IT Outlook for 2003: Overcast, Some Sun

Information technology vendors: expect growth — slow growth — in enterprise IT spending during 2003. IT consultants: prepare to scramble even more for the key opportunity in your sector, outsourcing.

Those are just two of the consensus trends that tech researchers and analysts are forecasting for the coming year in IT services. Surveys from all the major tech research firms show that overhang from IT investments during the dot-com boom still has to cycle through enterprise networks ahead of any potential big spending decisions. In addition, as many corporations wrap up their budgeting process for 2003, surveys show their IT budgets remain tight.

Tech research firm IDC is calling for a return to IT spending, but only in the single digits at 6.3 percent growth for the U.S. IT Services industry.

Overall, the research outfit is expecting spending growth of 2 percent to 5 percent in technology spending. “Hardware spending and wireless services will benefit the most from increased spending over the near term, while IT consulting will continue to languish,” noted John Gantz, chief research officer at IDC.

“Project-based IT services will be flat or down again in 2003 as companies focus on smaller, short-term projects and managed services,” he wrote.

Other research firms are sticking with single digit expectations as well. Forrester Research is forecasting just 1 percent growth, while Gartner sees sun along with clouds in its 7 percent growth outlook for global IT spending.

Major technology companies are also preparing to unfurl fourth quarter and year-end results, and the lackluster results are expected to continue into 2003, analysts said.

“We hear many of the same themes we heard last quarter — continued tight IT budgets, pricing pressure, little incentive to close new deals,” Deutsche Bank Securities said in its mid-December IT outlook. “We sense very little new information from our field contacts that fundamentally excites us from a growth or investment perspective heading into next year.”

Other sentiments noted in the report: a lot of deals are not going from analysis to contract; there’s still a lot of tire-kicking going on; yet another IT exec said next year “will be a scramble,” especially for outsourcing contracts.

DB analysts also noted that India-based IT services vendors are among the most competitively positioned in the industry, and continue to win more market share among outsourcing-focused firms.

The report cited an example from its own internal IT management team. Deutsche Bank currently outsources about 25 percent of all its global equities application work offshore, the report said, with a goal to outsource 50 percent of the work eventually.

“The current wave of offshore delivery of outsourcing services is yielding a major disintermediation effect specifically on the IT consulting industry,” the report said. Field contacts quoted in the report said vendors can’t even hold discussions with firms regarding help desk or applications deals without Indian firms becoming involved because of their positioning with outsourcing contacts.

And despite the technology recession,” deal volumes amongst the major India vendors continue to climb, as have deal sizes to India. Our research in India also suggests hiring trends amongst the major India vendors have begun to ramp materially.”

CIOs See Sun, Clouds on IT Spending Horizon

Even tech bellwethers such as IBM and EDS felt the brunt of the spending slowdown among corporate customers during 2002, IBM in hardware sales and EDS with major bankruptcies of customers WorldCom and US Airways.

IBM’s CEO, Sam Palmisano, speaking at an analyst presentation day last fall, called the past two years among the worst for tech spending he’s seen in his 30 years in the industry. But he also said he thinks the tech recession of the past two years has bottomed out.

His view is in line with a
poll of chief information officers
released in November, which showed positive sentiment that spending on information technology would be on the upswing by the second half of 2003.

The poll, administered by Deutsche Bank Securities and Prudential Securities and compiled by CIO Magazine, found optimism in new spending on fundamentals such as replacing hardware and upgrading security and infrastructure software. But the majority of the 301 CIOs who took part in the poll tempered their outlooks with their concerns over the impact of continued weak profits on their IT budgets.

The CIOs actually ended up sounding more optimistic on their forecasts than research outfits did, with 38.2 percent of those polled expecting an increase in their IT budgets compared to 22 percent who expected smaller budgets from the year before. It found, on average, that IT budgets in North America would increase by 5.1 percent over the year, with security software atop most spending priority lists.

“(This) poll is the second to last survey of 2002, which culminates a difficult year for IT companies,” said George Elling, Deutsche Bank managing director, enterprise and PC hardware research. “Optimism early in the year for a year end budget flush has not materialized and pessimism regarding the industry’s outlook remains rampant.”

Still cautious though the hands on the IT checkbook may be about new IT investments, the consensus holds that spending will resume in the coming year, with a bigger outlay expected in the second half of the year.

IDC, meanwhile, points to wireless LANs, Linux, and messaging as major technology trends poised to make important gains in the year ahead, in which worldwide spending for information technology and telecommunications is expected to hit $1.9 trillion.

Look for the mid-range server market to return to positive growth, following two years of decline, IDC said. But expect the market to come back 20 percent smaller than it was in 2000.

The adoption of 64-bit computing will remain slow and vendor-driven during the coming year, as IDC does not expect to see full 64-bit use in commercial applications until later in the decade. IDC said Linux is expected to gain more ground on Unix operating systems, “particularly with RISC-based Unix systems.”

Other sunny spots amid some clouds in IDC’s outlook: adoption of wireless LANs, even though their spread could further complicate the rollout of 3G services by major carriers, and instant messaging, which could dampen productivity as workers struggle to manage growth of messages coming from expanded buddy lists.

Clarifies in third paragraph IDC’s spending forecast for IT Services in U.S. markets compared to overall technology spending expectations.

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