The end is in sight for the IT supply industry's current doldrums. Annual growth in corporate user IT spend will pick up from 8.2% this year to 8.6% growth next year. In 2003, growth in user spend is expected to be 11.7%, a return to the level of the late-1990s.
There is little gloom among corporate IT users. They have £60.2bn to spend on products, services and staff this year, and the 8.2% increase on last year is more than four times the rate of inflation. That equates to an average of £2,476 spent on IT this year for each company employee - from office cleaner to managing director.
The results from the latest six-monthly Computer Weekly/Kew Associates IT Expenditure Survey indicate that the gloom surrounding the IT and telecoms supply industries is based on inflated expectations. The Y2K bubble produced the highest recent growth in user IT spend (12.8%) but also concentrated spend into a bulge. In addition, economic conditions indicate than suppliers will be squeezed until 2003.
Moreover, following the Y2K bonanza, users are also under tight pressure from their boards to produce value for money. There is simply no extra money to spend.
Quarterly comparisons of IT spend growth and gross domestic product (GDP) growth prove that IT spend follows GDP. With the exception of 1999, IT spend has been running at 3.7 times inflation. With the general economic outlook uncertain IT users are free to spend their budgets as they see fit as long as these are not increased.
So, for example, when Microsoft wanted money up front for subscription licences in May, corporate users could not find the cost from their budgets and forced the issue into next year.
According to recent surveys of IT directors, the highest priority for IT users is staff retention and recruitment. This is reflected in IT spend, where staffing spend will rise 11.6% this year, about five times inflation. So, although suppliers are shedding staff in droves, users are nurturing their best people.
The energy and water supply industries now spend more on IT per employee than any other
industry except computer services. Spend there is growing 11.2% to £13,255 per employee, overtaking the banking and finance sector, at £12,574, which, after computer services, traditionally spends the most on IT per head.
For growing budgets, the public sector is the place to be. Overall spend there will grow by 12.9% next year to £11.5bn and will continue growing at that rate until 2003. The public sector has much catching up to do and in central government the survey predicts that the average spend per employee will leap by 17% to £5,025.
Spend on PC hardware is in overall decline, -2.5% on last year, putting enormous pressure on hardware resellers and PC manufacturers. Moreover, growth in spend on packaged software, at 11.3%, is the lowest for years. However, that 11.3% is still growth that many industries would give their back teeth for.
The survey highlights why there seem to be mixed messages coming from the software industry. Users are keen to protect existing investments and are focusing on infrastructure, which accounts for the good outlooks for companies such as Logica, CMG and enterprise resource planning (ERP)-focused companies such as SAP and PeopleSoft.
Software companies that concentrate on specific vertical sectors are enjoying variable fortunes. IT spend in banking and insurance is down on next year, which is impacting companies which focus on the sector, such as Misys for banking or Sherwood for insurance.
IT services is showing a growth of 12.5% this year, although consulting is dropping to a 2% level of growth. That explains why Logica and CMG are denying a slowdown, whereas Cap Gemini is affected. Cap Gemini has a large presence in consulting along with Ernst & Young.
The outlook for IT services next year is grim with an expected overall drop to 5.2% growth. Worst affected will be outsourcing companies, now enjoying a 20.7% growth in user spend but set to crash to just 2.4% next year.
All areas of infrastructure have very high growth rates, the highest being e-commerce infrastructure which is growing at 59% this year to a total of £3.9bn (or £166 per employee overall). Fuelled by the modernising government initiative, the public sector is growing fastest in e-commerce at 129%, but from a very low base - just £127m last year to £292m this year. Growth will tail off fast in this and other application areas as these areas mature.
One surprise is the 31% increase in spend on application service providers (ASPs) and the expected 43% growth next year. These figures are based on the user definition of ASPs. There is confusion in the industry between suppliers and users over what exactly constitutes an ASP.
Another trend highlighted by the figures is the plummeting telecoms spend, especially in telecoms hardware which has gone from 18% growth into actual decline. Online services that have historically grown by 30% to 40% a year have slowed to below 20%.
Throughout industry, technology issues are intertwined with business issues, which accounts for the close correlation between IT spend and GDP. Therefore, if GDP continues to drop, overall IT spend will continue to fall, although the priorities within that spend are likely to remain tight.
Factors driving IT spend: user comments from various industry sectors
- Reducing costs by supporting existing applications by in-house staff and cutting back on new development (energy and water supply)
- Results from the cyclical internal/FM review could alter the picture over the next two years (energy and water supply)
- State-of-the-art technology not necessary for our particular business, ie IT is helpful, but not critical (metals, minerals, chemicals manufacturing)
- Maintenance of services is critical. Projects include new CRM systems and some better broadband access (metals, minerals, chemicals manufacturing)
- Business needs drive expenditure. Some critical areas supported in-house therefore expense is covered in staff costs (metals, minerals, chemicals manufacturing)
- Increasing sales/profits would allow greater expenditure on IT in future (metal goods, engineering, vehicles manufacturing)
- The only area that enables us to increase expenditure is increased business, at the moment this is pretty static (metal goods, engineering, vehicles manufacturing)
- Increased competition in our marketplace is introducing pressure to make drastic cost cuts (other manufacturing)
- Organisation's expansion or contraction (transport and communication)
- We have no overall plan with regard to replacing old equipment, rather a knee-jerk reaction instead (other manufacturing)
- Major review of our business IT will be held this year - following that we will return to a maintenance replacement mode (metal goods, engineering, vehicles manufacturing)
- A slow down in the irrigation industry due to the worst weather conditions for over 400 years has had a knock-on effect on IT expenditure due to sales reduction (construction)
- Construction industry is very conservative and its specialist applications, eg, Cistax, are expensive so we tend to lag behind other industries (construction)
- If the business performs poorly the IT expenditure is the first to lose its budget (retailing, wholesaling, hotels, catering)
- In the past two years, wholesale system changes have occurred; now we are stabilising and building for the future (retailing, wholesaling, hotels, catering)
- Consolidating system; planning will take place later this year for future projects (transport and communication)
- Potential replacement of 12-year-old bespoke mission-critical system with e-enabled Europe-wide solution is prime goal (banking and finance)
- Main drivers cover moving from local bespoke to central standard systems (banking and finance)
- Ability to show business the effect IT can have on business efficiency (banking and finance)
- Balance between suitability at present and "wait and see" developments (insurance)
- Possibility of outsourcing IT staff (insurance)
- Keeping vital staff. Keeping overall costs down (business services)
- To improve quality and productivity of overall service (business services)
- We base our development on "need" not "want" (business services)
- Strides up the technological ladder are unfortunately only taken when required/deemed necessary (business services)
- IT expenditure is to be limited to maintenance of existing systems - little spent on new/upgrade of software or equipment (computer services)
- Betting the future on ASP (computer services)
- IT expenditure is severely curtailed by competing council projects, tight funds and a reluctance to deploy IT solutions (local government)
- Reconsidering outsourced infrastructure management - may bring back in-house as it is a core competence (central government)
- E-government targets and modernisation of IT systems are draining IT expenditure (central government).