IT industry will not have New Year hangover, analysts say

What will happen to IT spending once the hubbub surrounding the Y2K issue dies down? Pessimists say the IT industry will experience a downturn after next year as a result of businesses trimming their technology budgets, but local and international analysts agree this is a myth. In some cases, IT-related spending might even improve, they say.

The pessimistic view is that once computer systems are Y2K-compliant businesses will not spend as much on IT as in recent years. However, industry insiders say this belief is based on two misconceptions: that so much money was spent to escape the threat of the Y2K bug that there will be none left to spend next year, and that since systems have been upgraded to fix the problem, there will be no need to spend more.

Analysts agree this view is flawed. They add that overall IT spending will not fall after 1 January, although some analysts say there may be a slowdown in some aspects of the IT sector, particularly software sales, while other areas, such as services, could see some growth.

There are several reasons for this more optimistic view. Most importantly, Y2K spending, as Merrill Lynch analyst Gordon Taylor says, is not a huge part of South African companies` IT budgets. The US-based International Data Corporation (IDC) estimates that the worldwide Y2K spending from 1995 to 2001 will be $296.74 billion, representing only 2.9% of worldwide IT spending.

Another factor is the indication that spending on Y2K compliancy is expected to continue even after next year. An analyst notes that Y2K problems will not come to a sudden halt after 12.01am on 1 January and says "Y2K events" will occur throughout the year and related spending might continue into 2001. IDC agrees, saying that some companies will wait until next year to see if they actually need to replace desktop hardware and related software. Hardware and software spending next year will reflect companies that have adopted a wait-and-see attitude, it adds.

While some analysts believe IT spend will see a marginal softening after the Y2K furore dies down, most say spending might even improve. Most analysts polled agree there is a backlog of work that companies put on hold while focusing on Y2K readiness. "Projects were deferred so there may be some catch-up spending," says Taylor. "But the overall effect is almost impossible to predict." Another analyst says the deferring of projects is especially true of the services side.

John McCarthy, director of research for US-based Forrester Research, speaking after a keynote address at a conference held at Sun City in August, said he expects spending to pick up over the next 18 months.

"Some companies that have finished their testing will see those sectors pick up sooner, others will follow later," he says.

Jane Burns, marketing manager at ICL, says in a video interview for Silicon.com`s Careers Channel that "we expect to see the floodgates open early next year as companies say `OK we`re now ready to start the real work of the business`."

According to IDC, Y2K efforts have resulted in only a minor increase in revenues for hardware and software vendors overall. "There have been winners, such as the enterprise services packaged application vendors, which have grown dramatically, but it is not possible to attribute this growth solely to Y2K. Services firms have fared well, but even they are experiencing reductions in demand for older, traditional services such as systems integration and business process re-engineering."

The corporation says companies faced with a Y2K problem have undertaken to solve it at minimum cost and have not increased their IT operating budgets enough to allow their IT organisations to continue spending at the same level as before on non-Y2K projects. "Instead, these companies have shifted priorities and managed to reduce spending or defer projects in other areas, increasing the total IT budget by about a 14% compound annual growth rate in the past three years."

Some analysts are predicting that an increase in demand for e-commerce services will lead to further IT spending.

According to an SIA/TowerGroup survey conducted in the US earlier this year, US organisations` investment in their IT platforms is increasing at a faster pace than originally anticipated as firms prepare for increased demand for online trading. Preliminary survey results show that spending on Internet, intranet, and extranet technology will account for 37% of firms` total IT budgets by 2002, compared with 3% in 1996.

The survey was sent in early May to about 250 firms, including eight of the top 12. The responding firms represent 30% of the total securities industry employment, and 30% of the estimated technology spending.

"The shift in IT spending to Internet/intranet/extranet is occurring more rapidly than the IT professionals we surveyed in 1996 predicted," says Larry Tabb, securities and investments research director at TowerGroup, which conducted the survey for SIA. "Then, they estimated that it would be 17% of the total budget by 2000; it already reached 21% in 1998."

This shift is being driven by the surge in Internet trading. Respondents predicted that 50% of their retail client orders for mutual funds and equities will be received electronically by December next year, compared with 20% last year. "Firms are looking beyond year 2000 and realising that demands for larger IT budgets and staffs will continue," says SIA president Marc Lackritz. "We can expect that in 2002 one out of every eight employees in the securities industry will be involved in information technology."

"E-commerce will definitely have an impact," says Deutsche Morgan Grenfell`s Chris Veegh. "Everyone has to have it just to keep up with the pace."

However, just as there are winners, there have to be losers. Veegh expects a slight slowdown in overall spending in the last quarter of this year, but particularly in spending on software. "Software spend is a bit of an unknown because we don`t really know how much of the software companies have bought is related to Y2K," he says.

Bob Austrian, an analyst at San Francisco-based NationsBanc Montgomery Securities, says business for enterprise application software vendors has slowed because of uncertainty in the finance industry about the effects of the Y2K problem. Quoted in Faulkner & Gray`s Electronic Banker, he predicts spending on enterprise software will continue to lag throughout this year and into next year as companies divert resources to Y2K fixes and related disaster planning. Many companies are postponing software rollouts until the first quarter of next year.

The consensus seems to be that the real overall losers, however, will not be the IT industry, but the pessimists.