IT Services Spending Predicted to Double by 2005

Spending to pick up by fourth quarter, says survey.
Jennifer CaplanMay 3, 2001

IT spending is alive and still expected to grow well.

Despite the spate of high-profile revenue and earnings warnings from the blue chip tech set, led by Cisco Systems, a survey recently released by Gartner Dataquest paints a rosy picture of the future of the global IT services market.

The worldwide information technology services market is poised to double from its current $700 billion to approximately $1.4 trillion in 2005, according to the market research firm. This works out to something like a 15 percent to 18 percent annualized growth rate.

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In 2000, IT services revenue in North America reached $345 billion, which represented 52 percent of the total global services market, according to the research firm. By 2005, the U.S. is expected to generate $712 billion in IT services revenue, and will continue to represent about 52 percent of the total market.

“We have been seeing a shift, which began in the mid-90s, away from expenditures in hardware toward software and services, as companies integrate their technology with business process,” says Michael Palma, an analyst for IT services at Gartner Dataquest.

Dataquest said the development and integration segment, which makes up the largest portion of the IT services industry, is expected to grow from $169 billion to $369 billion by 2005. Development and integration services include the deployment, customization, and integration of legacy systems with new technologies, according to Palma.

Business processes management services, which include the services provided as part of an outsourcing contract, made up the second-largest segment of the IT services market, racking up sales of $148 billion in 2000. Dataquest expects this segment of the market to have the strongest growth rate in coming years, reaching $345 billion by 2005.

These rosy predictions dovetail with the results of a recent survey of senior financial executives at CFO Enterprises’ recent CFO Rising conference in Atlanta.

According to the survey, which was tabulated and analyzed by Stanton and Crenshaw Communications, 58 percent of the 98 SFEs surveyed said they would increase their IT budgets in 2001 and 2002. Another 30 percent said spending would remain unchanged, and only 11 percent predicted that it would decline.

Mindful of the current economic slowdown, 25 percent replied that expenditures would pick up in the fourth quarter of 2001. Another 35 percent of the respondents said their companies would resume a more expansive spending phase in the first and second quarters of 2002 while 10 percent said they will wait until the second half of 2002 to resume tech spending.

Indeed, when asked what portion of total IT spending would be greatest in 2001, 50 percent of SFEs responding to the survey pointed to application integration and e-commerce. Only 9 percent said that wireless initiatives would make up the bulk of their IT spending in 2001, and another 17 percent cited content management and security as priorities.

But a less clear picture emerged when CFOs were asked whether their expectations for ROI on technology investments had been met over the past year. The response was essentially equally divided–49 percent of respondents said their ROI expectations were met, while 48 percent said their investments had failed to generate expected returns. Only two percent claimed their expectations had been exceeded.

The CFO survey also showed that most CFOs regularly reevaluate their technology purchases. About 31 percent of CFOs surveyed said they carry out quarterly evaluations of their purchases, 24 percent responded that evaluations are done every six months, and 16 percent wait until the end of the year to assess investments.

How do these SFEs go about measuring the effectiveness of their technology spending? Nearly half–48 percent of the respondents–said they measure the value of their IT investment using a combination of metrics, including–in order of importance–impact on productivity, impact on customer strategy, impact on relationships with customers, and financial payback. Another 11 percent of respondents claimed they had not yet established a method for measuring ROI.

When asked what was the worst mistake companies had made over the past year, the number one answer was having had unrealistic profit expectations. But a close second big blunder was having had unreasonably high expectations for the Internet’s potential.

So the bottom line appears to be that although the Internet has proven not to be the panacea many prophesized only a year ago, technology is here for the long haul and will remain a high priority at most corporations well into the foreseeable future.