The reduction in demand for IT products and services as businesses cut spending is constricting supplier innovation and reducing choice for IT project leaders.
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Research by BT Global Services indicates that 80% of UK managers are preparing to sweat their IT assets. While 75% acknowledge IT has helped to fight the recession, only 10% plan to invest in new technologies to achieve business growth in the next year.
This reduced spending is limiting the ability of IT companies, particularly smaller ones, to meet end-user demands for new technology to cut costs and improve efficiency. This has a knock-on effect for businesses because they are heavily reliant on off-the-shelf products and development services from suppliers.
It does not look like things will improve quickly as supplier funds look set to remain scarce. Worldwide IT spending growth in 2009 was the lowest ever recorded by Gartner, dropping 5.2% compared with 2008. According to Gartner, total worldwide IT spending was $3.17tn in 2007, rising to $3.36tn in 2008, before dropping to $3.2tn in 2009. Next year is expected to see a modest recovery, with total spending increasing 3.3% to $3.3tn.
Lack of choice
Credit also looks set to remain in short supply, says Niki Dixon, partner at business advisory firm Grant Thornton. "The lending environment is still constrained and no one expects it to get much better soon."
This will mean a lack of choice, says Allan Pollard, previous president of the British Computer Society (BCS). He says there is a danger that the shortage of funds for innovation can lead to large monopolies in IT. "In tough times the bigger suppliers are able to invest, but the smaller ones are not."
He says this can negatively impact businesses when negotiating. "If you want an innovative deal, you are more likely to get it from smaller suppliers. The larger suppliers can offer investment, but then you are tied into a monopoly supplier."
But small suppliers are finding ways around the lack of funds by forming strategic partnerships with other suppliers, says Dixon at Grant Thornton.
At the highest levels, cash-rich companies such as Oracle are acquiring smaller companies that provide good add-ons to the core technology. This trend is now filtering down to smaller IT companies, which are looking for strategic partnerships to fill the gaps to enable new products and services, says Dixon.
If small suppliers are unable to innovate, IT directors will have little choice when buying the latest technology.
"There is increasing pressure on IT suppliers to provide web and cloud-based services, for example," says Dixon. Gearing up to respond to this kind of customer demand is a big challenge for smaller companies and few can do it alone, she adds.
Yann L'Huillier, chief technology officer at trading platform Turquoise, says some IT does not require a lot of innovation once installed, but if it offers a competitive advantage it must be continually improved by suppliers.
"If it offers competitive advantage, such as our Progress Apama complex event processing software, we need to be sure the supplier will innovate," he says.
"To ensure we get innovation we chose a technology in a field where there are two or three suppliers that are all very good at what they do. It keeps them on edge and this is the way we ensure the products will remain the best."
When the economy grinds to a halt and supplier revenues shrink, research and development funds dry up. Suppliers are finding new ways to innovate when funds are low, such as through partnerships. But if businesses are reliant on suppliers for their IT, they must choose them carefully to ensure continued innovation.