GARTNER DATAQUEST: WORLDWIDE IT SERVICES SPENDING TO BE $865 BILLION BY 2005.

Worldwide IT services revenue is projected to reach $554 billion in 2001, a 7.1 percent increase over 2000 revenue of $517 billion, according to Dataquest Inc., a unit of Gartner, Inc. (NYSE: IT and ITB).

The industry is forecast to continue growing through 2005, when IT services revenue will reach $865 billion.

While poor economic conditions and the impact of heightened terrorism are expected to dampen growth to single digits through 2002 in many segments and regions, Gartner Dataquest believes overall demand will bounce back to double-digit growth from 2003 through 2005.

"Following 2002, increased confidence in the economy and business will present vendors with an opportunity to drive renewed demand among end users of IT services based on exploiting recent technology innovations," said Kathryn Hale, principal analyst for Gartner Dataquest's IT Services worldwide group. "Practical applications for mobile and wireless solutions, Web services, computer interface technologies, and communication convergence should prove to be critical."

North America remains the leading region for the IT services industry. North America IT services revenue in 2001 is projected to reach $271 billion, and the region will continue to drive worldwide sales through 2005, as North America revenue totals $423 billion.

Western Europe is on pace for IT services revenue to total $149 billion in 2001, and the region will still rank No. 2 worldwide in 2005 when revenue is expected to surpass $229 billion. Japan's revenue will grow from about $65 billion in 2001 to $86 billion by 2005. Asia/Pacific is forecast to be the fastest-growing region with revenue projected to be $31 billion this year and increase to $60 billion in 2005.

Development and integration has been the largest segment within the IT services industry, and this will continue through 2005. In 2000, the development and integration segment reached $156 billion, and in 2005 the market is expected to be $263.5 billion. Business process and transaction management (BPTM) services was the No. 2 segment in 2000 and is forecast to have the strongest growth rate in the IT services market as enterprises attempt to reduce the cost of transaction processing in noncore areas by turning to external suppliers. BPTM services in 2000 totaled $74.8 billion, and in 2005 it will total $145.2 billion.

Economic and political uncertainty is expected to hit consulting the hardest of all sectors, growing from $46 billion in 2000 to $74 billion in 2005. Gartner Dataquest believes the general recovery of consulting will lag the larger economic recovery by three-quarters. However, the introduction of Windows XP, demand for customer relationship management, supply chain management and e-commerce solutions, and adoption of Web services software should drive growth beginning in 2003.

Gartner Dataquest has identified two critical factors that most impact end-user spending for IT services: degree of decision-maker confidence and the pace at which vendors generate demand by implementing technology innovations. The second half of the 1990s, a boom time for the IT services marketplace, was a period of regular strides in technology. But with the rush to invest in e-business, vendor focus shifted away from exploiting technology to experimenting with business models. This shift in investment focus combined with a low point in product innovation left customers with fewer reasons to invest in IT during 2000, when the critical U.S. economy began to decline.

"Decision makers are still digesting the effects of a declining economy and the war against expanded terrorism," Hale said. "So far, the overall response has been to avoid risks and delay investment decisions. If senior executives can reasonably predict how the economy and security situation will play out, they could make investment decisions to compete in any environment, and begin buying IT services again. In the meantime, IT services vendors must rely on their "life preserver" services: payment processing, applications and data center outsourcing, and product support services, and security and disaster recovery."

Additional information is available in the Gartner Dataquest Alert "Worldwide IT Services Forecast: Growing in Tough Times." In this document, Gartner Dataquest analysts examine how the various sectors in IT services will evolve, as well as how each of the regions will do globally.