IT spending growth to double

As spending on IT continues to recover, 2004 is set to be the best year since 2000, according to the latest Computer Weekly IT...

As spending on IT continues to recover, 2004 is set to be the best year since 2000, according to the latest Computer Weekly IT Expenditure Report. Ian Mitchell reports that the public sector is leading the way

There has been a remarkable turnaround in sentiment within the IT industry over the past six months as attention has turned from making the most of systems already in place to implementing new projects to improve business processes.

As a result, 2004 is set to be the best year for growth in IT spending since 2000, according to the latest Computer Weekly IT Expenditure Report, produced by Kew Associates. The expected 8.6% increase in IT spending in 2004 is nearly double the 4.4% recorded in 2003 and will bring a welcome boost to the industry. However, it is not expected to herald a return to the late 1990s when double-digit growth was regarded as normal, as growth is predicted to return to about 5% in 2005-2007.

The spending figures reveal that UK organisations spent a record average of £2,576 per employee on IT in 2003. Expenditure increased most quickly in the public sector, a trend that is set to accelerate in 2004. Spending on IT hardware fell for the second year in a row and is likely to remain flat for 2004/2005.

A feature of the expected increase in IT spending in 2004 is the forecast 17% increase in training and education. "The bulk of this additional expenditure is likely to be allocated to training end-users, particularly in growth areas such as customer relationship management, enterprise resource planning systems and the NHS," says Kris Wicka, managing director of Kew Associates.

While the survey is backed by anecdotal evidence from a number of sources, it contradicts several surveys that show lower growth in 2003 and a slower recovery in 2004. The disparity can be explained by the fact that other surveys typically concentrate on spending by larger users and revenues from major suppliers, while the Computer Weekly IT Expenditure Report, the UK's most comprehensive study of IT business spending, captures data from all sectors and size of organisations. The report finds that, aside from the NHS effect, it is smaller organisations that are leading the recovery.

Increase in IT spending by the public sector   

The public sector recorded the fastest growth in IT spend in 2003 (5.8%), which was driven by increases across the board.  

In 2004 the effect of additional spending on the National Programme for IT in the NHS and the push to meet deadlines to make local services available electronically will see growth in public sector IT spending run at more than 16%. This is double the rate in the services sector and, the report predicts that in 2005, IT spending in the public sector will exceed the production sector for the first time. "The government's agenda is driving growth," says Socitm spokesman John Serle.  

The focus of the additional IT spending is customer-facing projects such as public access kiosks, e-procurement, supply chain systems and a steady uptake of enterprise resource planning systems. "In local government you can achieve efficiencies if you are prepared to make the decisions about changing processes," says Serle. However, he sounds a note of caution about whether the money will achieve its aims. "Perhaps in a year or two we will recognise that some of the investments were not so wise," he says.  Just as spending patterns were disrupted in 1999 by efforts to achieve millennium compliance, so 2004 will be distorted by spending on the £2.3bn NPfIT. 

Spending in the NHS is set to grow 61% in 2004 as the first wave of spending under the NPfIT gets underway. Other spending growth in the health service would be running at 12%. The effects of the NPfIT also distort expected expenditure on outsourcing, as the local service provider contracts awarded at the end of 2003 get under way.

IT spending and the economy   

Research by Kew Associates over the past decade has established a relationship between growth in IT spending and the economy.   This shows that, aside from the "Y2k effect", growth in IT expenditure is a fairly constant multiplier. Additional research has also established a link between growth in IT expenditure and employment growth.  

 "The strength of the relationship between employment and IT investment destroys the myth that implementing technology leads to job losses in the economy," says Kris Wicka, managing director of Kew Associates.

The sectors set to benefit   

Sectors set to see a significant  increase in expenditure in 2004 are led by retail/leisure (up by 9.2%), which was driven by supply chain initiatives, radio frequency identification and chip and Pin. 

Education is the next greatest beneficiary (up by 8.1%) as the government continues to invest in IT for schools; followed by construction (7.9%) and central government (7.7%).  

The increase in spending in government adds further importance to Computer Weekly's campaign to improve the efficiency of government IT, and ensure that spending achieves the objectives. The only sectors expected to record lower expenditure in 2004 are insurance and energy/water.

SMEs on the rise   

The greatest rise in IT spending in 2003 was among companies with 10-99 employees and the trend of smaller companies increasing their IT spend more quickly than large organisations is set to continue in 2004.  

In 1999, spending by the largest organisations accounted for 45% of the entire UK market. In 2005, that figure is set to fall to 42% as small and medium-sized enterprises increase their use of technology. 

Matthew Knowles, policy adviser at the British Chamber of Commerce, attributes the increasing uptake of IT among SMEs to a combination of the take-up of broadband and acceptance by organisations of the benefits technology spend can bring to business. 

"Your report backs up our own findings," he says. "Broadband is still rolling out and enabling mobile and home working and companies are being persuaded that new software products can improve business efficiency and achieve savings."

Where the budget will go in 2004   

One of the largest increases in IT spend expected in 2004 is on education and training, which is expected to rise by 17%, driven mainly by training for end-users as new systems are rolled out. Colin Steed, chief executive of professional body the Institute of IT Training, believes the need to update skills such as web development and networking may be another factor behind the rise.  

Although in 2003 spending on IT staff increased by only 4%, in 2004 the Computer Weekly IT Expenditure Report estimates that staff costs will increase by 8%. The rise is likely to be driven largely by requirements for additional staff to work on new projects rather than large salary increases across the board.  

Paul Smith, director at recruitment consultant Harvey Nash, says there has been a significant improvement in the market for permanent and contract recruitment in the past few months. 

"There had been a lack of major new development cycles. Now we are seeing more new projects from firms to enhance their systems, both in terms of applications and infrastructure." 

Smith points to the increase in demand for developers and project managers to back this view. "It is pretty well across the board, but telecoms and media are doing particularly well," he adds. 

The downturn in the IT sector since 2001 created a pool of available talent that has meant that businesses have not offered higher salaries to attract the right staff. "We are not seeing increases in contractor rates, but people are beginning to protect permanent staff through pay rises and incentive schemes," says Smith. 

In the public sector the situation is similar. "Our biggest cost remains labour - we tend to overpay at the bottom and underpay at the top," says Socitm spokesman John Serle. "However, at the moment we do not see any major pressures on salary."   

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 spring 2004 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 at Computer Weekly.  georgina.tucker@rbi.co.uk  01895-632163

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