years" (Computer services)
- "Increased reliance on remote working and Net-based information
services = greater security" (Computer services)
- "E-government" (Local government)
- "Standardisation of operating systems, applications and merging
of applications to run under single databases" (Local
government)
- "National licence for software will obviate most software cost
in the next two years" (Central government)
- "NHS expectations to reduce all bills annually by 3% yet still
maintain and improve services" (Central government)
- "Cash limited NHS IT resources" (Health service)
- "Implementation of government NHS plan and e-government"
(Health service)
- "Without Microsoft dependence we could reduce costs by
approximately 50% overnight" (Education)
- "Massive cuts in funding - running on a shoestring"
(Education)
- "IT expenditure is on an 'as needs' basis" (Other
services)
- "EDI developments increasing. Use of Internet for access to
customers" (Other services)