Canadian Information Technology Spending Forecast Summary

Transcription

1 Developing Tomorrow s Workforce Today Information and Communications Technology Council Conseil des technologies de l information et des communications REPORTS March, 2007 Canadian Information Technology Spending Forecast Summary

2 Table of Contents IDC Opinion In This Study Methodology Situation Overview Canadian IT Market Group Overview Canadian IT Forecast Future Outlook Forecast and Assumptions Canadian IT Forecast Summary Canadian IT Forecast by Submarket, Market Context Key IT Subcategories Hardware Subcategories Software Subcategories Information Technology Services Subcategories Canadian IT Market by Industry Canadian IT Market by Region Essential Guidance Learn More Related Research Definitions Hardware Software Services

3 IDC Opinion The information technology (IT) market continues to be a strong contributor to economic growth and prosperity to Canada. The Canadian IT market had a banner year in 2005, with many markets exceeding our original estimates for the year. This positive momentum has been carried forward into our forecast for 2006 to Canadian IT forecast highlights include: The IT market growth rate was 5%, generating about C$37.2 billion in Overall this represents a higher growth rate than anticipated due to the strong economic environment as well as continued fulfillment of latent demand. For 2006 the IT market grew at an annual rate of 4.9%. The economic environment continues to be strong with positive profit growth and business investment plans. IDC expects the compound annual growth rate (CAGR) for the IT market to be 3.7% for the five-year period of 2005 to Annual spending will increase from C$37.2 billion in 2005 to just over C$44.7 billion in In total, more than C$246 billion will be spent on IT over the next five years in Canada. The competitive and creative environment that exists in the IT market provides an excellent opportunity for the buyers to evaluate and integrate the value of IT into their business strategies and implementation plans. Understanding how IT drives strategic business advantage is critical to the success of both the buyers and providers of IT. With the strong economic environment, now is the time to invest in IT for the future. IT providers need to emphasize the positive impacts of IT in marketing messages and translate how IT fits into their clients strategic goals to help ensure the success of their customers business strategies. To underestimate the value of IT and simply view it as a method of cost containment misses a great opportunity to leverage technology for the benefit of individuals, organizations and our nation. 1

4 In This Study This study presents IDC Canada s forecast for the Canadian IT market for 2006 to All three major IT markets (hardware, software and IT services) are covered in this study, and a five-year forecast is included for each market. This study also provides a brief qualitative overview, which offers readers a summary of the key trends shaping the market. For the purpose of this study, IDC examines select segments in the IT hardware, software and services sectors in greater detail, and provides a regional and industry view of the IT market for For more detailed information on individual markets, readers may refer to the documents referenced at the conclusion of this study in the Related Research area in the Learn More section of this study. The key IT markets covered in this study include: Hardware Single-user hardware Multi-user hardware Storage hardware Other hardware Software ERM applications Other application software Application development and deployment System and network management Networking software Security software Other system infrastructure IT Services For the purposes of this study, IDC Canada has segmented the Canadian market into the following industry groups: Manufacturing and resources Infrastructure services Distribution and services Financial services Public sector Home/consumer IDC Canada categorizes the 10 provinces and three territories in Canada into six regions: Atlantic Canada (ATL) Quebec (QC) Ontario (ON) Other Western Canada (OWC) Alberta (AB) British Columbia (BC) Please see the Definitions within the Learn More section of this study for a detailed explanation of the terminology used to define these market parameters. Methodology This report assembles IDC Canada s most current forecasts for the key segments in the overall Canadian IT market. These forecasts are based on extensive research and analysis of the various IT segments in Canada carried out by IDC Canada analysts, presented through direct consultation and in published reports. Please note that all revenue and sales figures in this forecast are stated in Canadian dollars (C$), unless otherwise noted. Consulting and integration Outsourcing and operations-related services Support and training services 2

