The first significant growth in user IT spend since the
turn of the millennium occurred in 2004 according to the Computer
Weekly IT Expenditure Report, produced by Kew Associates. But this
looks likely to prove a false dawn: the rate of growth slackened
off sharply in the last quarter and is projected to reach little
more than half the 2004 level by the end of 2005.
The situation today is exactly as we forecast it would be at the
beginning of 2005. In our analysis of the last report, we wrote
that "[2005] is set to be the most prosperous for the UK IT
industry since the end of the Y2K boom", and so it has turned out
to be.
This prediction did not require either rocket science or the
predicting skills of Nostradamus. There has been a close
correlation between the rate of growth in user IT spend and the
rate of national economic growth since the Expenditure Report
started 11 years ago. UK gross domestic product (GDP) growth peaked
at 3.5% in the middle of 2004 and has fallen since. This was
forecast by both government analysts and independent experts and
the consensus has proved correct.
Total annual spend on IT in 2004 came to £73 billion, up 8.6% on
the previous year. This was nearly twice the level of growth noted
in 2003. The total was distorted by the massive NHS national
programme for IT, but even without that the growth rate was 6%. At
the same time, GDP rose well in excess of 3% in the first half of
2004 for the first time in four years.
The major growth in IT expenditure came in the middle of 2004,
peaking during the third quarter. By the end of the year growth had
slowed to 5.4%. Growth in IT expenditure is projected to rise by
smaller amounts for the foreseeable future. Kew Associates is
forecasting a rise of 5.3% over the whole of this year, about the
same as that recorded in the last quarter of 2004. The company then
expects growth to fall to 3.9% in 2006, in line with the Treasury
forecast for a 0.5% fall in GDP in that year.
Many in the industry would prefer a sustained level of
relatively moderate growth to a sudden short-term surge followed by
a cut in spending. As Kris Wicka, managing director of Kew
Associates, says, "Like the economy, user IT expenditure has had a
record period of sustained growth. Over the coming few years it
looks like more of the same. You will notice when it stops, so make
the most of it."
Comments from those surveyed during the preparation of the
report underline the correlation between business growth and IT
expenditure. A business services company executive wrote, "The
increase in IT expenditure reflects company growth this year. Next
year there will be less dynamic growth." A less well-placed
retailing respondent wrote, "This year's expenditure has been on
necessities only. Next year I am hoping to be able to spend more on
the niceties."
Across the board, after two years of low growth following the
Y2K boom, 2004 proved a mini-boom year and is likely to be followed
by two years of unspectacular growth. The increase enjoyed this
year will not lead on to a return to the double-digit growth days
of the late 1990s - we are unlikely to get back there for many
years, if at all.
This is widely recognised. There is no sense of wellbeing among
the organisations surveyed, or even of cautious optimism. Some are
investing in new projects, but many organisations are still
suffering from managements whose mindset is mired in the depths of
recession.
One manufacturing company respondent wrote that the "directors'
vision is to provide the cheapest IT service possible". Another
reflected, "Cost reduction is uppermost in most things we do." A
retailer noted a "reluctance to spend at all", and a local
government official found that "as the costs fall there is
increasing pressure to get more for less".
The rate of expenditure growth fell most sharply in the last
quarter for large organisations, those with in excess of 500
employees. Expenditure on IT among these companies grew by 3.7% in
the last quarter, just half the amount of the preceding three
months. That slump reverses a trend of gradually increasing growth
which had lasted for 18 months.
The rate of growth among smaller organisations was 8.5% in the
fourth quarter, up from 8.1% in the third quarter, but still below
the 9.7% of the second quarter. This ebb and flow in the rate of IT
spend of small and medium-sized firms has been a consistent trend
for the past three years.
Breaking down the overall spend by sectors shows that all types
of organisation increased their IT expenditure in the last quarter
by more or less the same amount. In the public sector growth was
5%, in services 5.7% and in production industries 5.1%.
