IT Is Approaching Its Golden Age, Not the Ice Age

AMR Research’s latest quarterly survey of corporate decision-makers reinforces the optimism that we’ve been expressing since early this year: Although we will not see anything close to the wild ride we experienced in 1999 and 2000, stability is finally coming to IT spending patterns and technology markets, which will benefit established companies. I write this positive outlook amid a growing backdrop of negativism on the future and the importance of IT markets.

Yes, structural changes are happening within IT. However, rather than this being a negative circumstance, we are finally entering a phase where widespread deployment of technology is possible. This will yield real productivity benefits.

This point can be seen clearly through two perspectives:

• Signs of recovery, based on the details of our latest survey results and outside indicators
• A counterview to the “I.T. Doesn’t Matter” camp

Signs of recovery continue

AMR Research’s ongoing survey of IT decision-makers supports a stronger outlook for technology through the second half of 2003 and 2004:

• For the first time in two years, IT managers are more optimistic going into the second half of the year than they were at the start of the year. In 2001 and 2002, optimism, as reflected in expected IT budget growth, declined as the year progressed. That changed this year--expectations for IT budget growth have risen to almost 3.5% in 3Q03 from 1.7% in 1Q03.
• IT investments are targeting customers rather than cost or competitors. Companies want to invest in technology that lets them improve customer service to increase customer loyalty and grow customer bases. Economic factors, such as GDP growth or consumer confidence, and competitive motivators, such as time to market and price optimization, are also strongly influencing how businesses spend on IT.
• Nearly two-thirds of the CIOs we surveyed plan to invest in infrastructure, particularly in software infrastructure (25%), hardware (21%), and networking (18%). Many companies will spend on the integration tools they need to connect the existing applications they’ve already purchased.
• Compliance with government regulations is a major factor behind investment. Companies have to adhere to government regulations like the Sarbanes-Oxley Act, the TREAD Act, CFR 21 Part 11, and HIPAA--all expensive propositions that involve investments in technology.

Macroeconomic data supports our survey findings and makes it clear that we can expect this positive trend to continue into 2004:

• Consumer confidence appears to be returning, improving over the past three months since reaching a low in the spring.
• Profits have returned. Manufacturing profits have improved steadily since 4Q01, returning to pre-2000 levels, and cost containment continues to yield impressive results. After-tax profits averaged 7.1 cents per dollar of sales in the current quarter, 5.6 cents in the last quarter, and 5.8 cents a year ago.
• Business investment and expansion should follow. After finally achieving positive growth in 4Q02, investment has improved five of the previous six quarters (with the exception of the first quarter of this year, a result of the uncertainty caused by the war in Iraq).
• Although significantly more volatile than overall business investment, U.S. capital investment in software and related technologies has grown in four of the last five quarters.
• The Institute for Supply Management’s Index of Purchasing Managers indicates that U.S. manufacturing has been expanding since July, reversing a four-month trend of contraction.

All of the above means that companies are entering the 2004 budgeting cycle with optimism. This means continued growth in spending and IT, with the opportunity for new projects and innovation inside end-user environments.

A counterview to the “I.T. Doesn’t Matter” camp

First, let’s examine the backdrop for the negativism. The theories of gloom and doom for IT markets are as follows:

• The end of innovation--The IT industry will shrink because there will be no new killer application. This yields commoditization, which will make for long-term malaise in the IT industry.
• Commoditization means “I.T. Doesn’t Matter”--With regard to technology resources, their “very power and presence,” in the words of Nicholas Carr, “have begun to transform them from potentially strategic resources into commodity factors of production. They are becoming costs of doing business that must be paid by all but provide distinction to none.”

Now, the counterview: Because of the massive innovation of the late 1990s and the resulting infrastructure that it created, what’s actually happening are significant structural changes to the technology supplier and technology user environment:

• Established vendors are back in control--During the late-1990s, power shifted to venture-backed technology vendors, which offered extended functionality and new capabilities. Much of this is now incorporated into the core products of established players because of the massive consolidation of the past three years. New opportunities in IT may have shrunk and venture capitalists may not like it, but to the larger established players, this means market stability and an opportunity to concentrate on long-term account control and market share gains. It’s also good for the technology buyer, who can concentrate on managing technology rather than sifting through growing lists of features and functions.
• Technology users are increasingly business users--With commoditization and stability in technology markets, a whole new generation of technology users will emerge: business users. For the first time, technology has gotten easy enough to use that it can be deployed widely within organizations and across industries. What has been a long time coming can finally happen because of the convergence of the ease of global communication provided by the Internet, availability of easy-to-use handheld devices, emergence of wireless access, and full deployment of advanced applications that make business data accessible. This is causing a structural change within the user community that will make technology a part of the fabric of every line of business. It will also lead to the widespread use of this technology infrastructure within small to midsize businesses, which in the past could not afford either the technology or the complexity of using it effectively.

Conclusions

These structural changes are the basis for what IBM refers to as “The Post-Technology Era.” The importance of this new era is that it will yield what Carlota Perez, author of Technology Revolutions and Financial Capital, calls the “golden age of technology deployment,” a period after the financial bubble bursts when technology finally lives up to its promise by creating huge productivity gains across all industries. In this book, Perez draws parallels to the eras of mass production and the automobile; steel and electricity; rail and steam; and the original Industrial Revolution. With history as a guide, Perez argues lucidly that this golden age is right in front of us. We agree, and these structural changes are the basis for this to occur.

AMR Research originally published this article on 8 October 2003.