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Analysis: A slow return to growth in the software market

Simon Quicke

We all want to know what is going to happen in the future as not only can money be made that way but business security can also be achieved through understanding where the world is heading.

So there will have been those that sat down last week at the BT Tower last week to hear from the chairman of analyst house TechMarketView Richard Holway speaking at the Prince's Trust Technology Leadership Group very keen indeed to get some idea of which way the wind is blowing.

Unfortunately those hoping for a tub thumping all smiles assessment of the state of the market will have come away disappointed as a rather stark picture of the state of the software and IT services market was painted by the analyst.

Next month sees the publication of the latest assessment of the state of the software and IT services (SITS) market from TechMarketView but Holway revealed in his speech that the forecasts of a return to growth had been downgraded.

"This has resulted in the largest and most severe reduction in our forecasts in my 25 years as an analyst," stated Holway.

"We are now forecasting that, rather than the three years of decline (in real terms) between 2008 -2010 as in our current forecasts, that run of declines will now extend to 2012. Indeed the forecast return to growth in 2013 is so meagre that even that must be in doubt," he added.

Now instead of coming out of decline this year the SITS market has to brace itself for several more years of tough conditions.

What has contributed to this change of forecast is a number of things that are combining to form what Holway describes as an earthquake. After years of building up the pressure is finally being released and could claim victims.

The first factor is off shoring with its inevitable impact on home grown suppliers. As more firms look to put the care of their IT into foreign hands then the UK operators face losing out on revenue.

The second problem is the emergence of cloud computing. Customers are not only demanding more flexible ways of paying for applications but are expecting them to be cheaper than on premise versions.

Finally, there are the looming public sector cuts which have the potential to reduce spending and hit revenue by a fair few percentage points for those that have enjoyed the custom of local and central government.

There are two results from those factors. The most obvious is that it will delay the recovery in the SITS market but the other is more fundamental in that those that fail to read the runes will struggle to survive.

Talk of the on premise model dying out have been muddied by the approach taken by Microsoft with its Software and Services approach encouraging the user to stick with a mentality of the shrink wrapped product with a bit of cloud functionality over laid on top.

But even with that hybrid approach there is still recognition that the cloud has a fundamental role to play and that will only grow in the future.

Holway used his speech at the Prince's Trust event to warn those that fail to move away from relying on the on premise model that they were heading for a bleak future.

The analyst house summed up the changes as "cold Tech", a range of factors which will shrink the market.

"In the next decade, Cloud computing will provide major benefits for users but at a much lower cost; greatly affecting the revenues and valuations of those suppliers dependent on the old 'on premise' model. Those that can't change their business models fast enough will disappear," warned the analyst house.

His is not the only making that stark prediction and as these warnings mount up there is going to be increasing pressure put on those that fail to heed them. Those that sat in the BT Tower last week might have left feeling downbeat but at least they are armed with the knowledge of the way the market is going.

For those resellers that can make the shift from relying on the old on premise model and have the ability to juggle the finances with the cloud and its more flexible approach the future is going to be a lot easier. For those that don't make those moves then things look a lot darker.

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