5 Situation Overview Canadian IT Market Group Overview turned out to be a banner year for the IT market in Canada. Providers that were cautiously optimistic about their sales outlook were finally rewarded in IDC estimates that total spending in the Canadian IT market reached C$37.5 billion in 2005 and grew at a CAGR of 5%. Earlier in 2005, IDC forecast that year over year Canadian IT market growth would be about 4.7%, with the hardware segment leading the charge with growth of about 6.3%. IDC s latest IT market figures now show that Canadian IT market growth surpassed expectations, posting 5% growth year over year and the hardware segment exceeded predictions, posting the highest growth rate of the three markets (hardware, software and services) at 6.9%. Economic activity was strong overall in 2005, with gross domestic product (GDP) growth rate at just about 3%, profit growth at just under 11%, and business investment growth of just under 8%. However, IT growth did not keep pace with the profit or investment indicators, and was only slightly faster than GDP growth. While business investment is growing, much of this investment was in capital equipment in industries such as oil and gas, as well as the automotive and transportation industries, and was not IT related. Also, given the economic slowdown of the early 2000s, companies are less enthusiastic about spending as fast as their profit grows, deciding instead to continue to strengthen their balance sheets and cash positions. This continues to be a challenge to the IT industry. As long as IT investment is considered in the context of cost containment (as opposed to providing competitive advantage and top line growth opportunity) overall IT market growth will remain muted. In addition, with the size of the IT market now C$37.2 billion, growth rates will be lower due to the maturity and large size of the base off which it is growing Canadian IT Forecast Table 1 presents the Canadian IT market spending figures for hardware, software, services, and communications for Figure 1 segments the Canadian IT Market by the key submarkets. Table 1: Canadian IT Market Spending, 2005 (C$M) Market 2005 Hardware 14,268.9 Software 6,502.1 IT Services 16,499.9 Total IT Market 37,271.0 Source: IDC Canada s IT Market Forecaster, Figure 1: Canadian IT Market Segmentation, 2005 Source: IDC Canada, 2007 Note: Total IT market = C$37.2 billion Hardware Services 45% Hardware 38% Software 17% IDC estimates that spending on hardware totaled over C$14.2 billion in The hardware segment is the second largest submarket in the IT market, representing about 38% of the Canadian spending. Although the volume of hardware shipments continues to increase in most segments, intense pricing pressure hampers total spending growth in this market. Canada, along with Western Europe, Latin America, Asia/Pacific and the United States all experienced strong PC spending, described as a second wave to the Y2K upgrade cycle. This surge in spending is an example of meeting the pent up demand resulting from the relatively low spending years between 2001 and

6 Software Although software is the smallest segment of the Canadian IT market, with estimated spending of C$6.5 billion in 2005, it is one of the fastest growing segments. IDC estimates that the Canadian software market grew by 5.4% in 2005, and the rate of growth is expected to remain between 4% and 5% into the forecast period. The software market, while in part driven by a replacement cycle like hardware, is also driven by the increasing need to streamline business process, improve supply chain integration, improve customer relationships and deliver increased functionality for competitive advantage. Also, as the hardware market continues to proliferate with volume servers, the support, infrastructure and security software required to manage the environment increases. Information Technology Services Canadian spending on IT services amounted to more than C$16.5 billion in 2005, making it the largest individual submarket within the Canadian IT market. While outsourcing continues to be the single largest driver of this market, its characteristics have changed there are fewer large megadeals and an increasing number of discrete and selective outsourcing contracts. This is at typical evolution of a maturing market, as the need and application of the benefits of outsourcing start to find their way into smaller contracts and smaller organizations. Also, the delivery platforms to deliver what in the past were considered viable at a high unit cost to large organizations only, now are benefiting those same providers because they have the critical mass needed to support lower transaction costs and pricing. 4

7 Future Outlook Forecast and Assumptions IDC Canada takes into account a number of macroeconomic factors when building its market-specific forecasts. Based on an interpretation of these factors, IDC develops a set of assumptions that in turn influence the forecasting process. A summary of these assumptions and their subsequent impact on the IT market forecast is presented in Table 2. Table 2: Canadian IT Market Macroeconomic Assumptions, Accelerator/ Inhibitor/ Certainty of Market Force IDC Assumption Impact Neutral Assumption Macroeconomics World Economy At an estimated 4.4% (measured using purchasing power parity conversion rates), world growth in 2005 was considerably weaker than in 2004 but is still comparable with some of the best years of the 1990s. The global economy will continue to decelerate in both 2006 and 2007 and the structure of growth will change as domestic demand trends become increasingly more important relative to the external trade dynamic. While our central forecast calls for reasonable growth in the world economy in the years ahead, there are a number of downside risks that could turn the gradual slowdown into something much more serious. Moderate: The global economy is in a stable environment from an economic perspective. While pressure in the high growth countries like China and India continues to drive commodity prices high, the overall impact of lower costs of manufacturing and services seems to be offsetting the impact on inflation and interest rates. In developed economies where there is near full capacity utilization, there is not as much impact on inflation as would be expected. This is due to the continuing globalization of resources and capabilities, resulting in a new global context for supply constraints that are not bound by geographies. While the global economies work to provide a stable environment, the global geo political environment continues to be a threat if there are new and unforeseen terrorist acts that unsettle the global economies.! GDP GDP Canada 2.9% 3.0% 2.7% US 3.5% 3.2% 3.0% Eurozone 1.4% 2.0% 1.8% E.U. 1.6% 2.2% 2.0% AP 4.5% 4.3% 4.2% Latin 4.1% 4.1% 3.7% Source: Consensus Economics High: GDP forecast growth will average 3.0% in 2006 and 2.7% in 2007, little different from the estimated performance in A cautious GDP forecast mainly reflects our concerns about the financial health of Canadian households and the prospect of slower private consumption growth as Canadian interest! 5

