IDC Canada: IT market maturing

As economic recovery continues to edge its way along a bumpy path, IDC Canada on Thursday tried to give a clear view of the current state of the IT market in Canada, the U.S. and the globe.

Vito Mabrucco, group vice-president, products and services research group for the Toronto-based analyst firm, said the future is bright, but it will take a bit of work to get there.

Mabrucco and his team broke their state of the union presentation up into their forecast and their downside. They came up with a number of assumptions, which were used to determine their best guess and best forecast. And they determined what the downside scenarios would be if another set of assumptions were to come true. Their findings were presented during a conference call.

In its forecast, IDC Canada saw economic growth over the next three to five years in the three to four per cent range.

“Profits continue to improve – albeit from a low base – even though profit growth often comes from cost-cutting,” Mabrucco said. Profits could come from price increases, but a downside assumption is that vendors will not be able to raise prices and there will be some unpleasant surprises on profit reports.

Mabrucco said the IT market is maturing. It’s looking to redeem itself from the excesses of the past and looking for the next big thing. The downside version of the IT market is a crisis of confidence in technology.

The telecom industry is still struggling, although there is growth in terms of service offerings. However, there is the potential for more bankruptcies and the deep competitive nature of that market could hurt it in the long term, according to IDC.

“Probably the most important is the business investment plans. We assume they will spend with the recovering economy. On the downside, business investment continues to remain in depression mentality.”

In terms of killer apps, Mabrucco said there are none, in either the forecast or the downside.

He said Canada will have a good year for 2002 GDP, with a faster growth rate than the U.S.

In terms of IT budgets, there is a bit of confusion, as IDC CIO polls show that month after month CIOs say they will spend more than they currently do, yet they continue to predict increases. “Are they playing out a self fulfilling prophecy or is there a need for an expectation adjustment?” Mabrucco asked.

New projects and outsourcing deals are what generate growth in IT, he said. A large portion of IT is dedicated to keeping the lights on or to previously committed projects. A potential precursor to a lower spending environment is when new project sizes get smaller.

Mabrucco stressed that a larger market with a lower growth rate can have greater absolute growth than a smaller market with a larger growth rate. In the first stage of growth there was $30 billion added to IT. When the market moved to 10 per cent, there was still $50 billion to $60 billion, now with smaller growth rates, it’s still resulting in increased market spending.

“Will the IT industry ever reach double digit growth again? Probably not. But of course, there are still a large number of markets growing at double digit rates,” Mabrucco said.

He noted that in late 2001/early 2002, IDC Canada downgraded its forecasts for the Canadian market, when it realized second-half recovery was not likely.

“Now in the current environment, and actually driven by negative growth in PCs and storage, we actually see that in 2002 we will have a negative year-over-year growth rate for the IT market in Canada. Following into 2003, where we had predicted 4.2 per cent, take that down to 3.2 per cent now, and although that is lower than historical, that’s actually the beginning of a ramp up,” Mabrucco said.

He predicted strong growth for outsourcing and services, even suggesting that some telecom companies may move more toward those offerings. Software deployment and support were strong in both the forecast and downside scenarios as well.

Early in the new year, he said IDC Canada expects to update their forecast and close out 2002. He said it is likely that the forecast will trend to the downside.

Hardware growth was expected to decline in Canada in the U.S., but worldwide there could be a rise as developing countries start to purchase more.

Mabrucco noted that in a downside scenario the total spending for five years would be $175 billion, whereas the forecast would have it at $194 billion.

“That ‘s a difference of $19 billion. Still, the downside is still greater that total spending of the previous five years, which was about $150 billion. The market continues to get larger because IT spending continues to occur and the growth rate just adds to the total market spending.”

The IDC Canada forecast is of gradual recovery, assuming the stability of the assumptions. The worldwide market is being driven outside of North America.

Ross Marsden, senior vice-president of business engineering for CGI in Toronto, was one of those listening, and he said he walked away from the conference call feeling positive.

“The growth rate was lower, but there is a substantive amount of business out there over the next few years,” he said. “The quantitative growth was positive.”