Growth Barriers

By Eric Nee  |  Posted 11-11-2002 Print Email

But that's not the only barrier to growth. There is also something called the law of large numbers at work. The bigger an industry or company gets, the harder it is to achieve double-digit rates of growth. And IT has gotten big—real big. In 2000, U.S. business spent $447 billion on IT equipment. To achieve 7 percent growth would have meant convincing business to buy an additional $31 billion worth of hardware and software on top of the $447 billion—more than the combined revenues of EMC, Sun Microsystems and Oracle.

But size isn't the only reason IT growth is slowing. If business could continue to get demonstrable returns on its investment, it would keep spending. The problem is that too often there is little, if any, measurable return on new IT investments.

Take hardware upgrades, for example. In the current economic slowdown, hardware upgrades are being put off, as evidenced by the latest Goldman Sachs survey of CIOs that showed them as dead last in spending priorities. This situation is not expected to change much even after the economy recovers.

In the early years, new PCs offered substantial improvements in productivity. But is there really a cost justification for upgrading PCs every three years these days? Unless the user is a scientist pushing the limits of computation, the answer is probably no.

It's much the same in the back room. Businesses spent billions upgrading their mainframes and servers when they went through the Y2K conversion, and these machines continue to run just fine. Thanks to the efforts of IT vendors, computers are much more reliable today than ever before, and will likely become even more reliable in the future.

There is every reason to believe that the upgrade cycle for hardware will lengthen, not shorten, in the years ahead. If the average upgrade cycle for computers goes from three years to four years, or even five years, that's a lot fewer computers sold. The U.S. Department of Commerce, in its "Digital Economy 2002" report, says: "Some experts believe that businesses are finding that the IT equipment is not becoming obsolete as rapidly as a few years ago, and they are stretching out their replacement cycle from 3 to 3.5 or 4 years."

And business spends more money on software than computers. Yet here too, there are reasons to anticipate a slowdown in spending growth. Name just about any function within a company—manufacturing, distribution, sales, accounting, administration—and chances are it has already been automated. That's what business has spent the last decade doing, putting in enterprise software to automate the various business processes.

That isn't to say that there won't be incremental IT improvements in each of these areas—there will. But future software projects are not likely to be the massive, bet-the-company efforts that ERP vendors like SAP and Oracle made their billions on. New software projects like Web services will be implemented incrementally, not on the sort of wholesale scale as in the past, says Goldman Sachs analyst Rick Sherlund. "The CEO is not interested in big projects anymore," he says.



 

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