8 Table 2: Canadian IT Market Macroeconomic Assumptions, (continued) Accelerator/ Inhibitor/ Certainty of Market Force IDC Assumption Impact Neutral Assumption Macroeconomics GDP (continued) rates rise further. With interest rates expected to rise by around another percentage point, private consumption growth is forecast to ease from 4% in 2005 to 2.8% in This will slow further to 2% in 2007 when higher interest rates really begin to bite. The household savings rate is at a historical low and much consumer expenditure has been debt-financed. Debt growth has rapidly outpaced the rise in earnings, and household balance sheets are particularly vulnerable to rising interest rates. The stabilization of house prices will also dampen equity withdrawal, which has been a major driver of additional household expenditure over the past few years. GDP Provincial High: Among the provinces, look for Alberta to grow at a robust 4 per cent per year in the period. In spite of the likelihood of some slackening in oil patch conditions later this year and into 2007, there is significant forward momentum currently built up in the province s economy. The economic expansion in British Columbia will remain strong in 2007 above the 3 per cent mark as continued strength in construction and services activity more than offsets a slowdown in forestry. Elsewhere in the Western region, continued expansion in the energy and mining industries, and some improvement in the! 6

9 Table 2: Canadian IT Market Macroeconomic Assumptions, (continued) Accelerator/ Inhibitor/ Certainty of Market Force IDC Assumption Impact Neutral Assumption Macroeconomics GDP Provincial (continued) crop sector, is likely to keep real GDP growth in Saskatchewan above the national average, while the diversified economy of Manitoba is expected to advance at the same beat as Canada as a whole. Inflation Core inflation is forecasted to remain well within the central bank s 1-3% target range. High oil and gas prices lead to rise in prices in early 2006, however tightening of monetary policy will prevent further increase in price in mid-06 and inflation will slow in the latter half of 06 and even further in 07. Moderate: If inflation stays in the target zone for the Bank of Canada, then inflation will have little impact on the expectation of interest rates tapering off. However, if there is worldwide events that drive energy prices to new highs, the impact on the domestic Canadian economy will be negative as the CDN$ will rise, and interest rates will rise as well. The challenge is that while the energy sector benefits, the rest of the economy (other than government revenues) does not as prices and interest rates go up. I Interest Rates Interest rates are expected to raise a percentage point in 2006 and even higher in Depending on the overall inflation rate, the Bank of Canada may slow the interest rates increases by late Low: While interest rates rise to manage the inflation impact of higher energy prices, they still remain relatively low from a historic perspective. Consumer spending could start to see an impact due to higher interest rates, as would the housing market, but it would not represent a collapse in the total market. Spending by business is expected to pick up the slack of any decline in the consumer market.! 7

10 Table 2: Canadian IT Market Macroeconomic Assumptions, (continued) Accelerator/ Inhibitor/ Certainty of Market Force IDC Assumption Impact Neutral Assumption Macroeconomics Geopolitical Continued geo political tensions will exist, with the possibility of another major event impacting all economies. Moderate: Continued tensions and other potential threats are widely expected to continue.! Business Investments Business, governments and institutions are expected to increase their spending on plant and equipment by 8.2% in This is a higher growth rate than was achieved in 2005 (7.6%). Machinery and equipment spending is expected to increase 4.5% in 2006, versus an increase in 2005 of 4.2%. Source: Stats Can. High: Business investment spending has direct positive impact on spending on ICT, we expect to see continue increases in spending to replace aging hardware together with ongoing ICT investments as part of the productivity agenda.! Corporate Profits While not matching the Y/Y increase of 2004 corporate Pre Tax Profits will continue to be healthy in 05. Years Canada 18.7% 10.7% 6.2% US 12.6% 14.2% 9.5% Source: Consensus Economics High: Profit growth continues to be positive. Although the rate of profit growth is declining, it is growth on a larger profit number from the previous 2 years. Over 3 years profit will increase by over 35%. The result is increasingly strong cash flows and strong balance sheets. Given the need to drive increased competitiveness, and the strength of the corporate profit picture, we should expect to see an increase in the pace of investments in ICT.! Market Dependence on Macroeconomics Overall, the Canadian macroeconomic indicators are strong. Canada is expected to be one of the stronger economies in the G8 for 2006 and The strength in the macro economy includes: large export surplus, increasing current account surplus, strong government revenues and surplus, low interest rates, strong corporate cash flow and balance sheets, world wide demand for commodities, including energy, stable political environment, strong Moderate: With the continued demand for commodities, as well as the strong current account surplus (resulting in less foreign debt and interest payments) the economic environment in Canada is positive in the short term. There are numerous challenges in the longer term regarding the competitiveness of Canadian organizations on a global basis, as well as the continued drain of manufacturing and services jobs! 8

