The Y2K boom for the supply industry is well and truly over, as users rein in their IT spending over the next three years. While overall user spend on IT products, services and staff is rising, from £50bn last year to £67bn in 2002, the underlying growth rate is now in decline. The only major bright spot, at least for suppliers, is double-digit growth in public sector IT spend, a direct result of Gordon Brown's spending review.
These are among the findings of the latest half yearly analysis of user IT spend by Computer Weekly and KEW Associates, based on information from 50,000 UK budget-holding IT users, supplemented with an in-depth survey of spend patterns over the summer, responded to by some 3,000 users.
IT spend in the UK is now firmly back in synch, correlating closely with the overall UK Gross Domestic Product growth. The quarterly analysis of IT spend growth set against gross domestic product clearly plots this development by the first two quarters this year.
The outlook is tight in all non-public sector areas over the next two years. IT spend in the manufacturing industries and the services sectors shows a continual growth decline, with both sector groups firmly in single-figure growth in 2002. By contrast, the traditionally hard pushed public sector, which will spend £9.3bn this year, will enjoy a spend growth rise to 13.5% by 2002. This is a direct result of the Government's spending review, which announced heavy investments to shore up the creaking public sector IT infrastructure.
Of the five major manufacturing vertical sectors analysed in the report, only one, the metals, minerals and chemicals sector, shows increased IT spend next year.
Although two of the seven services sectors, insurance and computer services, show increased growth next year users in both expect spend growth for the following year, 2002, to drop back sharply to below last year's figures.
Despite being an area of rapid growth, e-commerce does not offer a panacea to the general IT supply industry - at least for the next couple of years. While IT-related spend on e-commerce, as defined by senior IT user budget-holders, is enjoying strong growth, it will this year only account for about 5.3% of overall IT spend (£2.9bn out of the total £55bn). E-commerce spend growth will drop over the next two years as the market matures but it will still be strong, averaging 36% growth, and e-commerce will account for 9.4% of the total user IT spend by 2002 (£6.3bn spent on e-commerce infrastructure, out of the total £67bn).
Other strong growth areas, IT security, and private and public Internet, have a similar growth pattern to that of e-commerce. Central government is one of the largest spenders on IT security, perhaps not surprisingly, given the Ministry of Defence. But in the future, the construction industry, which has been making concerted efforts to catch up, will spend most proportionately on IT security.
The euro is looming as a growing source of IT spend. With Y2K out of the way, users expect a 99% growth in euro IT spend next year to £954m overall. That will increase to £1.2bn by 2002.
Computer software and services suppliers are severely hit as users tighten their belts. The Computer Weekly/KEW figures, drawn from the user community, concur broadly with those collected by software and services analyst Richard Holway from the supplier community.
Apart from a flurry of growth in spend on software application products last year, the general picture is one of gradual decline, particularly in custom software and system software spend. Applications and development software growth will remain in double figures, but with no clear industry spark, such as the supply industry enjoyed with Y2K, the days of really large software spend growth are over for the time being.
Users expect a sharper drop in services and consultancy growth. The contract recruitment market is in actual decline. They have served their purpose now that industry has survived Y2K and other reasons to bring them back, such as the euro, are more open-ended in time scale.
IT consultancy, too has taken a knock, from 21% growth last year to 6% for 1999/2000. Companies like Hewlett-Packard, Cap Gemini and Cisco all buying into consultancies are clearly aiming at management of change - users certainly do not see the need for IT consultancy.
Staff costs, the major part of any IT director's spend, are moving into a period of slower growth as the economy calms down. The fear of not retaining staff is not as great as before Y2K.
Although there are shortages in some areas - especially e-commerce-related - any extra spend is eclipsed by the proportionately much larger staffing spend generated by traditional IT.
The slowing of staffing costs is to some extent counterbalanced by the growth in facilities management, which will sustain about a 15% growth to 2002.
There is good news for IT hardware suppliers. While they are currently going through a tough time, orders should pick up next year, according to their users.
Portable PCs are currently bucking the trend and next year sales of desktop PCs and PC servers, which have had a poor year, look set to grow sharply.
Factors driving user IT spend - users' comments
What's in the survey?
The Computer Weekly/KEW Associates User IT Expenditure Survey, for over seven years the most comprehensive analysis of IT spend for the UK, has gone six-monthly for the first time. The report, based on information from Computer Weekly's database of 60,000 UK IT budget-holders, a detailed survey responded to by 3,000 senior users, and government statistical information, is unique in its scope. It analyses and forecasts IT spend according to 21 spend categories, in 16 industry sectors and for four sizes of organisation.
To order copies of the report, UK IT Expenditure, Trends and Forecast 1998-2002, Autumn 2000 edition, price £2,500 + VAT, contact Julia Hoare at Computer Weekly Publications. Tel: 020-8652 3099. Fax: 020-8652 8927.