How does your budget stack up?

IT spending is still rising in the UK, though slower than in recent years. But the pattern of spending is changing. Does your...

IT spending is still rising in the UK, though slower than in recent years. But the pattern of spending is changing. Does your budget reflect the national trends? Karl Schneider reports.

If you've recently met any senior executives from an IT supplier company, they probably were not smiling much. In the past two years most IT firms have seen their share prices plummet. Many have embarked on severe cost-cutting programmes aimed at stemming profit slumps, resulting in thousands of redundancies across the sector.

So you might be surprised to learn that last year the total amount spent on IT hardware, software, services and staff by UK organisations reached an all-time high of £63bn. That is more than £1,000 for every man, woman and child in the country.

These figures come from the latest release of the Computer Weekly/ Kew Associates UK IT Expenditure Report, the UK's most comprehensive study of business IT spending, current and future, based on information from more than 60,000 UK IT budget holders.

According to the report, due to be published this month, there has not been a single quarter in the past seven years when IT spending in the UK has actually fallen. So much for the IT recession.

However, what has happened over the past two years is that the rate at which IT spending is increasing has slowed dramatically. In 1999, at the peak of the Y2K spending boom, the UK's total IT budget rose by nearly 13% in one year. Last year the increase was 4.6%, only a third of the 1999 growth rate.

The report is more optimistic about 2003. It forecasts that overall IT spending will increase by 7.5% to reach £67.7bn. On average, UK organisations will be spending £2,623 per employee on IT this year.

If these figures leave you scratching your head and wondering why your IT budget is so out of step with the rest of the UK, it is probably because the total and average figures quoted so far hide a lot of variation between industry sectors and different sizes of organisation.

For example, this year IT spending in the public sector is expected to rise much faster than IT budgets in the private sector. Within the private sector, forecast IT budget growth this year ranges from 12% in the construction industry to just 2% in energy and water supply. And spending per head ranges from about £800 in construction to nearly £20,000 in computer services.

Also, smaller companies are expected to continue to increase their IT spending at a much faster rate than larger organisations.


Public sector has its day in the sun

Public sector IT chiefs have suddenly found themselves in demand, feted and courted by IT suppliers in a way that used to be reserved for traditional big-spending IT directors in blue-chip companies.

Traditionally the Cinderella-sector when it comes to IT budgets, the public sector is now where IT spending is increasing the fastest. The dramatic rise in public sector IT budgets is being driven by high-profile initiatives such as the e-government programme, the National Grid for Learning and the computerisation of the law courts. And there is no sign of this growth slowing. The biggest prize of all, the planned £2.3bn IT investment for the NHS, is still to come.

Total IT spending across all parts of the public sector is expected to rise by 9.3% this year, compared to about 7% for the private sector. Within the public sector, IT spending in education is set to leap by 12% this year, while local authorities and central government departments are expected to increase their spending by a more modest 8%.

In the private sector it is construction, the industry with the lowest IT spending per head in the region of £750 in 2002, that is expected to increase its IT spending fastest in 2003, with a 12% rise.



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.



So why are the suppliers in such pain?

If IT spending is still increasing faster than inflation and GDP, why are IT suppliers facing such a crisis?

According to Kris Wicka of Kew Associates there are four broad reasons:

<ul><li>  Spending growth may be high compared to other markets, but for IT a 4.6% growth rate is extremely low. Companies with cost bases and shareholders geared up to expect double-digit revenue growth each year have struggled to come to terms with the dramatic slowdown</li>

<li>  Not all areas of IT spending are rising. For example, spending on desktop PCs fell by 5% last year. Companies focusing in these worst hit parts of the market can justifiably talk about facing a recession</li>

<li>  Larger organisations, the traditional focus of the biggest IT suppliers, are increasing their IT spending the slowest</li>

<li>  Some of the growth in IT spending is not going into the pockets of traditional IT suppliers. For example, spending on IT education and training rose by 20% in 2002. But one of the notable beneficiaries of this growth has been the Open University. An increasing slice of IT budgets is going outside of the traditional pool of IT suppliers.</li></ul>



Buying the report

The Spring 2003 edition of the Computer Weekly/Kew Associates UK IT Expenditure Report, segmented into 16 vertical sectors, is available this month, price £2,500. For more information e-mail georgina.tucker@rbi.co.uk or call 01895-632163.



