Forecasting the Future of the High-Tech Market

We came into the year with the most bullish expectations since the end of 2000 for High-Tech markets. While confidence grew throughout 2003, AMR Researchs most recent quarterly tracking survey of decision-makers shows the highest confidence level in spending plans since we started the survey three years ago (see Figure 1)>.

The market is clearly in recovery

However, significant structural changes to the overall Information Technology (IT) market underlie the positive news. Even in recovery, IT spending growth will be tempered, and the dynamics of the new market suggest it is a long-term trend. In other words, were never going to see the go-go days of the late 1990s again. As Figure 2 shows, > IT spending growth has, for the first time in history, come down to the same growth rate as Gross Domestic Product (GDP). This is the basis of the structural change to the market; it’s not a mere cyclical drop that occurs during all recessions. The charts history reflects that > During past recessions (like 1991-1992), IT spending still grew at a multiple of GDP growth. This new pattern, however, is uniquely different and is here to stay. In recent discussions with executives from IBM, Hewlett-Packard, and SAP, they concur. They don’t expect that spending growth, for the market in aggregate, will ever again exceed more than two times GDP (and some off the record believe that thats wishful thinking).

High-Tech is now a mature industry, and like all other mature industries, there will be fewer new entries and more consolidation. Further, the battle between vendors will be more about market share and process productivity than creating new markets through product innovation.

This is not a gloom-and-doom scenario

There remains enormous opportunity for growth and prosperity within this new reality. Consider that the best days of the Automotive market happened after it hit its maturity phase and stable markets formed for vehicle manufacturers and suppliers. Maturity is a boon to growth for three reasons:

• Its a move away from the constant introduction of new features, releases, and product segments that keep mainstream buyers frozen in their tracks.
• It creates stability for leading suppliers, which can now concentrate on customer lifecycle management without being forced by an endless stream of startups to constantly modify products in response to an ever-growing list of available features.
• There wont be a new architecture every 10 years that makes all existing investments obsolete, that requires massive new investments with no short-term benefits, and that inevitably wipes out one generation of leading suppliers to make way for the new innovators.

The winners are the technology buyers and users. Companies can now buy more for less and concentrate on building business benefits for the long term with stable products and suppliers.

Dispelling the myths

This coming boom is clouded by a shroud of myths, which create unnecessary confusion in todays market:

• Company spending patterns leave no room for innovation.
• There is no next new thing to sustain market development.
• Outsourcing and offshoring mean a shrinking number of good IT jobs in Western economies and signify coming economic troubles.

I dispute each of these below. (I will also address each in more detail in follow-on columns in the next few months.)

Myth #1: Company spending patterns leave no room for innovation

This is just not true. Companies are benefiting from trends that lower the cost of maintaining existing systems to allow for a higher percentage of spending on new projects or innovationeven with flat spending. In the past, a huge percentage of spending went to maintaining the status quo or supporting release upgrades and basic maintenance. Every trend now brings the cost of doing this down. For example, consider the following:

• The emergence of open source options
• Outsourcing/offshoring
• Utility computing
• Emerging offshore competition
• Users renegotiating maintenance agreements with their enterprise software suppliers and demanding fewer new releases

All of this means that users can bring down traditional IT costs without sacrificing capabilities, and thus free up capital for new projects within existing budgets.

Myth #2: There is no next new thing to sustain market development

This industry has been driven by decades of next new things that didnt make customers any more productive. The interesting thing now is that technology has become easy enough to use and inexpensive enough for widespread deployment. The next new thing is not a new bell or whistle or next-generation architecture, but the productivity benefits that users will realize through the use of technology. As McKinseys detailed studies have shown, beyond High-Tech itself, the only industries that have truly seen productivity gains through IT have been Retail (largely led by Wal-Mart) and segments of Financial Services (by deploying industry-specific systems).

If you want to see the next new thing, watch the productivity statistics as the winners in old economy industries, which have business process leadership, extend their margins of advantage through the deployment of technology. Part of this deployment, which will really affect the growth of the IT economy, is the widespread use of technology infrastructure within small to midsize businesses. (In the past, the technology was too expensive and too complex for these companies to use effectively.) This spread of technology use means productivity benefits across the entire value chain (from customer through Nth tier supplier), which in the past was not possible.

Myth #3: Outsourcing and offshoring mean a shrinking number of good IT jobs in Western economies and signify coming economic troubles

This myth will be strengthened this year by presidential politics and populist appeals against free trade, globalization, and outsourcing. No doubt, there is a growing trend to outsource jobs to Asia and Eastern Europe, and there are public policy implications on what to do with displaced workers. However, what effect has this had on the last three years? The fact is that a huge technology bubble burst, and thousands of companies were wiped out along with the jobs they funded. Alongside this, the job-driving private equity market disappeared. Add in corporate scandals, 9/11, two wars, escalating oil prices, and ongoing fears of global terrorism, and the resiliency of the Western economy through all of this is fairly remarkable.

We have seen phenomenal productivity growth through all this turmoil, and most economists stand by forecasts for continued 3 percent-plus productivity growth. This may create short-term pain on the jobs front, but this growth remains the only way to raise the living standards of the workforce, companies, and the macroeconomy overall. So what does this have to do with outsourcing? Companies are finding ways to get the same done for less, which will raise productivity for these companies. Unfortunately, some individuals will be hurt, just as has happened in the manufacturing economy in the past few decades. However, per the trends cited above, computer use will go up within these companies as well as across the value chain to small companies previously left behind by the computer revolution. This will create jobs for those who know the business processes and have the expertise to use computers in improving these processes.

While this is not good news for generic programmers or systems maintenance or call center staff, it represents an opportunity for more business-focused technical talent. The fact that lower tier jobs move offshore will have a significant, long-term effect on what organizations look like in the future and on their future use of technology. What matters and the new source of competitive distinction is management and integration between organizations at the business process level. Exemplifying this replacement of one kind of IT job with another, IBM is outsourcing 3,000 programming and maintenance jobs to India, but it is also looking for 4,500 new employees to work with customers on business process consulting and implementation projects, among other higher-end functions. Since this is a subject that requires much more detail than I have provided here, my next column will be dedicated entirely to this outsourcing issue.

We are entering a golden age of technology deployment. The first phase of this is underway as we are finally in a spending recovery.