Forecast Analysis Worst-Case IT Spending Scenario Gets Worse Abstract: Early market indicators provide some compelling reasons for considering a worst-case scenario where global IT spending stays almost flat until 2005. By Roger Fulton and Kathryn Hale Recommendations Plan to put enough business flexibility in place to operate profitability in each of the three scenarios. Establish at least one set of business objectives that assume overall global IT product and skill-based service spending remains flat through 2005. Anticipate that competitive conditions and user buying behavior may have been fundamentally altered during this continued downturn. Watch for signs that this worst-case scenario is or is not actually playing out. Publication Date:21 March 2003
2 Worst-Case IT Spending Scenario Gets Worse Purpose of Forecast Scenarios Gartner Dataquest forecast scenarios offer a way of assessing upside and downside potential against the published detailed forecast data. Each of the three scenarios (most likely, best case and worst case) is linked to potential economic trends as well as buyer behavior and IT-related product, skill and service trends. For more information, please see the Gartner Dataquest Perspective "Economic Outlook, 1Q03: War Worries and Other Concerns" (HARD-WW-DP-0431). Organizations are encouraged to plan for their own versions of all three scenarios and to identify and track market conditions that will indicate which scenario is actually playing out as time passes. This can be a very effective way of avoiding surprises when things don't go quite according to plan. Around the world, Gartner continuously reviews the markets for indicators of movement in our underlying assumptions. Forecast Scenario Overview For the last 18 months, Gartner Dataquest has been updating a set of three medium-term forecast scenarios a best case, a most likely case and a worst case. The most likely case is the one for which we publish detailed numeric forecasts in the quarterly IT Market Databook "Gartner Dataquest Market Databook, March 2003 Update" (HWCP-WW-MS-0278) and elsewhere. In the fourth quarter of 2002 update, we kept almost exactly the same spending-upturn storyboard in the scenarios but pushed away the more positive changes by another quarter. Meanwhile, threats of war and rising oil prices increase economic and social uncertainty and diminish consumer and business confidence. Most Likely Scenario Gartner Dataquest's most likely scenario economic forecast assumes that real gross global domestic product (GDP) growth ranges from 1.8 percent for 2002 and 2.8 percent for 2003 to 3.8 percent for 2004. The likely impact on the software market is a late burst of growth around the end of 2003 as some discretionary funds are released. The fear of conflict in the Middle East is also impeding growth. Best-Case Scenario The best-case scenario is for strong recovery starting as early as the first half of 2003, led by the United States, with continued above-potential global growth through at least 2004. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 21 March 2003
Worst-Case Scenario For this update, we are setting out a new worst-case scenario one which includes no medium-term upturn and total global IT spending on external products and skill-based services stays more or less flat. Of course, there will still be hot pockets of growth as well as areas of further decay (in IT sectors, countries and industries), but they will balance out in the big worldwide picture. Worst-Case Scenario Assumptions Demand-Side Factors Tight financial control of discretionary investment and operating costs in difficult business conditions will continue to drive tough value/cost assessments and priorities. Business lessons learned and benefits gained during 2001 and 2002 will not be forgotten. The resulting scenario assumptions are: Market saturation The shortage of compelling new applications means that market demand for IT continues to emphasize buying for short-term payback in well-known business problems and processes. Business value The ability to demonstrate (rather than just describe) anticipated and achieved value or payback to the business will become an increasingly critical requirement. Businessprocessimprovements Significantadvancesindeveloping business process change can lay the groundwork for justifying new IT investment. Driving business process improvements has proved more difficult than implementing new technology. User/sponsor buy-in IT investments that do not have the clear buy-in from receiving organizations (in terms of willingness to change business processes and staff practices) will not gain approval. Declining corporate revenue This will continue to limit discretionary budgets but will keep management focus on cost-reducing initiatives. Lower costs Cost reduction, productivity and streamlining improvements will remain the most commonly acceptable justifications for new spending. Lower IT costs The broad desire to cap IT capital spending (measured as a percentage of revenue) and to reduce IT operating costs will be maintained. Outsourcing Outsourcing to a cost-effective supplier with greater critical mass or expertise in the needed resource will continue to be attractive. This transfers IT spending from internal resources to external services, but the goal is never to increase overall spending. Good enough systems For many business managers, their recent experience of cutting spending will have confirmed that lower-cost IT can still be good enough to deliver the levels of service essential to the business. 3 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 21 March 2003
4 Worst-Case IT Spending Scenario Gets Worse Worst-Case Key Indicators Governance Improved governance (decision making) and project management processes will help increase the business value of IT projects and resources while decreasing or stabilizing IT costs. Supply-Side Factors Vendor consolidation As a natural outcome of the current market weakness, packaged software suppliers will continue to polarize into powerful oligopolies (typically groups of two or three dominant market leaders) and much smaller specialist players. For more information, please see the Gartner Dataquest Perspective "1Q03 Software Forecast Update: Markets Still Struggling" (SOFT-WW-DP-0128). Product consolidation The integration and bundling of products into platforms, suites and portfolios is another way for vendors to consolidate power in a weak market. With fewer choices in the market, customers and vendors will see shorter buying (or not buying) decision processes. Moore's Law Customers will still be expecting ever-increasing performance and value for money from new technology products. But they will also be expecting a constant reduction in the cost of any particular IT solution (less cost, more value). Supplier oligopolies will be able to slow this price erosion effect. Agile architectures New technologies and architectures coming over the horizon promise more agile and adaptable corporate IT with less monolithic construction and more intelligent networking. The end result should be less expensive integration, operation and flexibility for users. Market revenue for enterprise software licenses, corporate PC replacements, small servers and key equipment components are all good leading indicators of changes in discretionary IT spending behavior. Quarterly growth, in 2003 and beyond, that closely matches the 2002 calendar seasonal variations will indicate that the worst-case scenario is playing out rather than the most likely case. Growth in the following would signal a more positive scenario than we have assumed for this worst case: An uptick in software licenses Throughout 2002, independent software vendor (ISV) license revenue continued shrinking, and software maintenance and services remained relatively flat. For more information, please see the Gartner Dataquest Perspective "Global Software Market Shows Signs of Stability and Caution" (SOFT-WW-DP- 0127). An improvement in user buying sentiment In the fourth quarter of 2002, there were indications that some corporations had authorized wholesale replacement of their PCs earlier than Gartner Dataquest had assumed. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 21 March 2003
5 An improvement in key supplier confidence Increases in semiconductor manufacturer inventories are another signal area indicating anticipated increases in demand. Long-Term Worst-Case Outlook Could this zero-growth scenario still hold true when business and consumer confidence is restored to more normal levels? Obviously, spending levels will still fluctuate from year to year. But the assumptions listed above also imply that the IT sector has potentially reached a point in its maturity when its growth will no longer be significantly different from other industries or the economy as a whole. So, growth slightly above or below inflation would become the norm. The limit assumed here is not in the demand for or supply of IT. It is in the ability to finance that demand. This is not to imply that the IT sector has reached the end of its innovative potential, only that the imaginative powers of vendors and users have entered a dry spell. Users sense that they can make do with established IT for a while longer. Creating the value propositions that counter this view and stimulate demand is key to the return of market growth. Key Issue What are the future growth prospects for this industry? 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 21 March 2003
6 Worst-Case IT Spending Scenario Gets Worse This document has been published to the following Marketplace codes: SOFT-WW-DP-0132 ITSV-WW-DP-0478 HARD-WW-DP-0450 TELC-WW-DP-0346 SEMC-WW-DP-0252 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-268819 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.gartner.com Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice. 113827