11 Table 2: Canadian IT Market Macroeconomic Assumptions, (continued) Accelerator/ Inhibitor/ Certainty of Market Force IDC Assumption Impact Neutral Assumption Macroeconomics Market Dependence on Macroeconomics (continued) Canadian dollar (C$). Weaknesses include too much dependence on commodities, declining manufacturing sector, high C$, consumer demand slowing. to offshore countries. This is a challenge to be addressed but will no likely slow ICT growth, and will probably accelerate as the challenge becomes more recognized. Exchange Rate With the US dollar expected to weaken against most currencies in 2006, the Canadian dollar should maintain its strength, averaging C$1.14:US$1 in that year, before weakening slightly in 2007 to C$1.20:US$1 as commodity prices slip back and the narrowing trade surplus reduces the size of Canada s positive overall currentaccount balance. Moderate: Strong economic fundamentals, including the government s healthy fiscal position and a positive currentaccount balance, will support the Canadian dollar against the US dollar during the forecast period. High resource prices are also sending the Canadian dollar to new highs against the US currency.! Free Trade Trade disputes involving Canadian exports of softwood lumber to the US threatens to sour trade relations. The export balance of trade continues to be very positive for Canada, with continuing strength in energy trade. The automotive sector is also maintaining it position, as the big three reduce capacity the Japanese automakers continue to invest in plants in Ontario. The current account continues to be in a surplus, driving a higher C$. High: Trade disputes will continue to cloud Canada s otherwise good relations with the US. The most critical trade issue involves Canadian exports of softwood lumber to the US, with the US ignoring yet another ruling, this time by a panel under the auspices of the North American Free-Trade Agreement (NAFTA), which found that Canada did not subsidize its lumber industry. The US has called for a negotiated settlement of the issue, but Canada has postponed talks indefinitely. The issue was momentarily diffused after the US Commerce Department cut countervailing duties by half in December. However, the issue has become embroiled in Canada s general election campaign and both major parties have called for the duties! 9

12 Table 2: Canadian IT Market Macroeconomic Assumptions, (continued) Accelerator/ Inhibitor/ Certainty of Market Force IDC Assumption Impact Neutral Assumption Macroeconomics Free Trade (continued) to be eliminated altogether and the money collected by the US since 2002, an estimated C$5B, to be returned. With yet another exchange of heated rhetoric, the dispute threatens to sour trade relations even further. Capital Markets Capital markets are reaching new highs based mainly on the strength of the energy sector, as well as mergers and acquisition activity. Low: Strong balance sheets and positive profit outlooks continue to make access to capital relatively easy. I Telecom Telecom industry growth is positive with revenue and profit gains drive mainly by in Wireless, Data and IP. Low: Telecom industry has gone through large structural changes and has now stabilized. Future growth in the industry depends on the development of new services and technologies, specifically as they relate to IP network rollouts and wireless.! Energy Short term events like rising petroleum inventories can momentarily deflate oil prices, but long term concerns are also creating a push- pull effect on prices in oil markets. Geopolitical uncertainties stemming from Iran s nuclear ambitions have added to the volatility. Give that Iran is a founding member of OPEC and the world s fourth largest oil producer, oil futures have remained above US$60 per barrel. Also, ongoing worries over supply continue to dominate following the recent disruption to Nigerian oil output. Expectations are that oil prices will remain above US$57 per barrel for at least the next 12 months. High: Oil prices at this level temper overall economic growth of the North American economy. While this has an impact on the cost of goods and services, it also is a positive impact to the Canadian economy through the strong profits generated and the taxes collected on those profits and the employment. With the higher C$ there is less impact on imported goods as they cost less to buy, along with the affect of lower cost products from Asia Pacific. High oil prices do create a dichotomy for the Canadian economy. While we benefit as net exporter of energy, we are also impacted through the affect it has on dampening US and Canadian consumer demand, as well as the potential to drive interest rates higher as the economy works at full capacity.! 10

13 Table 2: Canadian IT Market Macroeconomic Assumptions, (continued) Accelerator/ Inhibitor/ Certainty of Market Force IDC Assumption Impact Neutral Assumption Macroeconomics Government & Trade With the latest election resulting in another minority government, albeit led by the Conservatives this time, not much else will likely change in the near future. With a minority government Stephen Harper and his team will not be able to fully implement their policies. In fact, in light of the need to win a majority government, we can expect that there will be little in the way of major changes to the government agenda. The government will be challenged in delivering some of their campaign promises of reduced spending and such, but they will likely have to compromise given the minority situation they are in. Moderate: The public sector revenues in Alberta and the federal government continue to be very strong. The Federal government surplus is higher than expected given the conservative assumptions previously made. With the economy at near full capacity, and the strong energy tax revenues, there is plenty of cash flow. However, whether there will be a disproportionate amount spent on ICT remains to be seen. There is likely some pent up demand in the Federal government as we have had a number of years of uncertainty since PM Chretien resigned. Expectation is that some major projects will have to be initiated soon in order to meet some of the modernization and cost savings expected from ICT.! Legend: very low, low, moderate, high, very high Source: IDC Canada,

