Gloomy Outlook For IT Services Spending

IDC says spending on IT services will grow only slightly, with only outsourcing and training experiencing real growth.
The IT service sector in the United States continues to grow, but just barely, according to a new forecast by IDC based on preliminary numbers from 2002.

Opportunities in IT consulting, systems integration, outsourcing, and IT training, both current and through 2006, vary substantially by vertical market, IDC says in the report, U.S. Services 4Q 2002 Forecast By Vertical Market, 2002-2006. Only outsourcing and training will experience real growth by 2006 compared with 2001 spending levels.

Health care and government remain the bright spots in the IT market. Those two segments were also identified in a long-range prediction made by Gartner Dataquest last week. The two markets, says Anne Lu, the analyst who authored the report, "are currently more stable, with healthy growth across the forecast years compared with other vertical industries, which are more vulnerable to the cycle of the economy."

Health care's IT growth is driven by compliance with the Health Insurance Portability and Accountability Act of 1996, Lu says, along with the creation of portals to provide patients with information, the need to manage a large number of legacy information systems, and the need for medical personnel to have real-time access to data and reports from laboratories and diagnostic departments such as radiology and pathology.

Unlike most enterprise-related vertical markets, government IT spending should show healthy growth during the next three years. All four areas that IDC identified--consulting, integration, outsourcing, and training--will climb in the government sector at rates from 2.1% to 9.3%. Lu cited a number of factors, ranging from the establishment of the Homeland Security Department to a general increase in networking technologies, including overall security and encryption.

"Government, especially the federal government, is more and more open to the idea of outsourcing their IT needs, in part because of a shortage of IT workers," Lu says.

Nongovernment sectors, she says, are more vulnerable to the swings in the economic cycle and so in the short term will show a decline in IT services spending. "But some of these markets, such as retail and manufacturing, are also the segments which can bounce back very fast" if or when the general economy perks up.

Among the trends in IT service spending that Lu outlines:

• Enterprise spending on IT consulting--important news to consulting providers--is in the doldrums because of the pervasive freeze on capital spending. Through 2006, total spending on consulting services will actually drop by 0.6%.

• Systems-integration services spending won't rebound until next year, Lu says. Even by 2006, spending levels will be nearly 2% lower than the benchmark 2001 figures.

• Outsourcing, both in IT and business processes, will continue to post growth. In fact, Lu says, every one of the 16 vertical markets will boost its outsourcing spending year to year through 2006. By then, spending on outsourcing will be more than $41 billion, an increase of more than 7% over 2001.

IDC's latest projections, Lu says, are gloomier than earlier in 2002. "We thought that the worldwide economy would bounce back during 2003," she says, "but now we see it recovering very slowly. We see no dramatic increases in spending for IT services in 2003."

Instead, IDC has pushed back its projected recovery of the IT economy into 2004.

The reasons are obvious, Lu says, and include the possible negative impact on spending if the United States goes to war with Iraq and the continued languishing of the global stock markets this year.

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