Can you predict your budget?

The roller coaster ride of IT spending growth over the past few years may appear anarchic. But in fact it turns out to be remarkably predictable - if you know what to look for.

Computer Weekly and Kew Associates have studied the IT spending habits of UK private and public sector organisations for the past decade. What emerges is an incredibly strong relationship between the growth of IT budgets and the overall growth of the economy.

With the exception of 1999, when IT spending was boosted by the impact of the Y2K immovable deadline, IT spend growth for every quarter from the first quarter of 1996 to the second quarter of 2002 has marched tightly in step with UK GDP growth. In fact, to a good degree of accuracy, in any given quarter apart from those in 1999 IT spend growth was 3.5 times GDP growth at constant prices. So if you want to predict the average increase in UK IT budgets in cash terms for any given quarter in future, just find the best forecast of GDP growth at constant prices for that quarter and multiply it by 3.5.

"Taking inflation into account, this relationship means that, on average, IT budget holders have seen the amount they spend increase about twice as fast as the amount spent by their colleagues in other departments," says Kew Associates managing director Kris Wicka.

Unfortunately, predicting the budget increase for an individual IT department is not so simple. The relationship between IT spending and GDP suggests that the total pot available to UK IT budget holders is largely determined by economic conditions. "The amount companies spend on IT depends on how much money they are making, rather than IT-specific factors," says Wicka. "What budget holders can control is the way that money is spent".

The relationship diverges in the second half of 2002. This could be due to an inaccurate estimate of GDP by the Office of National Statistics in the third quarter. The ONS figures are constantly revised, and the third-quarter figure is out of step with less bullish assessments from the CBI and British Chamber of Commerce.



Spending by organisation size

Smaller firms lead the way

Companies with fewer than 500 employees are increasing their spending on IT more than twice as quickly as those with more than 500 employees.

The Computer Weekly/Kew Associates UK IT Expenditure Report says that for organisations with more than 500 employees the annual growth in total IT spending by quarter - the increase in spending compared to the same quarter in the previous year - ranged between 2.5% and 3.6% in 2002. But for organisations with fewer than 500 staff, the growth rates ranged from 5.3% to 8.8%.

"This growth gap between large and small companies is particularly wide at present, but it has been a feature of UK IT spending patterns at least as far back as 1996," says Kew Associates managing director Kris Wicka.

The biggest organisations still account for a disproportionately large chunk of total UK IT spending. In 2002, organisations with more than 5,000 employees accounted for 43% of total IT spending. But the faster growth of spending by smaller firms means that the proportion of total spending accounted for by very large organisations is shrinking each year.



What you spend your IT budget on 

Users opt for services over DIY IT

Although overall IT spending has continued to rise, budget holders have been altering the mix of products and services that they buy and some areas of IT spending have actually declined.

Hardware spending has come under tight scrutiny. In 2002 spending on hardware overall fell by 1.4% in cash terms. Many organisations have reviewed hardware upgrade policies, and opted to stretch upgrade cycles.

Within the hardware total, spending on desktop PCs was hardest hit, falling 5% in 2002. The only category in which spending increased was for non-PC, non-Unix hardware, mainly comprised of mainframe-related hardware such as enterprise storage.

Spending on software rose by 4.5% in total in 2002. Organisations increased spending on applications, system software and development tools by 5% to 6%. Spending on custom software rose at a more modest 2%.

Computer services was the fastest-growing area of spending, but also the most uneven. Overall services spending rose by 10.2%, but growth rates ranged from 26% for online information services and 20% for education and training, to a decline in spending of 4% on consultancy and a drop of 8% in the amount spent on recruitment services and contract staff.

Outsourcing continued to rise rapidly, with 18% more spent on outsourcing in 2002 than in 2001.

The report shows that recently IT budget holders have tended to over-estimate the amount they will spend in future on hardware and software while underestimating spend on services. "Users have ambitions to spend on hardware and software," says Kris Wicka of Kew Associates, "but in reality tend to underestimate their dependence on external sources to deliver systems and skills."

This year the Computer Weekly/Kew Associates report forecasts a similar pattern of growth, but at higher levels than in 2002 (see bar chart right).

While hardware spending is expected to rise this year, it will still lag well behind the growth rates of spending on software and services. Software spending is expected to accelerate strongly, rising as fast as spending on services in 2003.

This was last published in February 2003

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