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.