14 Table 3 presents IDC s Canadian IT market forecast for 2006 to Figure 2 shows the Canadian IT market forecast graphically, while Figure 3 illustrates the growth rates associated with each of the key markets in the Canadian IT market. Table 3: Canadian IT Market Forecast, (C$M) Market CAGR Hardware 14, , , , , , % Software 6, , , , , , % IT Services 16, , , , , , % Total IT 37, , , , , , % Please refer to Table 2 for assumptions supporting our forecast Source: IDC Canada, 2007 Spending C$M Figure 2: Canadian IT Market Forecast $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $ Year Source: IDC, 2007 Hardware Software IT Services Growth % Figure 3: Canadian IT Market Forecast Growth (%) 7% 5% 4% 3% 1% 0% Year Hardware Software ICT Wholesaling, Rental & Leasing Source: IDC, 2007 Canadian IT Forecast Summary The economic environment in Canada for 2006 and beyond is very positive. GDP growth is in the 3% range, providing respectable growth for the economy. More importantly, however, is that profits continue to show growth in the business environment, anticipating 6% in profit growth in 2006, after a year with nearly 11% profit growth. Also, tax revenues are continuing to increase with the rise in commodity prices, as well as the high employment and corporate profitability resulting in most governments in Canada with another year of budget surplus. With the strong balance sheets and cash flows, business investment plans remain healthy, with an expected increase of 8% in As the Canadian economy runs at nearly full capacity, and unemployment rates remain at relatively low levels, the Bank of Canada policy continues to be biased towards rising interest rates. Combining higher interest rates with strong world commodity prices has resulted in an increase value of the Canadian dollar (relative to the US dollar) to 12

15 levels not seen in almost 30 years. This factor puts a slight dampening effect on all the other positives factors in the Canadian market. IDC estimates that the total IT market reached almost C$39.1 billion in 2006, representing just over 4.9% growth for the year. Annual growth is projected to increase at a similar rate throughout the forecast, resulting in about C$44.7 billion in annual total IT spending by While a CAGR of 3.7% over the next five years may seem lower than historical growth (looking back over the last 10 to 20 years), it is actually quite substantial absolute growth on a very large market. At a 3.7% CAGR over five years the additional spending in IT is over C$7 billion, or about C$1.4 billion per year. Over those same five years, more than C$246 billion will be spent on IT in Canada. Canadian IT Forecast by Submarket, Hardware IDC estimates that the Canadian hardware market grew by about 6.5% between 2005 and 2006, producing approximately C$15.2 billion in spending. IDC expects this rate of growth to persist throughout the forecast, with more than C$16.9 billion in annual hardware spending by 2010, representing a five-year CAGR of 3.5%. Hardware remains the second largest IT market after services. With much of the latent hardware demand being met in 2005/2006, future growth will be driven by new applications and normal transaction volume increases. Software The Canadian software market is the smallest of the three IT markets, but it is growing at a faster five-year CAGR than the other submarkets. IDC estimates that software spending grew by 4.6% between 2005 and 2006, resulting in more than C$6.8 billion in spending. This rate of growth is expected to taper off slightly throughout the forecast period, with an estimated five-year CAGR of 4.5% producing more than C$8.0 billion in spending by The software market continues to be an attractive market, albeit competitive and high cost from a selling and support point of view. Also, with the shift to more software as a service (SaaS), new business and delivery models are having an impact on the software market in Canada. The hosted applications market continues to have strong growth, while the software on demand market has a lot of attention from buyers as an interesting and viable option, including large and medium size business. This SaaS business model will continue to capture market share, while at the same time increasing the total spending on software as customers find different ways to address business needs with the traditional and SaaS delivery options. Information Technology Services The Canadian IT services market is the largest of the three IT markets, and IDC estimates that spending reached C$17.1 billion in 2006, representing about 3.6% in annual growth. This market will continue to grow at a five-year CAGR of 3.6%, and should generate C$19.7 billion in annual spending by The IT services market is starting to show signs of maturity. While the growth is reasonable for such a large market, there are continuing signs of leveling growth rates. This characteristic is driving the development of some new business models. There is a drive to find ways to deliver IT services to the midmarket that is cost effective for them, while at the same time profitable to the provider. Selling more technology and functionally as a managed service is part of that trend, whether it is hardware, software, communications or even business process it is a model that many of the market players are attempting to find the right balance between value to the buyer and profitability to the provider. The IT services market has also become a favourite adjacent market for the telecommunications providers who are looking to add growth to their legacy portfolios and relationships. By entering these markets they are both competing and partnering with the traditional IT services companies. This is positive news for the ICT buyers as it drives increasing price competition, as well as innovative approaches to services delivery. Market Context The purpose of this feature is to identify and explain the key differences between the updated forecast and the prior forecast. This comparison should help IDC customers understand the market context and assumptions behind the data. Table 4 compares our updated IT forecast to our previous forecast from October Figure 4 illustrates the previous IT forecast to the updated one. 13

