End Predicted for IT Sector Slump

The tech sector slump will end in the third quarter of 2002 and a revival will pick up momentum in 2003, according to research from Forrester Research, but double-digit growth won’t return until 2004.

The IT sector that survives the current market downturn and emerges on the other side will have an entirely different look, however. Forrester expects the downturn will accelerate consolidation and change the entire technology landscape.

“Forrester estimates that 12 percent of the IT sector’s volume in 2000 represented overspending, which amounts to a hefty $62 billion,” said Bruce Temkin, group director at Forrester. “As buyers absorb their excess technology purchases, these ‘bubble’ expenditures will drag the recovery down over the next two years.”

As a result of the 2000 buying sprees, budgets will remain flat in 2002 when the sector will only experience 2.2 percent growth. Fueled by pent-up demand from delayed expenditures and a healthier economy, Forrester expects users will increase their IT investments in 2003 by 9.7 percent. By 2004, low-cost PCs and a boom in broadband access will enable a new generation of devices, applications and always-on wireless services. These advances, coupled with favorable economic conditions, will boost the tech sector by almost 12 percent in 2004.

Despite the bursting of the dot-com bubble, Forrester expects Internet investments to help boost U.S. productivity, as applications like supply chain planning and e-procurement become more mainstreamed. The downturn will also intensify the price pressure on hardware manufacturers — kicking current industry giants out of the business.

CIOs will respond to the weak economy by funding a series of smaller, shorter projects that replace the big bang e-business investments made over the past few years, Forrester found. To meet this change in demand, applications will be broken into smaller, more modular components, and subscription-based software will expand. In other words, the tech landscape of the next few years will look nothing like the tech landscape of 2000.

Forrester recommends that executives keep e-business activities alive by championing a few collaboration-centric efforts that should be viewed as process-design programs with business partners and customers, rather than IT initiatives. CIOs should cut deals with vendors when the tech sector bottoms out in the first half of 2002, and VCs should prepare for an onslaught of innovations from displaced technologists in 2003, while integrators get ready for smaller-scale projects and profits.

Forrester isn’t the first research firm to predict an altered IT sector post-recovery. Gartner Dataquest expects that IT services, not hardware and software technologies, will account for 45 percent of all end-user spending on IT by 2004.

A Dataquest survey found that 56 percent of those surveyed showed interest in using independent consultants and are considering outsourcing strategies of various types. More than half of the companies sampled expressed a willingness to form joint-venture relationships with external service providers.