Guild Companies--Analysts Prognosticate About IT in 2004

It's a tradition for the major IT consultancies to get out their crystal balls and predict what will happen in the IT sector in the coming year, and years to follow. Any consultancy is ultimately judged by the accuracy of its predictions, so it's a good thing that many of us don't check their batting averages on their prognostications. IT predictions are fun, if not always accurate, and are an indication of the issues we are all facing.

Everyone is hoping for an uptick in IT spending in 2004. While there is a consensus building among analysts about where IT spending may pick up, and where it may stabilize or continue to decline, hardly anyone agrees on what is going to happen. Whenever people are involved in a phenomenon--as they intimately are in IT spending--prediction is less of a science than an intelligent guess. Steve Milunovich, the lead analyst at Merrill Lynch, said in a report last week that, according to a recent survey of 100 chief information officers, budgets are expected to grow by only 1 percent on average. Only a few months ago, these same CIOs were expecting a 3 percent budget growth rate next year. The CIOs said that doing more with less money is still a priority and that reducing costs is still of vital importance.

Gartner analysts are saying that their latest IT spending survey, done in conjunction with Arnie Berman and John Jones, analysts at SoundView Technology Group, indicates that there will indeed be a recovery in IT spending in 2004--at least that's what the title of the report said. But in the report, Brian Smith, Gartner vice president of market research, actually says, "While corporate IT buyers are highly confident that their employers' business prospects are rebounding, they are less confident that this rebound will translate into improved IT spending. Historically, business confidence tends to lead IT spending confidence in an economic recovery." It is perhaps illustrative that Gartner axed 5 percent of its workforce of 4,800 people several days before releasing its prognostications for the future. It is hard to gauge if there will be a recovery or what magnitude it will take.

I happen to think that any recovery will not cause a big upswing in IT spending, since companies have now figured out they can either move to cheaper architectures or use existing architectures more efficiently to meet data processing demands. I think IT spending (as measured in the aggregate) will definitely lag a recovery in the economy, but certain areas of IT spending will rocket upward--virtualization and related systems management software, security appliances and software, X86 servers running Windows and Linux, extremely low-end PCs running Windows XP and Linux, NAS and SAN storage, and Gigabit Ethernet and wireless LANs are going to accelerate. (I realize you could have guessed all of these, too.) I also think that myriad services that are hard to describe, but that are perceived as vital, are going to pop up in the market, and there is not going to be uniform pricing within a given vendor for these servers, much less across vendors. There is going to be a lot of confusion and overspending here. Mark my words.

According to the Gartner-SoundView survey, conducted with more than 600 IT managers in late October, it looks like small and midsized businesses are going to lead the recovery in IT spending, which implies that enterprises are going to be a bit more conservative. They can afford to be, since they generally have more processing capacity than they know what to do with. The Gartner-SoundView survey said that organizations were interested in controlled spending where a quick return on investment could be demonstrated. Large companies will see their IT budgets stay flat to down in 2004, according to the survey.

That said, the Gartner-SoundView survey nonetheless indicates that aggregate IT spending across all company sizes will grow by 1.6 percent in 2004, based on the responses of those 600 CIOs. This is up substantially from surveys done this time last year about 2004 budgets, and is up a bit from similar surveys done in the spring concerning 2004 budgets. The two companies discovered that CIOs say that security, storage, wireless LANs, Linux, and business intelligence are their priorities for 2004, and add that software is at a higher priority than hardware. This has been true since 1999, and is nothing new.

IDC analysts are calling a "tech resurrection" in 2004, with lots of qualifications. IDC's analysts also presented a list of things that will and will not happen next year. The move toward standardization on Wintel and Lintel platforms will continue, says IDC.

"The shift toward commodity computing is a massive structural change that has been underway for several years," said Frank Gens, senior vice president of research at IDC, in a statement accompanying the companies' fortunetelling for next year. "But 2004 will be the first year where virtually all the leading hardware and software players have standards-based products at the center of their offerings. To succeed in this commodity market, vendors will have to learn how to differentiate their products without the protection of proprietary fences. This will present serious challenges for many of the major players, and sets the stage for some major market shifts by 2007."

Here is what 700 analysts at IDC came up with after brainstorming for the top-10 IT predictions for 2004.

