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Making the case for IT investment amid economic uncertainty

Many businesses look set to increase spending on IT despite the uncertain economic climate.

The UK's economic recovery has been nothing if not rocky over the past 12 months or so. Each time a corner appears to have been turned, business sentiment suffers another hammer blow at the hands of the statisticians. The latest major setback was January's economic figures for Q4 2010, which revealed a 0.5 per cent growth contraction during the final three months of the year. News of a downturn in gross domestic product couldn't have come at a worse time, especially with consumer confidence already floundering in light of the government austerity measures. And while the latest slump may have been heavily influenced by December's snow and ice, the economy is now teetering on the brink of a double-dip recession.

Fortunately, other economic indicators, including the Markit/CIPS Purchasing Managers' Index, suggest that this remains an unlikely outcome. The Confederation of British Industry has forecast 0.6 per cent growth between January and March, which would put the recovery back on track and offer renewed optimism. But from a business perspective, it is the impact of negative reports on consumers, who are already faced with increased VAT, high inflation and, in many cases, reduced job security, which is especially concerning. With the £81 billion public sector cuts beginning to bite, company executives across the UK are fearing for turnover and their profit margins, and budget cuts may be back on the corporate agenda. The key question is whether businesses are prepared to take a chance on growth and go through with their recently-formed expansion strategies, or pour back into the trenches with their capital intact. With the scars of the recession clearly visible in many firms, some may be tempted to err on the side of caution.

The quandary faced by businesses, understandably confused by the mixed economic messages they are receiving, is whether they can afford not to invest. After several years of chronic under-investment, many simply cannot afford to delay capital infrastructure spending any longer. With the healthiest enterprises committing millions to enterprise-wide IT upgrades, those wishing to keep pace must do the same. Legacy technology solutions purchased prior to the recession simply won't cut the mustard in 2011, especially in light of the rapid innovation of the past three years. Cloud computing has moved far beyond its embryonic form of the mid-noughties and businesses have lived through the Web 2.0 revolution. So for businesses with any form of reliance on IT it really is a case of now or never. The wait-and-see approach favoured by the accountants is a one-way ticket to reduced market share.

In the main, businesses are aware of this risk. Recent findings from research analyst IDC suggest that companies are indeed increasing their IT investment. The firm reports that global IT spending surged to its fastest rate of growth since 2007 last year, driven by pent-up demand for hardware upgrades and infrastructure investment. Consequently, the global IT market expanded by eight per cent over the last 12 months to a value of £1 trillion, with hardware spending leading the way. Capital IT spending on computer systems, peripherals, storage, mobile devices, and network equipment increased by 16 per cent to £441 million, and more of the same is needed in 2011 if UK businesses are to remain competitive in international markets.

IDC claimed that the pace of the IT market recovery was more robust than after any previous recession, including the dot.com crash of 2000, despite the great severity of the 2008-09 economic downturn. And crucially, despite the recent blip in the economy, the analyst believes continued expansion will be witnessed over the next 12 months. IDC has forecast seven per cent growth in global IT markets, with hardware sales increasing by ten per cent, software by five per cent and services by four per cent.

Stephen Minton, an IDC vice-president, said this "resounding rebound" in spending offered great confidence for the IT industry in 2011. He pointed to "a very real surge of demand" as businesses around the world continue to deal with the issue of managing, storing, securing, and analysing digital information. And with the increasing proliferation of mobile devices and embedded computing platforms, Mr Minton said this trend would be strengthened. "As long as the economy remains stable, we look forward to another strong year of investment in 2011," he commented.

Crucially, other research backs up the IDC view. Forrester Research recently reported a 7.0 per cent rise in IT spending during 2010, and has forecast 7.2 per cent growth for this year. The company claimed that demand for wireless, unified communications and videoconferencing technology will support the sector, as businesses upgrade their IT bases to account for new online tools. Fellow IT analyst Gartner has predicted slightly slower growth at 5.1 per cent, although this more conservative view represents an upwards revision from the previous projection of 3.5 per cent. On the whole, it would appear that despite economic concerns, businesses are committed to capital IT projects. Whether all other departments survive with their budgets intact remains to be seen.

The final word on the matter goes to IDC program manager and economist Anna Toncheva, whose 'cautiously optimistic' opinion appears to reflect those held by the majority of business leaders. While confident that businesses recognise the need to invest in IT, she noted that the global economy "could still be a wild card", and businesses do need to be on their guard. The European sovereign debt crisis could easily raise its head again during 2011 and weigh down on the private sector, she suggested. "We still lack sufficient visibility into many variables to be sure that a double-dip recession will not occur," Ms Toncheva stated. "However, the consensus opinion is currently that such a downturn is much less likely now than six months ago, and this continued economic stability will provide the foundation for another year of strong growth in the IT industry."