16 Table 4: Canadian IT Market Forecast Comparison, (C$M) Market Previous IT forecast (October 2005) 37, , , , ,522.4 New IT forecast 37, , , , ,286.4 % difference between forecasts -0.2% +1.7% +2.8% +3.5% +4.2% % annual growth (previous forecast) 4.7% 2.9% 2.4% 2.7% 2.7% % annual growth (new forecast) 5.0% 4.9% 3.5% 3.4% 3.5% Source: IDC, 2007 With the exception of 2005, the updated Canadian IT forecast is slightly higher than estimated in our previous forecast cycle (October 2005). Although IDC slightly reduced its 2005 estimate to account for a slight overvaluation of the software and services markets, continued optimism regarding the Canadian economy, business profits and IT budgets influenced our decision to raise previous IT forecasts in the later half of the forecast. Most notably, software estimates from 2006 to 2010 were raised due to a slight undervaluation of the market in combination with increased optimism for spending in the future. Hardware estimates were also increased based on the latest PC, server and other hardware tracker information. The amplified spending estimates for software and hardware subsequently impacted the overall IT market forecast comparison. In summary, we are more optimistic about the IT market than we were last year based on the most up-to-date market conditions, information and assumptions. Please reference the assumption table and related documents for more information on this revised forecast. Key IT Subcategories Hardware Subcategories Single-User Hardware The term single-user hardware refers to the PC market. It is the largest market within the hardware market and accounts for about 43% of hardware spending. IDC estimates that spending on PCs reached more than C$6.6 billion in 2006, and will grow by more than half a billion dollars over the forecast period, producing C$7.1 billion in spending by This rate of growth represents a five-year CAGR of 2.5%. Escalating pricing pressure continues to hamper total spending in this subcategory even though the volume of shipments is rising on an annual basis. Spending on notebooks continues to drive spending in this segment compared to the desktop market, which IDC expects to decline over the forecast. Spending (C$M) Figure 4: Canadian IT Market Forecast Comparison, $44,000 $43,000 $42,000 $41,000 $40,000 $39,000 $38,000 $37,000 $36,000 $35,000 $34,000 Source: IDC, Multi-User Hardware IDC estimates that the multi-user hardware (or server) market grew by almost 3.9% in 2006 to C$1.9 billion. This rate of spending growth is expected to taper off slightly throughout the forecast, producing a five-year CAGR of 3.6%. Despite severe pricing pressure and the disruptive force of virtualization (which eliminates the need for dedicated servers), the server market is expected to grow to more than C$2.2 billion by Volume server spending is driving growth in this segment, while mid-range servers remain flat throughout the forecast period. Storage Hardware Previous forecast (October 2005) The storage hardware market accounts for the smallest proportion of hardware spending at approximately 8.9%, and generated C$1.35 billion in spending in As Year New forecast 14

17 the slowest-growing hardware segment (CAGR of 2.1%), storage spending will inch its way toward C$1.4 billion by Network attached storage and storage area network are the fastest-growing segments in this submarket. IDC expects the markets for direct attached storage and tape storage to decline over the forecast, which is slowing spending for this segment overall. Other Hardware The other hardware category includes spending on printers, handhelds, and other hardware-related items. As a group, this category generated more than C$5.2 billion in spending in 2006, growing over 10% year over year. Although this growth will slow down over the forecast period to 4.9%, the market will still generate an impressive C$6 billion by Software Subcategories ERM Applications The market for ERM applications grew by 6.9% in 2006, generating C$833.3 million. Although ERM application spending is expected to taper off throughout the forecast, resulting in a five-year CAGR of 5.4%, the market is still expected to reach over C$1 billion by Other Application Software Other Application Software is the largest subcategory, accounting for about 35% of all software spending. IDC estimates this market grew 3.1% year over year and generated more than C$2.4 billion in spending in Other application software is forecast to reach C$2.8 billion by 2010, a five-year CAGR of 3.4%. Application Development & Deployment The application development and deployment software market is the second largest software market in Canada, accounting for about 28% of all software spending. IDC estimates that this market generated almost C$1.9 billion in spending in 2006, and grew at a rate of 5.2%. This segment is expected to grow at a five-year CAGR of 5.1%, peaking at C$2.3 billion by System and Network Management IDC estimates this market experienced strong growth in 2006 of 6.6%, generating C$263.5 million. System and network management spending is forecast to grow quickly at a CAGR of 6% to reach over C$330 million by Networking Software Networking software is one of the smallest and slowest growing segments of the software market. In 2006, the market totaled C$85.8 million and accounted for just 1.2% of total software spending. IDC expects the market to experience slow, and at times even negative growth, with a five-year CAGR of less than 1% to reach C$86.2 million by Security Software Security software is the fastest growing software market in Canada. This market was valued at C$300.2 million in 2006, and grew year over year at 12.1%. Security spending will grow by an impressive five-year CAGR of 10.75% to reach C$446.1 million by Other System Infrastructure IDC estimates this market grew by 2.8% in 2006 to C$948.9 million. With a modest five-year CAGR of 2.9%, the market is forecast to reach over C$1 billion by Information Technology Services Subcategories IT Consulting & Integration The consulting and integration market accounts for about 36% of total IT services spending in Canada, and generated more than C$6.1 billion in IDC estimates that this group of services will grow at a five-year CAGR of 2.5% over the forecast period, producing more than C$6.8 billion in spending by Outsourcing & Operations-related Services Outsourcing and operations-related services account for the largest proportion of IT services spending at about 44%, or approximately C$7.5 billion in This group of services will continue a healthy level of annual growth throughout the forecast period, resulting in a five-year CAGR of 5.3%. IDC estimates that this group will generate almost C$9.2 billion in spending by 2010, based on the strong growth rates for all submarkets. Support & Training Services The support and training services group accounts for less than 20% of total IT services spending and generated almost C$3.4 billion in spending by the end of With a modest CAGR of 1.7% expected throughout the forecast, spending on this group of services should top C$3.6 billion by

