As the world’s economies continue their slow and hesitating recovery from the 2008 financial crisis, overall spending in the U.S. on equipment and software just reported its eighth consecutive quarter of growth as reported by the U.S. Department of Commerce, Bureau of Economic Analysis (BEA). Quarterly, the BEA publishes annualized statistics detailing “capital” investments; some years ago, the BEA adopted the practice of reporting spending on “intangible” computer software by companies as capital investments.

For business leaders within both the equipment and IT leasing/financing communities, the BEA data provides a quick snapshot of how the overall total available market (TAM) has changed. Understanding how TAM has changed provides business executives with a broad measure to gauge their organization’s performance.

Figure 1 on page 46 presents a summary of the BEA derived data detailing annualized U.S. investments. From the bottom of the so-called Great Recession in Q3/09, when annualized investments totaled $899 billion, to the latest forecast published during July 2011 when annualized spending reached $1.1 trillion, overall U.S. investment spending has increased at a compound growth rate of 2.8%. This is a reasonably positive rate of improvement given the economy’s many challenges.

Every Picture Tells a Story
Compared with the volatility of the overall spending, the largest single category, investment spending in computers, software and communications (IT spending) continues on a more positive track. During this past economic cycle (the period from Q1/08 through Q2/11), IT spending has cycled from a low of 39% of all U.S. investment to a high of 46% during Q4/09. As the economy has recovered and spending on non-IT investments has increased, IT spending has declined to 41% of overall expenditures. In other words, as other forms of capacity and productivity investment spending have tracked with the economy, spending on IT equipment and software has been buffered from much of the volatility.

One way of depicting change is to show the changes in the growth rates, quarter-to-quarter. Figure 2 on page 47 presents a comparison of these quarterly changes in U.S. growth rates for IT investment spending and contrasts it with spending for all other types of equipment. This chart shows the tremendous volatility of U.S. equipment investments through this economic cycle especially when IT spending is contrasted with spending for all other types of equipment. The word volatility is used often to describe financial markets. Within Figure 2, the average for quarter-to-quarter change for IT spending was a modest 0.3% — virtually flat — and nothing like the sawtooth pattern of the actual data. For the “all other” line, the average is -16.2% — again, nothing like the stomach churning drop the market actually experienced.

IDC believes that IT spending will remain reasonably robust through the forecast (2011 through 2015) even as the world’s economies continue to churn. IDC believes there are a number of macroeconomic and unique market trends sustaining this level of IT spending and investment — and these trends will remain in force for some years.

Macroeconomic Trends:
First, IT is the engine of a services-based economy. Without debating the pros or cons of the shift from a largely industrial/manufacturing-based economy to one based on services, for most services-based firms, their IT systems form their operational backbone. Consider airlines, trucking companies or media businesses. Without IT, there would not be a business. Next, IT enables business processes. Virtually every product and service consumed by commercial organizations or consumers relies upon computer systems — from bananas purchased at a grocery store to globally traded financial services through to construction of commercial aircraft. In the modern era, it is virtually impossible to find an aspect of modern life not directly touched by computer systems. People in the IT business like to say that IT is the business. While it makes for great ad copy, the expression also has a sound foundation in reality.

IT Industry Trends:
Three major factors have converged to fuel commercial investments on IT equipment and software: 1.) Explosion of online consumer websites — from social networking through to travel websites, consumers have an unprecedented ability to surf the Web and connect, purchase and interact; 2.) the evolution and build-out of public IT cloud services; that is, companies have the ability to acquire their IT/computer resources as a service versus having to invest in discrete assets; and 3.) a cyclic replacement cycle for enterprise/data center servers is well underway and will likely continue for several years.

As a result of these trends, IDC believes that the investment resources focused on IT equipment and software will continue even as a modest, and at times volatile, economic recovery continues. Yet, even with this apparently rosy picture, a number of significant challenges and risks exist for IT leasing and financing providers. From media tablets potentially displacing business PCs, an accelerating shift to software and services (intangibles) financing and the prospects of public IT cloud services potentially “replacing” physical on-premise equipment, there are a number of industry specific trends to ponder beyond the broader economic themes.

Leasing and Financing Outlook for IT Equipment, Software and Services
IDC tracks IT markets worldwide in exhaustive detail, including the IT leasing and financing market, and provides its clients with detailed statistical market analysis and forecasts. For 2011, IDC believes the U.S. IT leasing and financing market will reach $60 billion. This includes all IT buyers leasing or financing using dedicated financing instruments. IDC has also noted that, despite the political discourse, access to capital remains somewhat constrained for many small and mid-sized businesses (SMBs). Traditionally, SMBs use either 1.) their commercial credit line (revolving line of commercial credit or revolver) to fund IT resources; or 2.) company or personal credit cards to acquire/finance their IT resources. Because these are not dedicated financing instruments, IDC does not include them within this market sizing. Details of the forecast, by type of resource, are shown on Figure 3 on page 47.

