The Canadian IT industry can expect its final year of negative spending in 2004 as some enterprises begin to replace hardware and business process outsourcing dominates the services business, market research firm IDC Canada predicted.

Overall IT spending this year is pegged at -1 per cent,

the second year of a decline IDC said represents a loss of $1.5 billion of what had traditionally been allocated towards technology. Last year IDC had been relatively optimistic and had predicted spending growth in the two to three per cent range, but unexpected variables like high interest rates, political tension and SARS put a damper on that forecast, said IDC senior analyst Vito Mabrucco.

While most chief executives spent last year trying to get costs under control, Mabrucco said generating new revenue and increasing efficiency is higher on the agenda, which will help the IT industry’s sagging fortunes.

“”The IT recession ends in 2004,”” Mabrucco said, describing this year as “”the turnaround, but not the breakout.”” Some sectors may grow in double digits, while others will decline just as rapidly, he added.

Key growth areas include entry-level servers, which IDC predicted to make up more than 90 per cent of the market. PC volume shipments are expected to go up three to five per cent, while storage capacity and the related market opportunities will grow 40 per cent, according to IDC. The increased storage capacity, in turn, could bring a number of manageability challenges that could be solved by the software industry, Mabrucco added.

Software overall is only predicted to grow two to four per cent over the next few years, Mabrucco said, but there could be some strong sub-markets within that space. Customers will be pressuring vendors to offer more flexibility around licensing, whether it be through pay-as-you-go, software as a service or a utility model.

Vendors have dealt with a spending drought for so long so they are fearing a sense of malaise throughout their corporate culture, Mabrucco said, which they are trying desperately to shake themselves out of.

“”They assume that if they set (sales) targets high, the market will follow,”” he said, adding that turnover at the executive level at many high-tech companies means there will be little tolerance for failing to reach fiscal objectives. “”This is the playoff year — it’s sudden death, all those things associated with the real competition.””

Although enterprises froze their IT budgets in 2001 in order to review their best practices and increase their return on existing investments, many of them are dealing with vertical market pressures of their own, said Kim Croisdale, IS manager at Genetics in Balzac, Alta.

“”There’s a lot of pressures on the agriculture industry that ultimately affect us,”” he said. “”Our spending isn’t really increasing . . . it’s a very flat rate over the last three years in terms of our department.””

While IDC sees continued growth in the IT services business, Mabrucco said business process outsourcing (BPO) could represent the largest area of spending in 2004 and could wind up being larger than the entire IT market.

BPO applies to the people and practices around non-IT functions, like HR, logistics, accounting and call centres. Many of the applications and IT resources in these areas have become standardized, Mabrucco said, which paves the way for enterprises to farm them out. The winners here will not merely be well-known outsourcers like EDS, CGI and IBM Global Services but specialty firms like Ceridian, Mercer and Fidelity, he said.

Late last year Canadian Pacific Railway announced a major long-term outsourcing agreement with IBM, and to some extent BPO was included in the deal, said IS security manager Val King.

“”We’ve outsourced parts of the HR aspects of it — your benefits, and stuff like that,”” he said. “”I don’t really know if the company is planning on going any further with that.””

Other expected growth areas from last year did not pan out, Mabrucco admitted. Wireless LANs have yet to take a major foothold in the enterprise, while instant messaging has so far failed to pick up speed in corporate communications, even though IDC reported a moderate 30 per cent rise in the volume of e-mail.

“”We seem to be constantly trying to figure out new ways to interrupt each other,”” he said. “”There might be a limit to what people need or want.””

IDC is also expecting to see some very large software deals in pubic sector as they decide the way to fix complexity is to start all over and leave integration challenges to third parties. “”They may not have time to wait for the utopia of all things integrated.””

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