18 Canadian IT Market by Industry To cope with their unique business pain points, Canadian verticals are deploying diverse IT spending patterns (Canadian IT Forecast by Vertical Market, IDC #CA8SMB6). The public sector was the largest IT spender, accounting for about 20% of Canada s IT spending in IDC estimates that public sector spending will reach almost C$9 billion by With a five-year CAGR of 4.9%, the financial services sector is the fastest growing vertical. IT spending reached C$7 billion in 2006 as the industry addressed channel and distribution transformation, operational efficiency, and external imperatives. IDC believes financial services firms will increase IT spending up to almost C$8.5 billion by Although the Canadian dollar has been a big inhibitor in the manufacturing sector, IT spending still reached over C$6 billion, driven by the need for IT solutions that can increase collaboration, create operational excellence and help them reach their customers more effectively. Table 5 presents IDC s Canadian IT Market Forecast by Industry for the time period. Figure 5 illustrates the growth rates associated with each of the industry segments within the Canadian IT Market. Figure 5: Canadian IT Market Forecast by Industry Spending C$M $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Source: IDC, Year Home and consumer Public sector Financial services Distribution and services Infrastructure services Manufacturing and resources Table 5: Canadian IT Market Forecast by Industry, , (C$M) CAGR Manufacturing and resources 5, , , , , , % Infrastructure services 6, , , , , , % Distribution and services 7, , , , , , % Financial services 6, , , , , , % Public sector 7,430 7, , , , , % Home and consumer 4,066 4, , , , , % Source: IDC Canada,

19 Canadian IT Market by Region Spending on IT will vary significantly across the regions through the forecast period. The largest region will continue to be Ontario, accounting for about 50% of all IT spending through IT spending in Ontario reached C$19.4 billion in 2006, and is forecast to grow at a five-year CAGR of 3.9% to C$22.4 billion in Although Quebec firms spent about one third of what Ontarian firms invested in IT, they were still the second largest spenders in 2006 at C$7.4 billion. This spending can be attributed to the number of corporate headquarters in Ontario and Quebec that elevate the level of IT spending in these regions. More than 50% of the Financial Post 500 (FP500) list of companies were headquartered in either Ontario or Quebec in 2005 (Looking for Growth in IT Outsourcing: Regional Opportunities in Canada, IDC # CA8SO6). According to Statistics Canada, since 2003, Alberta has seen its economy, counted as real gross domestic product (GDP), grow faster than the Canadian average. This growth is forcing Western Canadian firms to act on their business challenges, and driving growth in IT spending. Alberta is the fastest growing region with a five-year CAGR of almost 5%. Spending on IT by Alberta-based firms will grow from just over C$4 billion in 2006 to over C$4.8 billion in Atlantic Canada organizations spend the least on IT, accounting for about 5% of total IT spending. At a CAGR of 3.3%, IT spending in Atlantic Canada is estimated to grow from almost C$1.8 billion in 2006 to just over C$2 billion in Even though Atlantic Canada firms tend to be laggard buyers, they are prudent investors in IT and focus on commodity and/or necessary technologies more than companies in other Canadian regions. Table 6 presents IDC s Canadian IT market forecast by region for 2006 to 2010, and Figure 6 illustrates the growth rates for each of the regions. Figure 6: Canadian IT Market Forecast by Region Spending C$M $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Source: IDC, Atlantic Canada Quebec Ontario Year Other Western Canada Alberta British Columbia Table 6: Canadian IT Market Forecast by Region, , (C$M) CAGR British Columbia 4, , , , , , % Alberta 3, , , , , , % Other Western Canada 1, , , , , , % Ontario 18, , , , , , % Quebec 7, , , , , , % Atlantic Canada 1, , , , ,948 2, % Source: IDC Canada,

