IT grows up and slows down

I first saw the Rolling Stones on their UK tour in 1963 just before I joined a new UK IT services company called Hoskyns (now Cap...

I first saw the Rolling Stones on their UK tour in 1963 just before I joined a new UK IT services company called Hoskyns (now Cap Gemini Ernst & Young).

I have been fortunate to have been involved in an industry which has experienced phenomenal growth for almost the whole of the past 40 years.

In the mid-1960s, IT was less than 1% of the UK economy. Since then it has grown rapidly to the point where IT was equal to 4% of the UK economy in 1999.

Indeed, the software and IT services industry has grown by an average of 11% a year since the mid-1960s. That is three times faster than the UK economy since 1964, and four times faster than the economy as a whole in the 1990s.

If IT continued to grow at that rate it would represent 100% of the economy by 2050. This would clearly be impossible - after all, we all need to eat, drink, be housed, move around and so on.

If you study any sector which is based on an engineering or technological development (railways, automotive sector, airlines, telecoms, TV and radio etc) you will find growth goes through four phases:

  • Pioneer

  • Growth

  • Maturity

  • Post maturity.

It was the introduction of third-generation computers, such as the IBM S/360 in 1964, that started the growth phase as it made IT accessible to many businesses. The introduction of the PC in 1981 accelerated growth in this phase by making IT affordable to smaller businesses and individuals too.

I have looked at every other engineering or technology-oriented sector of the UK economy over the past 100 years and cannot find one that has managed to exceed 5% of the economy. They grow to a certain maturity level and stay there.

The UK economy has grown on average by 2.5% per annum in the past 40 years. It has only exceeded 5% in one year and has been negative on a number of occasions.

I contend that IT has now entered its maturity phase. IT's percentage share of the UK economy will stay at or around 4% which means that growth for the next 40 years will be quite closely aligned to GDP growth.

For an industry used to double-digit growth rates year in, year out, low, single-digit growth may come as a shock. But for those that can both accept maturity and adapt, the future could well be very rewarding.

Companies will need to be run for cash and profits. Not for growth alone.

It was sentiment towards the IT sector that sent share prices into orbit. It was sentiment which plunged them to earth again. In a low-growth environment, investors will look upon, and value, IT companies just like other firms in their maturity phases.

The same applies to consultancy fees, contractor rates and even wages. The IT skills premium has evaporated for most jobs, with wage rates now on a long and irreversible downward trend.

Success in the future will come from:

  • Spotting and exploiting shifts in the market. But remember that, in a mature market, for every sub-sector getting a larger slice of the cake, another sub-sector will go hungry

  • Increasing competitiveness through higher productivity

  • Increasing market share.

IT will remain a vital part of the economy and I do not anticipate IT's maturity phase ending in our lifetime. But remember that it has for other sectors, such as the railways.

I have, for a long time, linked my views to musical themes. "There may be troubles ahead" in 2000, "Stormy weather" in 2001 and "Yesterday" in 2002.

"IT's all over now" is a particularly appropriate current theme, being a Rolling Stones hit in 1964 just as IT entered its growth phase and I joined the sector.
I already have tickets for the Rolling Stones concert at Wembley in August. As Mick Jagger turns 60, it will probably be their last mega tour as their glory days are over. I believe the same applies to IT. Jagger seems quite capable of making the most of his "maturity". Stop living in denial, and we can too.

Richard Holway is a director at Ovum Holway and an independent analyst

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