In November, IDC's best projection was for a 4.9 percent increase in IT spending for next year. Since that time, encouraging economic news has compelled IDC to raise its projects to 6 to 8 percent growth in IT budgets worldwide. The analysts believe consumer spending and good economic news (particularly in the United States, because it's an election year, and incumbents always pump up spending before an election, thereby goosing the economy) will drive up spending. They caution, however, that any string of bad economic news could completely kill the tech resurrection. This is, in their minds, a fragile recovery in IT spending.

We've heard it so many times that we're blue in the face, but IDC says that commodity products, like X86 servers and Linux operating systems, are going to start taking bigger pieces of IT budgets. IDC doesn't say it, but Windows is a commodity, too (at least compared with nearly proprietary RISC/Unix platforms and actually proprietary midrange and mainframe platforms). Windows is going to see a lot of action in the server market in 2004, and its growth is going to be substantial. (That's my prediction, not IDC's.)

IDC says this is definitely where platforms are heading, but that investments in virtualized systems and metering products, to keep track of who is using what resources on computing utilities, are going to be modest in 2004. And those investments will be in areas for managing IT infrastructure, not in creating new-fangled corporate data processing utilities, like vendors are talking less and less about. They know, too, that this approach is only for the biggest companies.

Get used to it, says IDC. The value of the programming and tech services provided to companies in the United States will double to $16 billion in 2004, despite intense political pressure. By 2007, the value of offshored services will reach $46 billion. That is, says IDC, one-quarter of the total programming and services portion of the aggregate IT budget for all companies in the U.S. If you don't think this is a problem, you must not be a high-tech company (or, indeed, any other company) that wants to squeeze IT budgets to boost profits. You are probably a programmer, a system administrator, or a project manager who is wondering if you will have a job in a few years.

Everybody who was an expert in supplying information technology now wants to be known as an expert in business transformation services that work in conjunction with information technology. Why? Because that's where the profits are going to be. So IDC says that the litany of on-demand, adaptive enterprise, business blueprints, and yadda yadda will continue apace in 2004. IDC also expects for some major IT suppliers to organize around industry verticals or business segments. First, this will reflect the IT players' go-to-market strategies, and, second, it will allow them to mask any problems they have in their hardware and software infrastructure businesses on a quarterly basis.

The good news is that companies are going to start spending on application software again after a few skinny years. These investments will be driven by the need to meet myriad new government regulations (like HIPAA, CFR Part 11, Sarbanes-Oxley, Basel II), by the need to innovate and start driving revenue growth, by the desire to better integrate companies that they have eaten or have merged with, by the still unfulfilled promise of having a single CRM system across all channels and lines of business, and by the need to better automate supply chain operations with partners and suppliers.

While Wal-Mart and the Department of Defense are big on radio frequency identification (RFID), to keep track of all their stuff, IDC says that vendors will put a lot more money into creating products related to RFID than is necessary, based on the customer spending levels in RFID. That doesn't undercut RFID's value: Wal-Mart and the DoD need it. It just means that vendors are way ahead of most buyers on this one, and Wal-Mart and DoD alone cannot drive the world to adopt it. IDC is predicting that, by January 2005, less than half of Wal-Mart's suppliers (which are supposed to have RFID implemented in two weeks) will even have early stage pilots up and running. RFID will have to have a smaller scope and a longer timescale.

The public will continue to love and deploy wireless LAN technology, and enterprises will start deploying it, too, says IDC. Worldwide WiFi hotspots are expected to grow to from 50,000 in 2003 to 85,000 in 2004. Western Europe will grow like crazy, from 8,000 hotspots in 2003 to 24,000 in 2004. IDC reckons that small businesses will go completely wireless first, and that larger enterprises will be laggards.

Whether you are talking about hardware, software, or services, growth in the Chinese market is in the range of 25 to 30 percent today, and will accelerate to 40 percent by 2007. Chinese businesses and consumers in the coastal towns of that vast country now represent enough of a connected market to drive substantial IT acquisitions for personal and business use. The European Union will add 10 Eastern European members, and these countries will start consuming IT products, generating growth in the overall European market.

IDC says that, in 2004, 40 percent of worldwide Internet users will be accessing the Internet through a broadband connection rather than through slow dial-up. This will be a tipping point, and many services and applications that were untenable on slow links, or with the small number of broadband customers that existed a few years ago, will now be possible. Digital convergence will be the catch phrase.