2001/02 META Trend: During 2001/02, users will outsource non-strategic components
while developing centers of excellence for strategy/architecture, infrastructure
planning, and partner management/negotiation (2001-04). Through 2006, infrastructure cost
metrics will be modified from total cost of ownership to a net present value/return on
investment model, and will shift from cost containment to value generation/agility to
absorb rapidly changing business requirements.
2002/03 META Trend: Network
spending will be flat during 1H02, increasing 10% for the remainder of 2002. Network
budgets will continue to increase 10%-15% through 2004, emphasizing conservative IT
portfolio and demand management. Compensation growth will level off as organizations
review staffing levels during 2002/03. As network spending integrates more with business
during 2004-06+, organizations should expect direct tradeoff between network and
personnel spending.
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Economic Pressures Continue as Companies “Return to Profitability”
For the past 10 years, companies have been giving IT organizations (ITOs) relatively free
reign in automating business processes and increasing the number of customer and partner
channels. As a result, IT spending has continued to increase as a percentage of revenue
(with rates from 1.5%-12%, depending on industry segment).
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In 2002/03, we see IT spending as a percentage of revenue decreasing by as much as 1%.
However, network spending continues to increase as a percentage of overall IT spending.
Although network spending will be flat for 1H02, it will start to increase in 2H02, as
the economy starts to recover. Through 2005, network spending will continue to increase
gradually, by 5%-10% annually, while bandwidth utilization will rise 20%-40%.
Unit Bandwidth Costs Flatten, Then Rise
Companies have been able to exploit aggressive circuit price declines (10%-15% annually)
for the past several years. Long term, this cannot continue. The network market will
continue to consolidate through 2004, with fiber carriers and broadband access providers
both going out of business and getting purchased by incumbents. This will result in less
competition, with an upward price pressure. The current core bandwidth glut will be
consumed by 2005, forcing increased carrier buildouts to continue through 2008. Because
the market will no longer allow skeptical financial accounting (e.g., booking
cross-carrier-traded bandwidth as revenue), pressure toward profitable service will also
drive prices up. Throughout 2002 and into 2004, we expect selected markets to have flat
prices or slowing price declines (e.g., frame relay prices will continue to decrease to
compete with emerging IP virtual private networks), with price increases through most
market segments appearing by 2006.
The Move to Outsourcing Pushes Up Costs
To reduce network staffing, many organizations are considering outsourcing various
network functions. Although almost everyone outsources the wide-area network (WAN) and
remote dial access, more companies are considering outsourcing higher-level functions,
such as WAN management, Web hosting, and managed security services. Through 2003,
commoditized functions will be the first outsourced. As companies gain confidence in
provider abilities, scarcity of security staff will increase the outsourcing of managed
security services through 2005. Although some outsourcing can be done more economically
by the outsourcer, large companies will find unit costs close to parity. However, more
staff members will need to be trained in managing vendor relationships, which will
increase overall costs. Individual outsourcing functions will be fragmented through 2004.
Eventually, outsourcing functions will be integrated into overall portfolio management by
2006+.
More Technology for Prioritizing Traffic
Bandwidth management will be an area of increased portfolio investment for the next
several years, as many technologies can exhibit near-term ROI. Point solutions will
continue to predominate through 2004, as companies employ caching, load balancing,
compression, TCP rate control, filtering, and queuing techniques to optimize the use of
existing network bandwidth. Although these technologies can minimize the rate of network
traffic growth, initial investments will cause short-term expenditures. In addition,
companies will need to increase administrative costs to implement and manage these
technologies. Increased technology integration will mature slowly through 2007, with an
eventual decrease in management costs.
Voice/Data Consolidation Is Starting to Arrive
Companies are starting to see voice/data integration as real, with most large companies
already having a limited IP telephony test bed (fewer than 10% of phones). Although
long-term integration of unified networking may decrease some costs, overall voice/data
integration will (at least initially) exert upward pressure on IT budgets. Planning and
conversion will increase costs from 2002-06, while training and integrating voice and
data staffs will have an impact on training budgets through 2007+. Resolving pay
disparities between data and voice staff members will also increase costs, as will
maintenance of legacy voice systems, which will likely still exist through 2008.
As we see upward pricing pressure reflected in the various areas discussed, overall IT
spending will continue to be pressured in the next two to three years. Companies will
increasingly examine all areas of IT as portfolios to be aggressively managed. Although
spending in the network will need to increase, executives will insist on IT demonstrating
where costs are being cut (sunsetting technology, staff reductions) to offset network
investments.
Business Impact: Companies will be forced to invest money in networking and make
difficult decisions on prioritizing IT portfolios.
Bottom Line: The focus on cost savings across the company will continue to drive
higher networking costs, as automation initiatives inevitably continue to drive greater
network consumption.