For those not familiar with the IT leasing and financing market, the amount of software and services financing, which again for 2011 exceed 50% of all IT financing, may come as a surprise.

Software financing covers software that is developed by external software companies and licensed to buyers. In IDC parlance, this means packaged software. The forecast shown here does not include the value of internally developed software that may have been capitalized. IDC expects this type of software financing activity to continue to grow, driven by companies’ near-universal goal of improving their internal efficiency and business operations.

Services financing is a category that can be puzzling. While services can include traditional “break/fix maintenance,” it also includes other types of services such as large consulting or advisory services projects associated with major infrastructure updates or new initiatives. As many organizations continue to shift their staffing models, bringing in “experts” only on a contractual basis (versus keeping them on staff), this type of financing is also expected to grow.

Server systems, once the mainstay of IT spending, are no longer the largest single category of equipment financing — that distinction has shifted to “client” systems — think PCs, smartphones and media tablets. Overall, the server market remains a market in tradition. High-end mainframe machines, which typically support business applications, continue their domination of certain key segments although IDC has seen some workloads being shifted to less expensive LINUX or x86 architecture servers as a cost-reduction strategy. Most of the segment growth is coming from x86–based servers (typically less than $10,000 each) linked together using virtualization software. Because servers are the centerpiece of most IT renewal and investment projects, the IT vendors are especially competitive in this space — as are their financing captives.

Storage equipment spending continues apace, for the simple reason that most organizations continue to struggle when managing rapidly increasingly volumes of data. As a result, demand for storage capacity continues, and, as with servers, this is an intense and competitive financing market dominated by captive financing suppliers.

PC, smart handheld and media tablet spending has recovered (and accelerated) faster than other equipment segments as the economy has recovered, resulting in an expanding financing market. The market for smart handhelds and media tablets continues to grow at a blistering pace although it is, at this time, largely a consumer phenomena. Purveyors of media tablets have declared that the market is now in the “post-PC” era, hinting it is just a matter of time before the ubiquitous desktop or laptop business computer goes the way of the mechanical adding machine or typewriter. And while this generates terrific media coverage, the hard realities are more sanguine. At the core of the business PC versus media tablet debate is the capability to run applications. Until both standardized applications and custom, company-created applications can be ported to these new devices, PCs will remain an office staple. A recent IDC study of U.S.-based enterprise IT buyers found that they did not expect media tablets to replace PCs for at least four years.

Network equipment and telephony gear increasingly relies on structured leasing and financing options. An IDC report published during mid-2011 reported that worldwide downloads of music, games and applications totaled about ten billion. By 2015, IDC expects downloads to reach 187 billion worldwide. This will require a lot of network capacity and new infrastructure.

Peripherals include a wide range of equipment, much of which is generally not financed. The segment of interest to leasing and financing companies is printers. These devices have a longer useful life than PCs, and they are often acquired at the same time.

IDC Essential Guidance
The IT industry continues to be a tumult of new technologies, intense competition and vendor consolidation. Virtually every major and most minor players have invested in customer financing and reseller working capital finance programs. The programs span an incredibly broad spectrum of internally operated and partnered programs. Most software and services providers offer “extended-terms” programs, a form of factored receivables, through an independent provider or their commercial bank.

The IT leasing and financing marketplace remains one of the more vibrant sectors with reasonable growth prospects through 2015. Even with the moderate economic growth forecast, IDC expects companies will continue to invest in technology that improves efficiency and helps them expand their reach into new markets — sustaining IT spending demand — and IT leasing and financing requirements.

New IT platforms such as cloud computing (public IT cloud services) and media tablets are already well-established technologies; however, IDC believes they will not materially affect traditional IT end-user leasing/financing profiles through 2014. By 2015, it is likely these technologies will have matured to the point where they will begin to affect portfolio behaviors.

Through the planning period, IDC believes the provider market will continue to evolve rapidly. Google’s purchase of Motorola’s mobility business and HP’s announcement that it may sell its PC business will likely be but two milestones along a much more tumultuous journey. This coming period of provider consolidation and restructuring will rival the period of 1988-1995, heretofore the last huge reordering of the IT provider landscape.

For IT leasing and financing providers, this will be a period of great opportunity and peril. New players without well-established leasing and financing partners/captives will come to the fore, while well-established names will evolve and reposition — all the while set against an industry with a moderately increasing investment spending outlook.

Joseph Pucciarelli, program director of International Data Corporation’s (IDC) Technology Financing & Management Strategies, provides a wide range of research on IT leasing and financing strategies to providers, IT organizations and leading IT finance providers. With more than 20 years of business experience in the financing and technology industries, Pucciarelli has held a variety of consulting, marketing, risk and senior management positions with companies including Gartner, GE Capital, Peregrine Systems and his own company, ComplianceOfficerForum.com. IDC, a subsidiary of IDG, is a global provider of market intelligence, advisory services and events for the IT, telecommunications and consumer technology markets. IDC helps IT professionals, business executives and the investment community make fact-based decisions on technology purchases and business strategy. For more information, visit www.idc.com.