Commitment to Digital Business Sparks Sales: 2017 Best Year on Record Since Recession

by Rita E. Garwood November/December 2017

IT spending is on the upswing, according to data from Gartner. John Lovelock examines the reasons behind the increase, including a commitment to digital business and a declining U.S. dollar. As software overtakes hardware and service-based models replace traditional ownership, he says businesses that fail to keep up with technological advancements will be left behind.

John Lovelock,
Research VP,
Gartner

With $3.5 trillion in global IT spending projected, 2017 is expected to be the “best year on record” since the Great Recession, according to John D. Lovelock, research vice president at Gartner. And according to its Q3/17 Worldwide IT Spending Forecast, 2018 should be another great year — Gartner projects global spending to reach $3.7 trillion next year, up 4.3% on a year-over-year basis.

“When we come off a few years of flattened growth, there is a technology debt that needs to be paid back,” Lovelock says. “There are certain cycles that just have to go on. We have to buy new service. We have to buy new PCs. We have to refresh our devices. When we have flat spending, we’re stalling some of that. We’re not buying new software, we’re holding off on things, and there is going to be a year of catching up. 2017 is the year where some of that technology debt has been paid off.”

The Dropping Dollar

One reason for this year’s catch-up, according to Lovelock, is the drop in the U.S. Dollar Index after a few years of steady increase. “The rising U.S. dollar made companies raise prices on products and services in Europe, Africa and, in some cases, India and China,” Lovelock says. “Raising prices dampened spending. This year was sort of a catch-up, releasing some of the pressure from the currency.

“When you have the U.S. dollar rising as it has in the last few years, we call that a currency headwind,” Lovelock says. “I sell €100 last year and it converts to $110, this year it converts to $120. I didn’t do anything different, but it looks like I’m getting 9% growth. So currency headwinds really affect multinational organizations in the revenue prospect by either inflating their revenue or decreasing that same revenue.”

Device Spending Increases

Gartner projects the devices segment will grow for the first time in two years — by 5.3% this year and by 5% in 2018. Lovelock attributes this growth to an enterprise refresh. “We know that overall, enterprises are cutting the number of devices being purchased for employees, but this was the year that we started to upgrade for Windows 10,” he says.

“Windows 10 was really nice when it came out in that it reinvigorated some of the old PCs out there and gave them a bit more shelf life. We’re past that though, so we put off two years or so of purchased PCs helped by Windows 10, and we’re starting to see all of that catch up. So if we do see a blip this year, we’re going back to flattening it down in the years going forward.”

Another factor that always affects device sales are new phone releases. “We get a blip every time a big vendor puts a new phone out, but we also get a lag leading up to it,” Lovelock says, explaining that many Apple purchases were pushed off earlier this year as customers waited to get the new model. “Even though we get that surge, it’s really coming from dampened demand leading up to it, and then there is a lull after.”

Software & IT Services Are the Future

By far, the software and IT services categories exhibited the strongest growth, with communications services continuing to drive most spending. Gartner projects software spending to increase by 8.5% this year and 9.4% next year, reaching a total of $387 billion. Spending on IT services is forecast to increase by 4% this year and by 5.3% in 2018, reaching $980 billion.

“Software is actually a great area. You really can’t do anything without software,” Lovelock says. “The big shift has been the move outside the data center, from licensed software to either subscriptions or some sort of hosting or cloud. That is making it easier for companies to implement software more quickly. It is also, from an IT spending point of view, changing around some of the dollar areas.

“Traditionally, if I bought a system from a vendor, and I wanted to put in payroll, I’d buy a server, some networking equipment and storage, some consulting and put my system in. I’d be running a data center, along with the consulting to keep it running,” Lovelock says. “You went to a cloud provider, and all you’re doing is paying them. They’re providing the server, and the maintenance and the other pieces to keep it running. We’re actually taking money from different areas and reallocating it into different areas of software because software is delivering more of those services under an umbrella.”

When asked if Gartner expects software spending to overtake hardware spending, Lovelock’s response is telling: “It already has.”

Lovelock explains that as “product productivity per employed individual,” or how much an employed individual can do, increases around the world, the percentage of spending allocated to internal services, devices and telephone services are dropping in response. “What fills the void are IT services and software,” he says. “Companies need specialized individuals for a shorter period of time, just long enough to create what you need. But once it’s up and running, you don’t need them anymore. You need software to do more and more things. You get better payback from software. You can go further down the rattail of specialized software in order to do small things because those small things mean money in a large productivity environment.

“Both software and services get much bigger as you get more productivity,” Lovelock continues. “As we’ve gone further down the cloud software route, and people are getting much more comfortable with it, now we have those integration services to say, ‘Here’s how we can make all of your software play well together. Here’s how we can start to maintain your software, how we can keep it running and watch it and keep it secure.’ So, the more software you have, the more software you need.”

Commitment to Digital Business

This reliance on technology, in turn, has sparked many companies to commit to expanding digital business development, which created a reason to spend money in 2017. “It was about folks starting on the new things, really committing to digital business,” Lovelock says. “Without that driving need, 2017 could have been a flat year.”

The push toward digital business drove spending increases in cloud-related technology, integration platforms as a service, computers and edge servers used to compliment data center cloud integration. Virtual personal assistants and wireless speakers also experienced a surge in growth: “It’s a very small market, but it’s a very critical market for capturing that connection with the consumer,” Lovelock says.

Push Toward Servitization

When Lovelock looks ahead to 2018, he says the most important trend in IT spending will be the ongoing conversion to service-based models. “The big thing that is at the heart of it is going from ownership to service,” he says. “I don’t need to own things as much as I need to use things. We’re seeing that playing out in IT. We’re seeing that play out in consumer spaces and business spaces. I don’t need to own a car; I need Zip Car. I don’t need a doctor; I can use a doctor online for a quick diagnosis. It’s going to start affecting everything. We see PCs as a service. We’re going back to basically renting PCs. And there’s what they call the gig economy. I’m not going to hire a sub-contractor; I’ll go onto Task Rabbit and hire somebody to put together my wardrobe from IKEA. Instead of having an employee, I get a service to do specific things for a specific period of time.”

Because of this shift, Gartner identified 10 markets expected to achieve dynamic growth in 2018, which Lovelock says “will be the key to remaining relevant and achieving growth in the future.” These markets include cloud segments such as infrastructure as a service, integrated platform as a service and communications platforms as a service. Technologies that enhance the digital workplace are also up and coming, including workstream collaboration, workforce analytics and video message-oriented middleware. Security, analytics and storage are also expected to achieve dynamic growth.

“Organizations that are not creating new digital business models or new ways to engage constituents or customers are falling behind,” Lovelock says. “Those vendors that do not move more quickly than their clients will be left behind.”

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