Prepare to go IT shopping - spending surge due in 2003

Exclusive research for Computer Weekly has revealed that the IT market has stabilised, and a cautious increase in IT spend has...

Exclusive research for Computer Weekly has revealed that the IT market has stabilised, and a cautious increase in IT spend has begun. Daniel Thomas reports.

The past two years have been a struggle for IT departments in the UK, with many seeing budgets slashed, while the massive growth of recent years has reduced to a trickle of new money.

However, the first sign of a revival in IT spending emerged last week, when an exclusive Computer Weekly survey, prepared by Kew Associates revealed that IT spending growth has increased after four quarters of decline.

Annual growth was 5.4% in the second quarter of this year, according to the latest installment of the quarterly IT expenditure survey. This compares with a 4.7% increase in the preceding quarter.

The green shoots of recovery will be in full bloom by next year, it suggested, with IT spending growth expected to return to double figures.

The survey, based on information collected in June from up to 60,000 businesses, predicted that the downturn in IT spend will end in 2003, with a rise of 10% to
£70.4bn.

Vicky Hawksworth, senior research analyst at IDC, said the survey results were good news for IT departments. "It shows that we have seen the worst of the downturn and are taking the first steps on the long road to recovery," she said.

Hawksworth predicted that many IT managers would focus on integration software when purse strings are loosened. "We can expect to see companies spending more on software when the market picks up, particularly on integrating applications.

"Many companies have implemented a lot of applications in a bid to stay current, but they are often not very well linked up." Software and IT services will be the strongest growth areas in the market, she said.

This is reflected in the survey results, which predict that computer services spend will rise by 20.3% this year, with spending on system software tipped to increase by 9.6%.

Philip Virgo, strategic adviser for IT professional body the Institute for the Management of Information System, agreed that companies will channel more of their IT budget into services in the coming months.

"Much of the increased spend will go on services," he said. "This will be the catalyst for incremental upgrades in software and, in some cases, hardware - not the other way around."

The discrepancy in spending growth between companies with fewer than 500 employees and larger firms is as marked as ever, the survey results show.

During the second quarter of 2002, small and medium-sized enterprises' IT spend is expected to grow by 8.8%, compared to only 3.6% in larger companies.

Smaller companies would increase their IT spend even further, if only suitable products were available, according to Virgo.

"There is a lot of unsatisfied demand from small users for low-cost systems - they are not being offered what they actually need," he said. "They want a business solution rather than an IT system."

Public sector spending growth, fuelled by government cash for getting services online by 2005, shows no sign of abating, according to the survey. It is expected to rise by 12.3% in the second half of 2002, a trend that did not surprise Virgo.

"There is an awful lot of money going into the modernising government agenda and there is a genuine demand in this area," he said. "This is likely to continue for the next year to 18 months with a lot of money going into training."

IT training spend is expected to rise by a massive 25.6% in 2002 - a level matched only by spend on online information services, which is expected to rise by 24.1%, the survey revealed. This is in stark contrast to spending on recruitment and contractors, which is set to fall by 10.7% this year. Hawksworth said the disparity between IT training and recruitment is a direct result of the prevailing economic conditions.

"Companies are trying to nurture the staff they already have rather than bringing new people in," she said. "However, this trend will begin to change as the market picks up and companies feel more confident."

Virgo sounded a note of caution on the training figures, suggesting other reasons for the massive growth.

"It may be that IT departments are bringing training schemes, such as the European Computer Driving License, back under their control," he said. "In some cases there has been a sharp increase from a low base for properly training users, for example in the NHS."

Nevertheless, Virgo admitted, companies are spending heavily on training in certain areas. "There has been a massive growth in training on IT security, while more companies are training users for project management," he said.

Companies are also set to commit heavily to outsourcing this year, with spending expected to grow by 17%, according to survey findings.

This, again, is a consequence of the downturn in the economy, said Hawksworth.

"It is the nature of the market conditions," she said. "Companies are looking for ways to save money rather than spending it on non-essential items, such as new PCs."

Indeed, the survey predicted that sales of PCs, in both desktop and notebook form, would fall by 3.3% this year. Virgo said this trend has been noticeable, particularly among smaller companies.

"A lot of them are extending the life of their PCs with upgrade cycles of five rather than three years," he said. "Upgrades will be more closely linked with service contracts in future."

Businesses have learned their lesson from the boom and bust of the dotcom era, suggested Virgo.

"Companies are much slower to spend their budgets unless they get value for money," he said.

"Do not expect any 'big bang' projects - the increasing spend is likely to go on lots of small contracts, perhaps as part of a bigger architecture improvement," Virgo predicted.

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