An optimist's analysis

More than three years after the Internet bubble burst, IT forecasters are still being asked. "Will robust growth in information technology spending ever return and, if so, when?"

Count me among the optimists. There have always been four main drivers of IT industry growth: inventory levels, the overall economic environment, customer confidence and major IT innovation. Although the current situation in each of these areas is by no means ideal, all four factors are now decidedly positive. This bodes well for a pretty good 2004 and a potentially strong 2005-06. Consider the following evidence:

Inventory levels. During the dot-com bubble, many companies over-invested in IT. It's hardly surprising that it has taken a few years to burn through the resulting excess. However, in areas such as mass storage, telecom equipment, PCs and software, there's growing evidence that most of this excess capacity has been consumed and that pent-up demand is building. Keep in mind that the last major slowdown in IT spending lasted roughly five years, from 1986 to 1991.

Economic cycles. Since IT now comprises nearly half of all U.S. capital investment, spending for it can't grow without the support of a solid economy. Fortunately, the U.S. economic recovery seems to be well under way. Whatever you think about the long-term wisdom of the Bush tax cuts, the huge federal deficits and the rapidly falling dollar, these policies have provided a powerful short-term stimulus that has led to renewed business and consumer confidence. On the other hand, any major new terrorist attacks in the U.S. or any worsening of the situation in Iraq could easily put an end to this momentum.

Customer confidence in IT. Forecasters are trained to rely on empirical data, but the single most important factor has always been psychological. That is, how strongly do customers believe in the potential of IT? During downturns, everyone likes to talk about short-term payback and ROI, but for most major IT projects, such measurements can't be made with accuracy. Consequently, customer confidence and perseverance is often required. As I wrote last month, Accenture's new ad campaign featuring Tiger Woods may signal a turning point in our industry's self-confidence and leadership.

Significant innovation. Historically, major supply-side innovations have helped drive the IT industry forward. Think PCs, LANs, the Internet and much more. But don't expect the coming recovery to be led by grid computing, blade servers or any other vendor technology. Instead, the most important innovations will be those coming from IT customers. Reasons for optimism include a revitalized online advertising business, the growing interest in RFID, the success of RosettaNet and the strong initial growth of Apple Computer's iTunes. On the other hand, many forms of potentially important demand-side innovation continue to lag, especially in health care, bill presentation and e-government.

The customer-driven innovations listed above suggest an important distinction. Many new sources of IT spending growth won't necessarily be part of the traditional IT budget. This is why many of the leading "IT spending surveys" could easily underestimate the strength of the coming recovery and why mainstream IT budgets may not feel any real sense of relief. Looking ahead, the prospects for overall IT spending and the IT department's budget will increasingly diverge.

- David Moschella's latest book is Customer-Driven IT: How Users Are Shaping Technology Industry Growth. Contact him at dmoschella@earthlink.net.

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