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MP72047

MAPS COMPUTER HARDWARE AND SOFTWARE NOVEMBER 1997

Overview

Table of Contents

Executive Summary

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EXECUTIVE SUMMARY

In 1996, the UK hardware market grew by 7.7 percent to £9.9 billion and the software market by 8.9 percent, to £5.8 billion, greater increases than the rise in GDP. This market expansion reflected not only post-recession growth, but also the importance of IT in improving competitive advantage to maximise shareholder value.

By the year 2001 the hardware market is estimated to be in the region of £12.9 billion and the software market about £9.4 billion. This would indicate a compound annual growth rate (CAGR) of 5.4 percent and 9.9 percent respectively between 1996 and 1997.

Whilst future growth is vulnerable to a slowdown in the economy, the market is undergoing a profound change. IT expenditure will be driven from 1997 to 1999 by two key issues, the Year 2000 problem, and the need to comply with EU Article 235 on EMU (European Monetary Union) whether or not the UK decides to join EMU. Post-1999 expenditure will depend on the UK joining EMU.

The cost of sorting out all Year 2000 problems is estimated at $1.5 to $2 trillion (thousand million) worldwide, and £60 billion for the UK. Market Assessment estimates that the actual UK expenditure will be around £15 billion, most of it on programming services.

Planned IT budgets cannot absorb the extra costs, and companies will have to cut other budgets. This could have important ramifications for e.g. promotional expenditure. The focusing of company expenditure to meet ‘must have’ IT needs could be particularly acute for the banks and much of the financial sector. They will also have to bear the brunt of the additional costs of modifying currency and dividend exchange rate procedures to comply with Article 235.

Year 2000 and EMU compliance issues will primarily affect computer services, but it is estimated to increase hardware and software expenditure by a CAGR of 7.3 percent and 13.8 percent respectively between 1996 and 1999. The market for hardware and software in 1999 is estimated to be £12.2 billion and £8.6 billion respectively. Expenditure will be focused on ‘network centric’ solutions as companies develop close electronic partnerships with their customers and also back to second tier and perhaps third tier suppliers. Another area of focus will be further development of ‘thin clients’ like Net PCs and NCs.

Microsoft’s Windows NT is a key part of the IT strategy of most organisations, and this will be the key hardware platform over the next five years. Different sizes and types of organisation have different types of needs, but business plans for even small purchases are becoming more commonplace.

Post 1999 expenditure on IT is expected to slow down, as organisations invest in non IT areas of their business which have taken a back seat due to the Year 2000 compliance and Article 235 needs. Between 1999 and 2001 the CAGR in the market for computer hardware is expected to be about 2.8 percent and for software 4.4 percent.

The IT successful suppliers will follow the examples set by the current high value added companies in areas such as inventory reduction. Brand building is key in all segments of the market. All aspects of the business must reinforce the brand.

The other key area is staffing, and outstanding, not just good recruitment, retention and development practices are essential.

The main threat to the UK hardware industry is the possibility of sourcing from mainland Europe. There are both exchange rate and corporation tax attractions in doing this, and Internet trading could make it very simple for large multinational companies. Legal issues associated with Year 2000 compliance must be addressed to reduce risks of expensive lawsuits.

Text © 1997 MAPS

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Last updated by Duncan Nottage 9th February 1999