IT Spending Up ... Modestly

Manufacturing, financial services to increase tech spend 6 to 7 percent this year

Tempe, AZ  June 19, 2002  Rebounding from a tough 2001, information technology suppliers can expect to see 6 to 7 percent increases in IT spending by manufacturing and financial services companies in 2002, according to recent surveys.

Worldwide IT spending for the manufacturing vertical market  including discrete and process manufacturers  is projected to total $326 billion in 2002, a 5.5 percent increase from 2001 spending of $309 billion, according to the Dataquest unit of technology consultancy Gartner.

Although growth in IT spending in the manufacturing vertical industry will be modest for the year, Gartner said the 2002 increase still reflects a turnaround from the 1.3 percent contraction seen in 2001. Dataquest predicted that the manufacturing industry will continue to experience single-digit growth through 2005, when spending will surpass $407 billion.

"The economic recession and the end of the e-business bubble have compelled manufacturing enterprises to severely curb year-over-year increases in their IT budgets," said Geraldine Cruz, senior analyst for Gartner Dataquest's IT services group. "In fact, some manufacturing sectors, such as the automotive industry, will continue to reduce their IT budgets this year."

Nevertheless, Gartner called upon IT suppliers to develop strategies, solutions and execution plans to gear up for a resumption in IT demand when the economy rebounds. Said Cruz said: "Even in the midst of this economic downturn, the leading manufacturing companies continue to place the greatest importance on innovation, competitive advantage and customer satisfaction, and not on productivity improvement projects. The challenge for IT suppliers is balancing leaner operations to cope with the market realities today with the need to develop cutting-edge, forward-looking solutions for the future."

In financial services, two separate studies found that IT spending in this sector will increase by about 7 percent this year. Dataquest predicted that this industry would see a 7.3 percent increase in IT spending in 2002, for a projected total of $350 billion this year, against 2001 spending of $326.1 billion. A related study, by Celent, a technology consultancy to financial services companies, also pointed to a 7 percent increase in technology spending in the U.S. insurance industry for 2002, with total outlays this year amounting to $18 billion.

As in manufacturing, the financial services industry will continue to experience single-digit growth through 2005, when IT spending in this sector will surpass $474.4 billion, Dataquest said. Celent saw 7 percent increases in spending continuing in the U.S. insurance industry for the next two years.

"The double-digit industry growth rates common in the 1990's are gone," said Susan Cournoyer, another senior analyst for Gartner Dataquest's IT services group. "The slow transition from recession toward economic resurgence continues to put pressure on IT suppliers to survive through lean times. In fact, 42 percent of financial services companies surveyed in late 2001 said they plan to reduce the number of IT suppliers they work with, compared to 22 percent of companies surveyed in 2000. Clearly the viability of the financial services practices of IT suppliers is at stake."

Matthew Josefowicz, a senior analyst at Celent, said the insurance IT spending continues to focus on short-term, demonstrable return-on-investment, and he urged insurance companies not to confuse those two goals. "While it is of critical importance to set clear, measurable goals and manage projects diligently, an exclusive focus on short-term [return on investment] can discourage carriers from undertaking much-needed but longer-term and more systematic improvements."

According to Gartner, the combined pressures of economic recession, re-evaluation of CRM spending and concerns about inadequate infrastructure put many IT investments on hold, even before September 11. Investments in security in the aftermath of September 11, and also in infrastructure and the optimization of investments in e-business and customer relationship management, are driving the incremental recovery in IT spending.

"Although payouts by financial companies related to September 11 intensified the short-term downward pressure on spending, by late 2002 insurance companies in particular will step up IT spending to meet increased demand for insurance offerings," Cournoyer said. "This will be related to a heightened awareness of risk by insurance buyers. We'll also see an increase in IT spending on application outsourcing and business process outsourcing, Web services and financial services software, reflecting renewed attention to finance-specific business process improvement."

Cournoyer said solutions targeted at improving business processes build heavily on IT services and software, driving the IT spending strength in these components. "Also, the growing acceptance of packaged vertical applications represents a real turnaround from past reluctance to use them, particularly in the insurance and securities segments," Cournoyer added.

Finally, while the growth rates for technology spending in the manufacturing and financial services sectors might appear low, it is worth noting, if only for the sake of comparison, that a recent study by technology research firm IDC found that U.S. public school IT spending will hit $9.5 billion in 2006.