20 Essential Guidance IDC offers the following advice to Canadian buyers of IT: Invest in your IT strategy now to ensure success in the future. The IT market continues to show strong prospects for both providers and end users/consumers. Given the current positive economic environment, now is the time for organizations to invest in IT as a strategic weapon to safeguard against uncertainty in the future. Procrastinators will find it difficult to make these types of investments if the economic environment cools off. The advantage of investing now is that the IT strategy will be in place to provide them the business advantage needed to succeed during the difficult times. The competitiveness of the IT market continues to drive interesting and valuable new offerings and business models. As providers enter adjacent or create new markets (eg. telecommunications firms entering IT services or software companies selling software as a service) they offer buyers of IT more choice and value. Both stakeholders should understand, however, that the overall health and value of the relationship would depend on mutual success. A low-price, low-cost relationship alone will not support the long-term goal of creating strategic business advantage with IT. Do not underestimate the value of IT in your organization or to the nation. The IT market is strong and more vibrant that it has been in years, despite relatively low growth rates (by historical standards) in the 3% to 4% range. With over C$39 billion spent in IT in 2006, and incremental spending of about C$1.4 billion a year on average, the IT market continues to be a strong contributor to economic growth and prosperity to Canada. To underestimate the value of IT and to view it solely in the context of cost containment misses the opportunity to leverage technology for the benefit of individuals, organizations and our nation. Understand how IT can create a strategic business advantage. Buyers of IT should seek to understand how IT could create significant strategic business advantage, not as a technology acquisition afterthought but as a key component and early participant in strategy development and implementation plans. IDC offers the following guidance to providers of IT in Canada: Focus sales and marketing messages on positive impacts of IT in organizations. Providers of IT should provide more value statements and proof points describing the positive impact on profitability, customer service, market expansion, efficiency and other business imperatives that both public and private sector customers have in their daily and long term operations. Integrate IT investment messages into business strategies/goals of your clients. Providers of IT should understand and integrate more effectively with the strategies and business goals of their customers by focusing on how IT enables and differentiates them. The goal should be drive the success of their customers business, and not just to increase their spending on technology. 18

21 Learn More Related Research IDC Canada s IT Market Forecaster,. IDC s Software Taxonomy, 2007, IDC # , Feb 2007 IDC s Worldwide Services Taxonomy, 2007, IDC # , Feb 2007 Looking for Growth in IT Outsourcing: Regional Opportunities in Canada, IDC # CA8SO6, Sep 2006 Canadian IT Forecast by Vertical Market, IDC # CA8SMB6, July 2006 Canada Information Communications and Technology Forecast Summary, IDC # CA2ITMP6, May 2006 IDC s Worldwide Hardware and Network Infrastructure Taxonomy 2005, IDC # 33333, May 2005 Definitions The definitions provided in this document represent the scope of IDC s current hardware, software, services and network infrastructure research. Consistent market definitions are one piece in a set of research standards and methodologies used by IDC worldwide. This consistency helps IDC provide clients with useful and accurate research they can use to identify opportunities and analyze trends in the complex and ever-changing IT industry. IDC has provided an abbreviated version of multiple taxonomies to assist readers in understanding the terms used in this document (below). Hardware The Canadian hardware market is divided into four primary categories: single-user hardware, multi-user hardware, storage hardware, and other hardware. Please refer to IDC s Worldwide Hardware and Network Infrastructure Taxonomy, 2005 for more detail on these definitions. Single-User Hardware Single-user hardware includes base desktop PCs and base notebook PCs. Multi-User Hardware Multi-user hardware generally refers to the server market. IDC s server class taxonomy segments this market into three classes: Volume server market (consisting of all systems with an average sales value [ASV] below $25,000) Midrange enterprise server market (consisting of all systems with an ASV of $25, ,999) High-end enterprise server market (consisting of all systems with an ASV of $500,000 or more) The midrange enterprise and high-end enterprise markets are referred to collectively as the enterprise server market. Storage Hardware The storage hardware market has four key components: direct attached storage, network attached storage, storage area network and other storage (i.e. tape, etc.). Other Hardware Key categories contained within the other hardware bucket are network equipment, printers and multi-function printers, smart handhelds, and other hardware-related items. Networking equipment includes spending on routers, switches, wireless local area networks as well as IP-based and PBX equipment. Software The Canadian software market is comprised from three primary markets: applications, application development and deployment, and systems infrastructure. The definitions for these primary markets are outlined below. Please reference IDC s Software Taxonomy, 2006 for more information. Enterprise Resource Management (ERM) Applications Enterprise resource management applications are designed to automate and optimize business processes related to resources required to meet business or organizational objectives but are not customer or prospect facing or specialized to various types of engineering. The resources automated include people, finances, capital, materials, and facilities. The resulting applications forecast, track, route, analyze, and report on these resources. The market includes software that is specific to certain industries as well as software that can handle requirements for multiple industries. 19