As I See It: Reading the IT Leaves
October 21, 2013 Victor Rozek
Economic activity is notoriously difficult to predict because it depends on the daily decisions of millions of individuals who themselves are difficult to predict. Behavior can often be capricious, and the money guys who manipulate markets are even more uncomfortable with uncertainty than a nun opening an attachment from Carlos Danger. Consequently, any time the needle moves in the wrong direction, hand wringing and consternation are sure to follow.
So when Gartner reported that IT spending would fall $74 billion below predictions, the sky wasn’t exactly falling, but it teetered ominously. Granted, $74 billion is not pocket change, but the sheer global scale of the IT industry makes that figure a lot less gloomy than it otherwise might be. In fact, it represents only a 2 percent deviation from the forecasted $3.8 trillion expected to be spent on all things IT in 2013.
Although the predicted growth rate for 2013 was originally pegged at 4 percent, the IT sector will still enjoyed a solid 2 percent increase over the previous year. But to economists, slow growth is slow death. Economics is the only game in which winning teams are punished for not running up the score. You can grow, make a profit, and still fail miserably in the avaricious eyes of the Wall Street investors.
Nevertheless, according to recently revised projections from Gartner, global IT spending for the year is now predicted to top out at a mind-boggling $3.7 trillion. A modest downward adjustment that can well be ignored until one considers the findings of Forrester. Examining the same data, Forrester puts IT expenditures at $2.06 trillion, which tells us two things: economic projections are a crapshoot, and someone is going to be wildly wrong.
Regardless, in a time when large numbers are thrown about like rice at weddings, it’s easy to lose appreciation for the magnitude of the IT industry. Using Gartner’s numbers, IT now extracts the equivalent of $530 a year from every man, woman, and child on the planet. Simply put, we have all become so dependent on information technology that it keeps us perpetually pregnant, with no choice but to keep feeding the baby.
On the global scale, the budget of the average IT shop would not even qualify as a rounding error. But the range of activity, and therefore opportunity, that inspires this level of spending (whosever figures you believe), is truly staggering.
Staying well fed is, of course, the name of the game and, according to the Enterprise Strategy Group, 32 percent of IT budgets go to feeding the staff. That’s the largest chunk of the annual pie for small and midsized shops, which may explain why management is perpetually focused on cutting labor costs. Although IT has weathered the worst of the outsourcing craze, for the poor guy who finds himself unemployed, there is a sad irony in the fact that management expenses employees but invests in hardware.
Speaking of hardware, it accounts for the second highest IT expenditure, totaling some 20 percent of the budget. That number is a little surprising given that one-quarter of midrange shops report hosting 50 to 100 servers. But replacing hardware is a cyclical process dependent on three intersecting conditions: need, affordability, and comfort with risk. Only 20 percent of IT shops purchase new technologies as soon as they become available, according to ESG. The rest prefer to wait until the new technology has been thoroughly tested and fully accepted by the marketplace. Tablets were mentioned as the latest device to garner widespread acceptance and are expected to impact hardware purchasing through next year.
It is only a small exaggeration to say that software is now running the world. And it does so rather inexpensively. Software purchases eat up only 17 percent of the average IT budget. The financial sector is expected to remain the biggest consumer of software, probably because it takes sophisticated script to make other people’s money disappear so thoroughly. But whether it’s used to guide missiles or robotic arms that perform surgery, software has become ubiquitous, and indispensable. And, like nature’s services that support human life, to countless millions of unsophisticated users, it remains mysterious, invisible, and wholly underappreciated.
Both Gartner and Forrester predict software sales will continue to rise, but again disagree on dollar amounts. Gartner forecasts $324 billion in software spending, while the more conservative Forrester calculates the total to be much higher, pegging the number at $542 billion. Go figure.
Telecom and Network services weigh in next at 11 percent, followed by Outsourcing, Consulting, and Professional Services which command about 8 percent of the budget. Somewhat surprisingly, Cloud Computing, so aggressively marketed as the next digital inevitability, merits only 6 percent of the midrange budget. Granted, the potential for savings increases with scale, but recent disclosures of government spying, and revelations of collusion by the largest service providers (followed by brazenly lying about their complicity), may have prompted prospective clients to question the security of their data.
The remaining 6 percent is applied to every manager’s favorite budgetary black hole: miscellaneous.
IT is a juggernaut. Information is the new gold standard and already about 30 percent of IT installations support businesses that offer no products or services other than the storage, retrieval, and manipulation of data. Those in the industry appear to be well positioned for long careers which offer interesting and well-compensated work. For the foreseeable future, nothing is likely to slow the IT advance with the possible exception of a petulant Congress deliberately shooting the nation in the foot. Standard and Poor’s estimates that the recent 16-day shutdown “has taken $24 billion out of the economy.” Brilliant. Perfecting the zero-day work week may be the only lasting legacy of this Congress.
Solutions to the budget and the debt ceiling problems have, once again, been kicked down the road. If the kids in D.C. can’t find a way to make nice and the nation defaults on its obligations (particularly Treasury bond payments), it is expected that in the ensuing economic pandemic interest rates will soar, which will stifle investment across the board.
As the government reopens, it would be wise to upgrade its software. One of the challenges for the Treasury during the shutdown was how to prioritize which bills to pay before the money ran out. It was a fiscal shell game made more difficult by the fact that the government’s computers are apparently programmed to pay bills in the order they’re received. Picking and choosing was problematic. I smell an opportunity for IBM.
Economics, it has been said, is extremely useful as a form of employment for economists. The man who said that happened to be an economist, and a legendary one at that: John Kenneth Galbraith. He is also credited with the following insight: “The only function of economic forecasting is to make astrology look respectable.”
I suspect Gartner and Forrester would both disagree, but that may be their only point of agreement.