According to new research from Forrester Research, the tech sector slump will end in the third quarter of 2002 and a revival will pick up momentum in 2003, but double-digit growth won’t return until 2004. The current market downturn will accelerate consolidation and change the entire technology landscape. To prepare for the transformation, Forrester recommends a series of next steps for companies.
“Forrester estimates that 12% of the IT sector’s volume in 2000 represented overspending, which amounts to a hefty $62 billion,” said Bruce D. Temkin, group director at Forrester. “As buyers absorb their excess technology purchases, these ‘bubble’ expenditures will drag the recovery down over the next two years.”
As a result of buying sprees in 2000, budgets will remain flat in 2002. The sector will only experience 2.2% growth in 2002, with recovery not surfacing until the third quarter. Then, fueled by pent-up demand from delayed expenditures and a healthier economy, users will increase their IT investments in 2003 by 9.7%. By 2004, low-cost PCs and a boom in broadband access will enable a new generation of devices, applications, and always-on wireless services. These advances, coupled with favorable economic conditions, will boost the tech sector by almost 12% in 2004.
The technology industry will start to look different in 2003. Despite the slowdown, Internet investments will help boost US productivity, as applications like supply chain planning and eProcurement become more mainstreamed. The downturn will also intensify the price pressure on hardware manufacturers — kicking current industry giants out of the business.
Forrester expects that CIOs will respond to the weak economy by funding a series of smaller, shorter projects that replace the big bang eBusiness investments made over the past few years. To meet this change in demand, applications will be broken into smaller, more modular components, and subscription-based software will expand.
As the tech sector recovers, Forrester has several recommendations on how companies can survive the challenging economy. Executives should keep eBusiness activities alive by championing a few collaboration-centric efforts. The projects should be viewed as process-design programs with business partners and customers, rather than IT initiatives. CIOs are advised to cut deals with vendors when the tech sector bottoms out in the first half of 2002. VCs should prepare for an onslaught of innovations from displaced technologists in 2003, while integrators get ready for smaller-scale projects and profits.
Forrester charted the IT sector recovery based on three factors: overall economic recovery determined by GDP; baseline technology demand; and the time it will take to work off the $62 billion ‘bubble.’