Gartner Forecasts 9.5 Percent Increase in 2008 IT Services Spending

While the economy remains weak, IT services will continue to grow through the end of the year, according to new predictions released by Gartner analysts last week.

Gartner forecasts that worldwide spending on IT services will increase 9.5 percent this year, to $819 billion. The biggest share of this spending has been for core outsourcing of IT management and process management, making up 42 percent of the overall IT services market. Gartner analysts expect dollars to continue to flow into services categories, such as BPO (business-process outsourcing) for short-term cost-control measures at organizations trying to tighten their belts.

Cost reduction is also driving growth in the consulting and development and integration services market, Gartner says. Spending on development and integration services is expected to expand 10.1 percent, a slightly higher rate than overall services. Despite these growth figures, Gartner analyst Kathryn Hale warns that the numbers may paint an overly rosy picture of enterprise spending on IT services. The steady decline in the value of the U.S. dollar has actually buoyed the figures when expressed in dollars, she explains.

“Although we expect continued strong growth in IT services, there are two causes for concern,” Hale said in a statement on the report. “First, the rate of innovation in providing new service offerings is sporadic, at best, and strong return on investment stories are hard to come by. At the same time, innovation in delivery is not growing as fast as hoped: Industrialization is being adopted slowly.

“A second fundamental problem in IT services is the inability of providers to provide compelling value statements about the services they provide, whether in offerings or delivery.”

Both concerns tend to induce “a common buyer mentality that focuses on IT cost takeout and adopts a ‘lowest cost wins’ decision-making in its services and sourcing decisions,” which can ultimately hold up innovation and harm long-term ROI, Hale says.

Hale’s warnings came just a few days after Goldman Sachs released the gloomy results of a recent survey it conducted among 100 CIOs at multinational enterprises. The major thread running through all of the responses was that CIOs will focus on ways to cut costs not only in-house, but also through service providers. Of those interviewed, 42 percent reported that they were reluctant to spend money on third-party professional services. In addition, 48 percent said they plan on cutting contractor staff.

Overall IT spending will grow but more slowly than last year, according to Goldman Sachs, which is predicting a 5 percent gain this year, compared with 7 percent in 2007.