Will the IT Doldrums Drag On?

As the summer slowly peters out this Labor Day weekend, the IT industry hopes
that the fall will bring more than just a change to the leaves: an end to
nearly two years of stagnant IT spending.

In 1999 and 2000, Giga Information Group tracked IT spending increasing by
leaps and bounds, rising almost 20 percent in 1999 and 16 percent in 2000.
Since then, however, the story has turned bleaker. After dipping by 6
percent last year, tech spending has remained flat this year.

U.S. government figures released at the end of July may have given the IT sector a glimmer of hope that the tech recession was abating. The Commerce Department reported that Corporate America was spending more year over year on IT equipment and services for the first time in 16 months. Forrester Research quickly followed up on the data with a report that North American firms will spend 2.3 percent more on IT in 2002.

But industry analysts now say the wait will continue a bit longer, because the days
of dizzying, double-digit quarterly growth in IT spending are over and done
with. The recovery in tech spending, which analysts had forecast for the
second half of the year, will not come until 2003, as analysts revise their
forecasts to account for a jittery economy that has led enterprises to delay
big IT spending increases.

Hard Times For Hardware

The hardware sector has had little to cheer about lately. Thursday, Sun
Microsystems said it expected its first quarter 2003 revenues would be 10 to 15 percent off fourth quarter 2002. Sun CFO Steve McGowan said he saw “no
change in the IT environment.”

That could spell further tough times for hardware companies in the months
ahead. Earlier this week, Deutsche Bank analysts George Elling and Steven
Grossblatt reported that demand in the PC sector was weak and showing few
signs of an impending turnaround.

“A replacement in corporate IT spending remains key to catalyzing PC
replacement demand,” the wrote, “But our CIO and field surveys show limited
visibility on an improved outlook.”

HP, in the midst of consolidating its merger with Compaq, reported this week
that a weak demand for IT was cutting into its results. Similarly, an Apple
executive earlier this month said the company just hoped to reach breakeven
in the third quarter, citing the poor economic environment.

A silver lining in these clouds is the performance turned in by Dell, which
has shrugged off tighter IT budgets to position itself at the head of the
class among PC makers. During the third quarter, Dell reported sales grew 11
percent compared to the same period in the previous year.

Meanwhile, the market for servers remains weak too. According to IDC, server
sales dropped for the sixth straight quarter in the second quarter of the
year. The researcher said the market would maintain flat growth for the rest
of the year.

Services Slowdown

The area driving much of the skyrocketing growth in IT spending during 1999
and 2000 was in the services sector, as companies spent huge sums to tie
together the disparate systems purchased during the technology boom of the
late 1990s. According to Giga, spending on services in 1999 and 2000 scraped
20 percent growth each year.

While that growth rate was unsustainable, the demand for IT services slowed
sharply, inching up a couple percentage points, but did not grind to a halt
last year. This year, Giga forecasts it will remain flat. Earlier this week,
Deutsche Bank Securities released a further gloomy report on the outlook for
computer services and IT consulting in the second half of the year.

While cutting its stock ratings for services companies like KPMG and Keane,
Deutsche Bank analysts William Zinsmeister and David Richman struck a
pessimistic tone.

“We do not anticipate the current business environment improving over the
next few months for most vendors,” they wrote.

Even the leading services companies, such as IBM and EDS, have said growth
will remain mostly elusive for the rest of the year. Last month, IBM
reported that its global services revenue fell for the third straight
quarter, while EDS has forecast revenue will only inch up in the third
quarter compared to last year.

Gartner analyst Dennis Wayson said many people lose sight of the forest
through the trees, since the services sector is still growing, albeit at a
slower clip.

Despite EDS’ announcement that said it was closing to winning a $1.5 billion
deal to run the computer systems of Dutch bank ABN AMRO, a particular
concern highlighted by the analysts was the continued absence of so-called
“mega deals” of $500 million or more.

“A few deals could close by year-end but our sense is that most will get
pushed out into the next budget year,” Zinsmeister and Richman wrote.

But Wayson paints a more optimistic picture, saying companies are
increasingly breaking projects into smaller chunks and for shorter periods
of time. Overall, he said, IT services providers are developing long-term
relationships with companies that will yield plenty of work.

“I think we’re in a situation where the rules of engagement are changing,
rather than the big deal is over,” he said.

Taking the long view, Wayson said he remains optimistic about the IT
services market, pointing to Gartner research that pegs IT services spending
rising at 6 percent on a compounded annual basis from 2000 to 2005.

“This is still a very good market,” he said. “Most industries would like to
see their potential growth rates at 6 percent a year. I think we’re at a
bump in the road. Things are going to start to come back.”