IT Services Having Worse Year Than Thought

Tech research firm IDC has put into numbers what information technology vendors are already feeling: the market for IT services is having a much tougher year than forecasts had pegged.

IDC lowered its 2002 worldwide IT services growth expectations by 3.9 percentage points to 6.7 percent growth instead of the double digit rate it had expected.

The firm also revised its 5-year-forecast, but is genuinely optimistic overall. It predicted that IT services spending worldwide would increase to $572 billion by 2006, a compound annual growth rate (CAGR) of 10.6 percent.

The revised numbers mean a relatively flat outlook for 2002 has actually fallen and that a full recovery for the IT sector is not expected until the spring of 2003. The revised numbers also represent a bottoming out of a two-year down cycle in IT spending, said analyst Ned May, program manager of IDC’s Worldwide Services research.

“As companies start to meet revised earnings and revenue estimates, we expect to see new spending on projects but it won’t show up until early in 2003,” he said.

“It’s been a very conservative year for spending, but as we approach the end of the year, we could see spending on projects that have been budgeted but not yet spent.”

The revised outlook said no region of the global economy escaped the downward revision on growth rates. Overall, IDC said the United States led the largest percentage change for spending (for 2002 and beyond), followed closely by Canada.

Least hit by the downward revision were Japan and Eastern Europe, the Middle East region, and Africa. Not counting the economic woes bedeviling Japan, the Asia/Pacific region is expected to see over 20 percent growth in IT services within four years (an annualized growth rate), IDC said.

IT subsectors taking the most hits were project-oriented services such as systems integration, IS consulting and custom applications, IDC’s May said. Spending in these areas together represented a nearly 5 percentage point revision which was factored into the overall 2002 forecast.

Many corporations spent millions on new applications throughout the past few years, May noted. And while the downturn reflects some not-so-wise spending decisions, corporations are also aware of the value in application integration projects that wring more from those investments.

“We do think the worst of the slowdown is over,” May added. He expects to see application integration projects lead the recovery in 2003 after a nearly two-year period of budgetary holding patterns.

IDC’s revised forecast was a tad more optimistic than Dataquest, the unit of tech research firm Gartner. The firm also released an updated IT spending outlook as part of its Symposia/ITxpo tech conference in Florida.

The firm said global IT spending would climb only slightly to revenue to $2.3 trillion, a 3.4 percent increase over 2001 spending levels. It also said any recovery won’t arrive until halfway through next year.

“Our forecast shows that we are unlikely to see anything beyond normal seasonality before the second quarter of 2003,” said George Shiffler, principal analyst for Gartner Dataquest’s computing platforms and economics research.

“We expect the return to spending to begin with shorter-term less strategic items, such as PCs, low-end servers and infrastructure software that can help deliver more value out of systems and networks. However, the global economic situation is quite fluid and given the rising uncertainty surrounding the strength of the global economic recovery, there are still significant downside risks to the industry.”

Dean Eyers, group vice president and worldwide director for Gartner Dataquest’s telecommunications group said fixed and mobile telecom services projects were helping to keep the overall growth forecast stable. “Combined, these telecom services segments are forecast to grow 8.8 percent in 2002. Absent them, and total IT spending would actually decline by 0.5 percent.”

IT services end-user spending grew less than 5 percent in 2001, and IT services vendors reported results for the first half of 2002 that will reduce growth slightly this year, Gartner Dataquest said. Outsourcing is also still holding its own as a function of cost reduction across corporate enterprise systems.

As to the clouds of gloom hanging over the IT sector amid a difficult technology recession, IDC’s May noted that IT spending still represents about 50 percent of corporate budgets.

“The fear that this (downturn) is the demise of the industry is unfounded,” said May. “IT spending still represents competitive advantage to many companies” looking to put new systems in place. “It’s just that too many companies made some poor choices of IT investments” during the past few years.

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