The figure for the public sector, which fell from 8.8% in the
third quarter, excludes the NHS national programme for IT: if it is
included, growth in this sector would have been about 20% in the
past three months. It was 15% over 2004 as a whole once the effect
of this massive project was included.
The NHS project has a one-off effect on the numbers as the
spending rises to a peak. For this reason, growth in this sector is
projected to be much lower over the next two years - 5.3% in 2005
and just 2.7% in 2006.
The services sector is the biggest, accounting for about
two-thirds of all IT expenditure. There is no change to the picture
if the total is broken down into smaller components: all the major
sub-groups within this sector also saw a slackening off of
growth.
Over 2004 as a whole, growth in the services sector was just
under 8%, taking the total spend to £50 billion. It is projected to
fall to under 6% this year and down to 4% in 2006.
In the production industries, the decline has brought an end an
18-month period during which growth has consistently risen. Growth
was lowest in this sector over 2004 at just under 5% and is
expected to shrink to about 3.5% both this year and next.
Production industries have been the most conservative. "IT is
geared to support and maintain rather than develop," was a typical
response from a manufacturing company respondent. Another believed
"use of IT has now reached saturation".
A construction industry respondent wrote, "The industry is slow
to use new technology and if it gets put on site, it gets stolen,"
adding ruefully, "In five years we may have a laptop on site
connected to the internet."
Within IT budgets across all industries, outsourcing continued
to prove very popular, with growth reaching 27%. This was closely
followed by education and training, which was up by 25%, and online
information services, which was up 21%.
Expenditure on actual IT equipment and software grew by much
smaller amounts, if at all - expenditure on desktop and laptop PCs
and data comms equipment declined.
Much expenditure on new hardware is considered unnecessary.
Replacing Microsoft NT4 systems was a job being carried out by many
organisations, but this was to get the systems up to date, rather
than because of any perceived business benefit.
For example, one manufacturing company executive wrote of his
grievance at "having to spend to keep up with software/hardware
being unnecessarily developed". Another felt "Windows upgrades
create more problems than they resolve".
A business services company respondent wrote that most new
hardware costs were "incurred because of obsolescence rather than
expansion", and an education sector response was, "We have to keep
spending extortionate amounts of money on ever-changing hardware
and software just to remain competitive."
One manufacturing company respondent was not merely groaning and
bearing it, saying his company "will try to move from Microsoft to
Linux for security reasons". But there are some still left who
orient their prayer mats towards Redmond. A retailing respondent
wrote that his firm's main system improvements were moving away
from Unix to Windows "for increased flexibility".
Kew Associates' broad-brush IT expenditure categories conceal
the real identity of many of the driving forces behind new IT
investment. Compliance with government and other legislation is
moving rapidly to the top of the agenda to judge from the anecdotal
evidence.
One manufacturing company summarised the responses of many with
the pithy comment, "Compliance issues drive specific investments."
The US Sarbanes-Oxley legislation was specifically mentioned as a
major driver by several respondents.
All the government respondents, national and local, emphasised
the need to comply with e-government initiatives.
New projects listed by respondents included all the usual
suspects: enterprise resource planning, customer relationship
management and supply chain management, IT and voice convergence,
mobile computing, web-based services and, perhaps more than any
other, security and disaster recovery.
Storage area networks and other storage issues also feature, but
less than one might expect, though doubtless many such developments
are covered by the catch-all phrase "upgrading infrastructure".
But those organisations which have detailed project-oriented
future investment plans were at least matched if not outnumbered by
those that do not. One business services company respondent wrote
that IT expenditure was driven by "necessity - if it breaks, fix it
- if it runs out, get more".
Staffing was causing no significant cost concerns at all and was
barely mentioned in the individual responses. The construction
company respondent who wrote saying the organisation's major focus
was on "staff training and retention" was a lone voice. For the
record, overall expenditure on staff rose 6% during 2004. The
average expenditure per IT staff member employed was £87,500.
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 spring 2005 edition of the Computer Weekly UK IT Expenditure
Report, produced by Kew Associates, is available this month for
£2,500. For more information, e-mail Georgina Tucker on
georgina.tucker@rbi.co.uk