2005 Trends: Analysts Predict Modest Growth
IT Budgets To Hide Some Major Shifts Below Surface

The leading IT analysts have weighed in with their projections for 2005. While they are calling for continuing modest growth for the industry as a whole, these aggregate numbers hide some major shifts below the surface. For example, the analysts see a move towards the implementation of software-as-a-service (SAAS) model that will impact traditional independent software vendors (ISVs) as well as a continuing trend toward global sourcing of IT services. Meanwhile the financial services and healthcare provider industry will offer pockets of relatively strong growth as they address some interesting special challenges of their own.

Enterprise IT Growth Predicted to Soften Slightly
Forrester analyst Andrew Bartels predicts that North American IT spending in 2005 will grow by 7 percent, consistent with 2004 levels and the same rate projected for the overall growth of the economy in current dollars. He believes that new capital investment in computers and communications equipment will drop from its relatively fast 2004 pace to 7 to 8 percent each in 2005, respectively. Software spending will continue to grow at a 7 percent pace. Within the application software sector, security solutions will lead the way in terms of growth, while enterprise process application will lag at 4 percent. While overall spending on IT consulting and integration services will grow at an even slower rate of 3 percent, spending on IT outsourcing will increase at a relatively rapid 9 percent, driven by downward pressure on prices.

Morgan Stanley's CIO survey, on the other hand, shows cash growth of only 2 percent in IT budgets. The difference between Morgan Stanley's and Forrester's predictions is largely due to the fact that Forrester takes equipment depreciation into account. The Morgan Stanley survey also suggests that both the demand for IT services and pricing will post low single digit growth.

Cost Reduction Spurs Move to Software As A Service
Gartner analysts see software and services converging in a war of survival. The success of such hosted CRM services like Salesforce.com and Right Now  has showed that the model can work for large enterprise systems - not just for selling grandma's trinkets on eBay. SAP has recently begun offering a hosted ERP solution that is accessible via a web browser, and can be rapidly scaled to meet your organization's needs.

By 2010, Gartner predicts that 30 percent of new software will be delivered via the SAAS model. By then, the research firm asserts that five of the top 10 application suppliers will be external service providers that leverage SAAS models to deliver industry-specific service-oriented business architectures. This change is expected to result in an industry bloodbath as less than one-third of ISVs make a successful transition to an SAAS model and ISVs that leverage SAAS models gain market share over vendors that don't. Gartner also contends that areas of SAAS adoption will include horizontal applications such as customer relationship management, human resources, payroll, finance, email, document management, IT operations, and many vertical industry applications.

For clients considering a move to the SAAS model, our recommendation is that you examine the advantages of a hosted solution compared with a package software implementation by an ISV. While applications delivered by SAAS may be more cost effective in the short run and better able to scale up and down with your business, there are some important factors to consider. These include whether the vendor will require a long-term commitment, the level of technical support available, the ease of adding and deleting users, and most importantly, if there are any hidden costs for upgrading, adding licenses, or canceling the service. However, the SAAS model is a viable offering by all accounts, and its potential should not be ignored.

Offshore IT Services Demand Grows
Gartner forecasts a dramatic increase in global sourcing of IT services, rising from a $20 billion market in 2004 to about $50 billion by 2007. The global outsourcing market is also growing as a percentage of the total market, expected to increase to 7 percent in 2005 from just 3 percent the previous year. According to Gartner, the emergence of global sourcing will have a profound impact on the entire IT services market, even though it will continue to represent a small portion of the market. The Morgan Stanley CIO survey provides a contrary view by suggesting that the rapid growth of offshore services could be slowing. In addition, Morgan Stanley says stable pricing could signal margin pressure for offshore vendors, who seem unable to recoup their rising wage costs from customers.

In either case, global sourcing has proven to be a robust and mature method of IT service delivery, and many Fortune companies will continue to leverage the cost, speed and quality advantages that they receive today. Organizations that have not yet dipped their toes in the water should seriously evaluate whether or not global delivery can deliver the quality and value that their business requires.

The Impact of Web Services Continues to Grow
Gartner predicts that the impact of web services will continue to grow. By 2006, 45 percent of U.S. companies will be using some form of IT utility enabled by Web services and by 2007 Web services will enable the emerging real-time infrastructure capabilities underlying 80 percent of the hybrid IT utilities deployed by U.S. companies. Gartner expects that standardization in service-powered portals and service oriented business applications (SOBAs) will provide the means through which many companies will begin to exploit Web services strategically.

Financial Services Firms Continue to Invest in IT
Financial services firms already spend 8.7 percent of revenues on IT, more than any other vertical industry. The financial services marketplace is growing more competitive by the day, as mergers and consolidation force a shrinking number of companies to compete for the same pool of consumers. In this environment, it is imperative that financial services companies look to technology to differentiate themselves from the competition, and Gartner tells us that technology will continue to have an effect on virtually all segments of this market.

Gartner expects financial services companies to expand their pace of spending by utilizing prepaid cards, wireless microtransactions, and business intelligence tools to streamline operations, generate new revenue, serve new markets and comply with regulations. Banking and nonbanking prepaid card use will increase as new products are developed for medical spending accounts, gift cards, telephone cards, and payroll cards. By 2015 adult consumers worldwide will make an average of at least 20 microtransactions per month, up from less than one per month in 2004. At the same time, Gartner says the rapid pace of change in operational and financial disclosure laws and market rules is draining firms' ability to comply.

Healthcare Providers Are Automating
Gartner states that healthcare automation is moving from a "nice-to-have" competitive differentiator to a core competency whose absence can place a care delivery organization's future at risk. The research firm identifies the evidenced-based medicine (EBM) field as a particularly hot area because of its potential to reduce medical errors while increasing productivity by reducing paperwork. Gartner predicts that EBM capabilities will become a major competitive differentiator among care delivery organizations in attracting patients as well as staff. Digital imaging will be another area of rapid growth, Gartner says, driven by the explosion in the average number of images obtained during routine diagnostic procedures. As a result, picture archiving and communications systems have become key factors in attracting physicians and are migrating from the departmental to the enterprise level.

Quiet on the Surface, Turbulent Below
The bottom line is that on the surface the IT business will experience about the same growth rate as last year, modest in comparison with the 1980s and 1990s. On the other hand, that overall trend disguises some major shifts that in which some industry sectors are experiencing rapid growth at the expense of others. While the focus on driving down IT costs continues, companies are demonstrating their willingness to continue to invest in technology that can generate incremental revenues, drive down operating costs, and help comply with regulatory initiatives.

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