IDC: Tech forecast bleak, but hope remains

The upcoming year will mark a return to growth for the struggling IT sector, IDC Canada Ltd. said during its yearly predictions teleconference on Tuesday, offering a grain of hope to an industry that has seen two years of sub-zero growth, and lost nearly $1.5 billion dollars in the process.

In 2003, Canada’s IT sector saw negative one per cent growth, four per cent less than the research firm’s initial predictions of three per cent. But while the forecast for 2004 is not sunny, it is at least, only partially cloudy.

“The IT recession ends in 2004. We’ve had two years of negative growth and see 2004 as a turnaround year, not the breakout year,” said Vito Mabrucco, IDC Canada’s group vice-president, products and services research. “Overall IT growth will be slightly less than two per cent, improving over the next few years and approaching three and four per cent.”

The IT services sector is where most of the growth will be. Right now about 51 per cent of total money spent on IT goes towards services, with outsourcing being the most popular choice totalling about $7 billion and growing. A key driver in this market is companies selecting to outsource non-core functions, and the onus will be on service providers to woo smaller companies into the throes of outsourcing. Business Process Outsourcing (BPO) will be especially popular, Mabrucco added.

Consulting and integration services fall slightly behind outsourcing at just over $6.5 billion, but those markets have flattened, Mabrucco said.

In the hardware market, which is under pricing pressure, volume continues to increase. Entry-level servers are predicted to perform very well — in 2003 they accounted for about 95 per cent of all servers shipped, but for only approximately 45 per cent of revenue in the server market. Mabrucco said this market will increase four to six per cent in 2004. Storage units will increase to over six per cent, but capacity of these units will be up 40 per cent. PCs and notebook computers will be up three to five per cent.

As for the software market, it has had historically low growth over the past few years. The overall software market will increase between two and four per cent, IDC predicted. Key drivers in this market are the need for maintenance and the need for products to manage and integrate applications. For example, solving security headaches, and business process management.

He said one big challenge for the software market is the licensing model — customers want cheaper, more innovative models, and whether it comes in the form of pay-on-demand, open source licensing, or software-as-service, customers are demanding changes.

“Those software companies that do not respond to [this] demand risk their position in the market,” he said, adding that buyers are likely to wait for firms to change their licensing models before making any purchases.

Mabrucco said that companies are also continually looking towards expanding their markets or becoming bigger in their markets through acquisitions and mergers. In 2003 some examples included PeopleSoft Inc.’s purchase of J.D. Edwards and Co., Computer Associates Inc.’s strategy on refocusing on the enterprise, EMC Corp.’s quest to become a software company, and Oracle Corp.’s mission to find acquisitions.

“The software market is in major consolidation mode, and may go to hyper-consolidation mode before long,” he said. “The challenge is that while organizations look to software companies to help solve their business problems, particularly at the vertical sector level, these software companies have been downsizing in Canada and may not be able to respond quick enough.”

In order to be successful, these companies need to re-commit to serving the Canadian market well.

One glitch in IDC’s 2003 predictions were those involving wireless LANs (WLANs). While there has been a lot of hype regarding the technology, it failed to take off in the corporate environment as predicted, although it has multiplied rapidly in the public environments such as hotels and restaurants. Mabrucco cited lack of business case and poor security as inhibitors to the technology in the enterprise.

Another technology that didn’t take off was instant messaging (IM), however e-mail was still up 30 per cent in 2003.

Despite the wary optimism of IDC’s forecast, Mabrucco said there could still be some bumps or even potholes in the road to recovery.

“Even as we speak, the economy is weakening in Canada, especially as compared to the U.S., with GDP (Gross Domestic Product) growth forecast in Canada being revised downward from the earlier expectation of three per cent, while U.S. forecasts are being revised upwards and approaching five per cent,” he said, adding that price deflation in the hardware, software and services markets could also inhibit growth.

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