Over the last five years, annual growth rates relating to
Although growth rates peaked at 12.7% in 1999 during the height of the dotcom boom, expenditure over the next four years is not expected to rise to an average of more than about 5.6%. This means that, while the overall
Kris Wicka, managing director of Kew Associates, which analysed Computer Weekly’s database of more than 60,000 IT budget holders, explains: “While we saw good growth in the late 1990s into 2000, it’s been very mediocre since, which reflects the maturing of the industry. We don’t anticipate this changing much over the next few years as growth is closely coupled with the performance of the economy.”
To a certain extent, the turn of the century acted as a watershed, Wicka believes, as organisations felt compelled to pump disproportionate amounts of money into fixing the millennium bug. Since then, however, the relationship between IT and the business has changed.
“In many cases, business has taken control of the direction of IT in terms of the way that it’s prepared to spend money and things are now much more geared to fulfilling business requirements. The business is now saying that IT has to live within its means,” says Wicka.
As for which sectors are seeing the highest increases in investment, business services such as accountants, lawyers, estate agents and advertising are currently leading the way. While the average growth rate across all sectors was 4.7% between 2004 and 2005, rising to 5.2% in the first quarter of 2006, this vertical market saw spend increase by 5.9% to £10.4bn between 2004 and 2005 and by 8.9% during the first quarter of 2006.
“The organisations here are largely small businesses and they’re seeing happy growth. This reflects the fact that the
The health service, meanwhile, saw growth rates of 5.9% between 2004 and 2005, even excluding the National Programme for IT in the NHS, bringing its total budget to £2.1bn. But again this figure leapt to 8.2% during the first three months of this year.
“The NHS National Programme for IT hasn’t delivered so health authorities are having to spend that bit more trying to support their systems. And the banking and financial City folk are getting paid nicely again, which is being reflected in the buoyancy in their first quarter IT spend,” Wicka explains.
In this sector, expenditure rose by 4.5% to £9.5bn between 2004 and 2005, jumping to about 6.5% during the first three months of 2006.
But it is small- to medium-sized enterprises (SMEs) that are fuelling growth in the main. The average budget increase across all sizes of organisation was 4.7% between 2004 and 2005 and 4.8% between 2005 and 2006, with rises of 5.4% expected in the year ahead.
Companies employing between one and 49 staff, however, saw expenditure rise by almost twice the normal rate (8.9%) between 2004 and 2005, valuing the sector at £9.7bn.
There was a similar pattern between 2005 and 2006 when investment increased by 8% to £10.5bn, but such rates are forecast to slow over the coming year with growth rates coming in at more like 8.3%, bringing total sales here to £11.4bn. The vast majority of the 1.4 million companies of this size spend up to £249,000 per year on IT, although some 4,447 do spend between £250,000 and £999,000.
But IT expenditure growth among slightly larger companies with between 50 and 99 staff is likewise impressive. Between 2004 and 2005, spend here rose 7.1% to £2.3bn.
The following year saw investment increase by 9.2% to £2.5bn, while growth during 2006 is forecast to be around 6.5%, meaning that the sector will be worth £2.7bn by 2007. Of the 23,420 organisations in this size band, most spend up to £249,000 on IT per annum, although 908 spend between £250,000 and £999,000 and 103 spend between £1m and £5m.
But the reason why the smallest firms demonstrate proportionately much higher IT expenditure levels, says Wicka, is “the disproportionate effect of computer services companies in the one to 49 staff category. They spend a lot more on IT than other organisations of the same size, which has an impact on the figures.”
For example, each computer services organisation spends on average £20,839 per PC – the most accurate benchmarking measure for IT spend – compared with education, which spends the least at only £1,098 per PC. Banking and insurance spends the second highest per PC at £12,691, while second from bottom in the rankings is non-business services at £3,304. The average across all sectors is £5,704 per PC.
In contrast with the high growth rates in investment seen among the smallest companies, meanwhile, the largest enterprises with more than 5,000 personnel tend to demonstrate relatively low increases.
Here budgets increased by only 3.2% to £35.8bn between 2004 and 2005 and by 3.6% to £37.1bn between 2005 and 2006, although this figure is expected to rise to 4.5% over the year ahead to £38.8bn. Of the 585 organisations in this sector, 423 spend more than £5 million per annum on IT, while the rest spend between £1m and £5m.
“It’s not quite linear, but as a general rule, the smaller the organisation, the higher the growth in IT spend. This is because there’s still a lot of growth to be made there and so as they increase in size, they need to spend more on IT. It’s obviously easier to double your size as an SME than it is as a large organisation,” Wicka explains.
At to what this money goes on, by far the biggest proportion of any IT budget is taken up by staff costs. In the case of SMEs, this equates to 23.1% of the total, and for enterprises, 28.9%.
As a result, in 2005 organisations of all sizes and across all sectors spent £20.1bn on IT personnel out of a total available sum of £73.4bn, a figure that is expected to rise by 3.2% over the year ahead to £20.7bn.
Because total expenditure across all purchasing categories is forecast to increase 4.8% to £77bn, however, this means that investment growth in this category is below the market rate.
Wicka explains: “Organisations do need their own core staff to look after legacy systems and undertake some new development, but it’s now about getting solutions out as quickly as possible, as companies have to react to market demands, particularly because of the uncertainty that the web throws up. As a result, businesses have found that they need be more flexible.”
This finding is reflected in the high growth rates being experienced by the outsourcing sector. While organisations invested £7.7bn in this area during 2005, sales here are forecast to grow by 14.9%, valuing the market at £8.8bn during 2006. Nonetheless, outsourcing is still predominantly a large company phenomenon, with enterprises dedicating 13.8% of their total budget to such services compared with 2% for SMEs.
Unsurprisingly, meanwhile, the internet is having a marked effect on purchasing patterns in various areas. Investment in online information services and internet and web services, for example, is perceived as likely to rise significantly over the coming year, with the former category increasing in size by 19.6% to £1.2bn and the latter growing 24.3% to £2.9bn.
But expenditure on hardware is on the decline because, says Wicka, “People are getting more for their money now and their existing systems can still cope with quite a lot”.
This means that spend on PC servers is likely to drop 8.6% during 2006 to £3bn, investment in desktops by £6.2bn to £4.4bn and expenditure on portables by 3.9% to £2.9bn. Overall, SMEs still spend significantly more of their total budget on hardware than corporates at 25.2% and 17% respectively.
Another area of dwindling sales is custom software, which includes applications, development tools and operating systems. Investment here is likely to fall 2.6% to £2.3bn over the year ahead and, according to Wicka, this trend is set to continue.
“People are no longer going for the bespoke aspect in the same way, which you could attribute to the influence of the internet. The focus is now on trying not to reinvent the wheel and some organisations now consider customisation as simply adding more delay in getting products to market,” he concludes.