A mild economic slowdown will precede the next wave of technology investment. Andrew Bartels, vice president of Forrester Research, looks into the future..
IT digestion makes hype more meaningful
IT market trends
The IT economy has been in a period of digestion since the peak of technology investment growth in 2000. During this time, users have concentrated on adapting to the prior wave of technology innovation, changing processes to take advantage of what new technology can enable. The growth rate in new IT investment slows to that of the overall economy, as companies prefer to buy only technology with tangible financial payoffs.
The last period of digestion lasted eight years from 1984 to 1992 so history suggests this period will also last eight years, until 2008. But this digestion period differs from its predecessors. It has already been through two phases, and has two more phases still to go.
The first phase was a severe recession in new technology investment from 2001 to 2003 the longest, deepest downturn in business and government investment in technology since the Second World War.
The second phase, from late 2003 to late 2004, was a post-recession rebound in new investment. Companies delayed spending as long as they could, and then replaced the computer and communications equipment purchased in 1998 to 2000, buying new PCs, servers, storage devices, routers, and switches. New business investment in computer equipment was 18 per cent higher in 2004 than in 2003, and investment in communications equipment was 12 per cent higher.
The third phase of moderate growth in technology investment will last through 2005 and into mid-2006. With the cycle of replacing old equipment complete, new investment will be driven purely by business needs for technology to save costs and support strategic objectives, regulatory compliance, or other return on investment-based decisions. As a result, IT investment growth will slow to that of the overall economy, about seven per cent.
2008: New technology reaches maturity
IT market trends
Forrester Research believes the US will probably experience a mild economic slowdown in late 2006 and 2007, which will cause a decided slowdown in IT investment growth in 2007 and early 2008. The US economic expansion by that time will have lasted 20 quarters since its start in the fourth quarter of 2001, close to the average economic expansion length of 21 quarters since 1945. This economic slowdown will then cause a comparable slowdown in tech-spending growth.
If past patterns hold, the next three years will also be the transition to the next period of technology innovation and growth. This period will start in 2008 with a new generation of technology reaching maturity, when firms will be receptive to new investments to deal with problems that the current generation of network computing technologies have failed to solve.
Not until 2009 and 2010 will IT investment growth start to increase at rates much higher than those of GDP.
IT market trends
Timing is everything. Invest too early, and you waste your money; invest too late, and you fall behind competitors. The right time for investing in a major way in the next big wave of digital business architecture technologies will be in 2008 and 2009. Wait until then to make big investments, but plan now for what you will want to invest in when the time is right.
Focus on getting value from current technology, by making the necessary process changes to take advantage of what that technology can enable, and by using current technology to make IT more efficient.
For companies likely to experience slowing revenues in an economic downturn, this means getting their new IT initiatives in during the next two years so they have room to cut back in 2007. For companies less exposed to falling revenues, the IT slowdown would be a good buying opportunity.
The next generation of technology is already being developed and tested, in the form of organic IT data centre technologies, service-oriented architectures for software, IP-based communications networks, and new client-side technologies such as RFID and mobile devices. While the value of business transformation from these new technologies is still taking shape, many have cost-savings benefits that can be realised now.
Andrew Bartels is a vice president at Forrester Research. This article is an excerpt from the Forrester report &aposExpect A Tech Slowdown Before The Next Boom&apos. www.forrester.com