The latest figures from the Computer Weekly UK IT Expenditure
Report show that, despite the recent problems faced by the
industry, spending on IT is buoyant and predicted to be on the
rise. Ross Bentley reports.
It hasn't been the easiest 18 months for professionals working in
the IT industry. Suppliers have seen their share prices plummet
from the the highs of the dotcom period and IT departments have
seen their budgets slashed. Redundancies and uncertainty about the
future permeate the entire sector.
So it might come as a surprise to find out that spending on IT by
UK organisations is still growing. In the second quarter of this
year, spending on IT hardware, software, services and staff was up
4.6% on the same period last year. In all, UK companies are
expected to spend over £65bn on IT by the end of 2003 - an average
of £2,546 for every UK employee.
These figures come from the latest Computer Weekly UK IT
Expenditure Report. The report which is produced by Kew Associates,
is the UK's most comprehensive study of business IT spending, based
on information from more than 60,000 UK IT budget holders.
According to the report, there has not been a single quarter in the
past seven years when IT spending has fallen. But what has happened
it that the rate at which IT spending is increasing has slowed
dramatically.
In the third quarter of 1999, at the peak of the Y2K spending boom,
spending rose by 17.5%. The latest figures show that while things
are still on the up, the current increase is a quarter of the
growth rate of that period. However, the report is more optimistic
about 2004, for which it forecasts overall IT spending to increase
by 6.3% to £69.3bn.
If these figures leave you wondering why your budget is out of step
with the rest of the UK, it is probably because the figures quoted
above hide the variation between industry sectors and different
company size.
For example, in the past quarter, IT spending in the public sector
rose much faster than IT budgets in the private sector. Within the
public sector, spending rose by 8%, while IT spending in the
manufacturing sector increased by only 2.6%. Annual spending per
head ranges from just over £800 in the construction industry to
£20,000 for employees in the computer services industry. The report
also shows that IT spending in small companies is growing at almost
twice the rate of spending by larger enterprises.
Increase in IT spending by the public
sector
IT spending is increasing the fastest in the public sector. This
dramatic rise is being driven by such high profile initiatives as
the e-government programme and the computerisation of the law
courts. There is also no sign of this growth slowing. The biggest
prize of the planned £2.3bn IT investment for the NHS is still to
come.
But IT chiefs in the public sector will have to get used to
sporadic surges in their IT budgets. Public sector IT expenditure
grew by 8% in the second quarter of 2003 which is up from 6% in the
previous quarter. This is a repeat of the figures for the prior two
quarters. "Such a yo-yo pattern is the hallmark of public sector
outlay since 1999," says Kris Wicka at Kew Associates.
"Difficulties created by tax revenue shortfalls and extra
government borrowing means funding will be tight. At the same time,
the political drive to improve services will ensure money is
available. Thus the ebb and flow in IT investment in the public
sector will continue."
Total IT spending across all parts of the public sector is
expected to rise by 7.8% this year, compared to an average of about
5.4% across the private sector. In the public sector, IT spending
in education is set to jump 6.9%, while central government
departments can expect to see a 5.75 % increase in IT
spending.
In the private sector, construction remains the industry with
the lowest IT spending per head, in the region of £800 for 2003,
while the computer services industry looks set to increase its
spending fastest with a 8.4% rise to £20,055 for each employee.
Changing spending patterns in 2003
Although IT spending has continued to rise, budget holders have
been altering the type of products and services they buy and some
areas of IT spending have declined.
In 2002 IT budget holders planned to increase their spending on
hardware by 9% but the report shows that spending has decreased by
4% in the past 12 months. One reason for this may be that many
organisations have reviewed their hardware policies and have opted
to stretch their upgrade cycles. Within the hardware total,
spending on desktop PCs was hardest hit, falling by 10% over the
past year.
Spending on software has risen by 5% in total over the past
year. Organisations increased their spending on applications and
system software by 5% and spending on development tools has leapt
by 11%.
Computer services was the fastest growing area of spending but
also the most uneven. Overall services spending rose by 10% but
growth rates ranged from 25% for online information services and
20% for education and training. Spending declined by 4% on
consultancy and the amount spent on recruiting and retaining staff
dropped by 8%.
Outsourcing has remained buoyant with 14% more spent in 2003
than was planned in 2002. Budget holders tended to overestimate the
amount they have spent on hardware and software while
underestimating the amount spent on services.
Does IT spending influence the economy?
Over the past decade, Computer Weekly and Kew Associates have
studied the spending habits of UK private and public sector
organisations. What emerges is an incredibly strong relationship
between the growth in IT budgets and growth in the economy.
There are two notable disparities: one is Y2K and the other
occurred in the past year when the Office of National Statistics
admitted difficulties in accurately measuring GDP.
This close coupling between IT spending and the economy beggars
the old chicken and egg question of the IT world: do organisations
spend more on IT when they have more money, or is overall economic
growth impossible without spending on IT? "It is a combination of
the two," says Justin Urquhart Stewart, a director at investment
management company Seven. "Companies will only spend on IT when
they are confident of a return on investment."
At the moment, recovery in the economy is weak so there is some
uncertainty, but those organisations that are spending more on IT
will encourage others to do so.
"About three months ago, we saw signs that the main IT suppliers
were anticipating an increase in IT spending," says Urquart. "All
the indicators point towards a a tentative increase in confidence
in the market."
The rate of IT spending by smaller
companies
The growth in spending on IT products and services by small and
medium-sized companies is almost double that of large
enterprises.
The report shows that while IT spending in the second quarter of
2003 for companies with over 500 employees grew by 3.5% compared
with the same period last year, spending by businesses with less
than 500 people increased by 6.8%.
Kris Wicka, managing director at Kew Associates, says the
statistics reflect a long-term trend. "IT is newer to the SME
sector and they are not second or third generation users. Go back
20 years and the big guys all had mainframes and the little guys
had nothing."
He says one reason why smaller companies are investing in IT is
to improve the supply chain and communication technologies that
link them to the larger companies they supply.
Federation of Small Businesses spokesman David Bishop points to
the continuation of tax breaks for SMEs that are investing in IT
and the increased business confidence since the end of the war in
Iraq as short-term reasons for the increased spending.
Philip Dawson, programme director at analyst firm Meta Group,
says the commoditisation of computer hardware made entrance costs
more attractive to smaller companies. However, he warned that SMEs
had to understand the ongoing cost of IT systems.
"While up-front costs may seem affordable, SMEs must still
contend with the costs of people, software, managing upgrades and
service agreements. These are the same things large enterprises
have to deal with but scaled down," he says.
The report also shows that companies of any size plan to spend
10% more on IT services this year compared with last year.
How the report was produced
Information on total IT spending is collected annually from more
than 60,000 UK IT budget holders on Computer Weekly's circulation
list. This is supplemented by more detailed IT spending information
from more than 5,500 budget holders surveyed each year.
Additional information is sourced from the Office of National
Statistics and the Treasury. The Cambridge Econometrics model of
the UK economy is used to forecast growth variations between
industry sectors.
How to buy the report
The autumn 2003 edition of the Computer Weekly UK IT Expenditure
Report produced by Kew Associates is available this month for
£2,500. For more information contact Georgina Tucker.
E-mail:
georgina.tucker@rbi.co.uk
Tel: 01895-632163