II. IT Spending In 2004: IDC Decidedly More Bullish

IT Spending In 2004:
On December 4, 2003, IDC hosted an Executive Telebriefing entitled
"IDC Predictions 2004: Top 10 Trends for the IT Industry." The most
striking take-away was that IDC increased its IT spending outlook for
2004 from 4.9% (as stated on its November "Black Book" telebriefing)
to 6% to 8%. What facts support IDC's optimism? The Economic outlook
is looking brighter, and optimism has been increasing in the current
budget cycle. Add to that the fact that non-farm business
productivity grew at an adjusted annual rate of 9.4% from July through
September, which represented a very strong 5% increase over the third
quarter of 2002, the fastest rate in 53 years. Concurrently, the
number of hours worked also increased at the fastest pace in three
years, which doesn't do much to help the joblessness situation. Now,
while this may be classified as a jobless recovery, we have seen 21
consecutive weeks with fewer than 400,000 initial jobless claims,
400,000 being a level viewed by economists as the sign of a soft jobs
market. If IT spending is a function of the economy, then we are
seeing economic signs of strength to support the increased optimism.
We believe that this may result in many of the prevailing estimates
being too low for many software companies.

Utility Computing:
IDC also made a number of predictions around various areas within IT.
Utility computing, it argued, will begin to drive major changes in
system architecture, management, product specification, and pricing,
but the actual investments in technology and services might be modest
in 2004. We can expect to see an increase in the advertising and
marketing messages around utility computing, but customers will be
slow to move toward a new architecture. By 2005, new leaders may
begin to emerge. This remains consistent with our current thinking.
We believe that utility computing and the subscription-based revenue
model will become a more meaningful part of software sales into 2005.
Future Field Guide articles will be dedicated to the emergence of the
utility computing model.

The Offshore Services Shift:
On the services side, the trend toward offshore IT services will
accelerate and even double in the United States next year. By 2007,
nearly 25% of the market will be delivered through offshore services,
and many customers will be unaware of the change. Low-cost sourcing
will be built into the global service delivery model led by the major
services vendors, IBM, Accenture, BearingPoint, and Deloitte. While
the project management may be in the U.S., much of the technical
analysis and coding will be occurring in India, China, or elsewhere.
This lower-cost model leads to savings for customers, but the impact
on IT professionals outside the low-cost geographies could be severe.
As the business models shift, IT suppliers will be forced to
reorganize around customer problems and industry segments. Business
process outsourcing will continue to expand, allowing companies to
focus on their core competencies. This trend has been well underway
for some time and many software companies are taking steps to increase
and shift resources offshore. Companies like PeopleSoft, Oracle,
Lawson, FreeMarkets, and Microsoft have all begun this process in
earnest. The big question will be: What is the right mix between
domestic project management and offshore support?

RFID (Radio Frequency Indentification):
The recent buzz in retail has been around RFID. Not to rain on the
parade, but IDC stated that actual spending on RFID in 2004 will
remain modest as the technology and standards take shape. In fact,
companies are still focused on justifying and implementing prior
supply chain automation investments, so further revolutionary
advancements in the supply chain may take time. The leaders of the
RFID rush, Wal-Mart (WMT-#=) and the Department of Defense, will
likely rollback the timeframe and/or scope on RFID requirements as
fewer than 50% of Wal-Mart's top 100 suppliers will be beyond simple,
early-stage beta programs by January 2005. In fact, Wal-Mart itself
will have RFID readers in less than 4% of its retail and distribution
centers by the deadline. This is a promising long-term trend, but we
believe, consistent with IDC's view, that current hype is ahead of
actual likely adoption. We believe that the progression will begin in
the supply chain with adoption in warehouses (pallet level RFID
tagging) long before broader adoption in stores. The cost of RFID
tags themselves will need to decline dramatically before product level
tagging is adopted. The cost of RFID tags will perhaps be the best
determinant of the pace of broader adoption beyond the warehouse.

International Growth?
Internationally, China and the European Union will be key growth
drivers for IT spending in 2004. In China, the small- and
medium-sized business will represent 25% of IT spending, and software
and services will both grow at 2x the rate of hardware growth. Growth
in the European Union will be driven by the expansion to 25 countries
in May 2004. Eleven percent of the IT spending growth in EMEA will be
related to the expansion of the EU, and a full 70% of the spending
growth in Eastern Europe will come from the expansion.

The bottom line is that IDC, a major IT and software market
forecaster, is beginning to see the sun rise over the nuclear winter
of IT spending. From a Wall Street perspective, this is a good thing.
Many estimates for 2004 already include 5% to 10% organic growth, and
even higher growth for license revenue. Of course, the theory is that
a larger percent of IT spending growth will go to software than
hardware, but what we need to see now are some good fourth quarter
numbers to support the appreciating valuations. The IT spending
recovery is likely to remain a gradual process, but signs are clearly
emerging of better days ahead. As the budgeting process for 2004 is
currently taking place at many companies, there are, at least, signs
that the purse strings may be loosening.