U.S. IT Industry Yesterday, Today & Tomorrow: Trends and Policy Priorities to Watch

Anders Halvorsen, Senior Program Manager, ITAAOctober 22, 2003

Today’s Points The Current Spending Environment

Overall IT Picture Commercial Sector IT Public Sector IT

Public Policy Trends to Watch Business Immigration Offshore Outsourcing and Global Competition State and Federal Protectionism Political Climate

Summary

About ITAA Established in 1961 Over 400 Corporate Members

Plus global affiliate, WITSA Offices in Arlington, VA and Silicon Valley

Leader in Public Policy Advocacy IT Workforce and Education Specialty

Overview of U.S. ICT Industry

U.S. A World Leader in ICT Spending

Powerful Source of American Employment

ICT Creates 1/3 of U.S. Economic Growth

Current Economic Environment Department of Commerce reports:

Real GDP increased 3.3% in 2Q 2003 Previous quarter was 1.4% Strong increases expected to continue due

to defense spending through 2003 Equipment and software expenditures up

8.2% in Q2 2003—largest such increase since 2000

Wells Fargo chief economic officer predicts economic growth at close to 5% annual rate in 2H ‘03 (Source: Washington Post)

Current Economic Environment Job creation may be underway

Job creation always a recovery “lagging indicator”

Challenger Gray and Christmas finds pace of layoffs slowing – down 6% in August over July

August 2003 was fourth straight month of fewer than 100,000 cuts planned – not seen since 2000

Consumer spending and confidence up Spending rose 3.8% in 2Q – over 2% in 1Q

Commercial Sector IT Spending Improving CIOs plan to increase tech spending 6.4% over

next twelve months, up from 4.5% in July Highest projected increase since May 2002 9 in 10 CIOs report application backlog 30.5% of CIOs say they plan to increase

spending on IT Services – up from 27.7% in July Only 21.2% of CIOs plan decrease in IT Services

spending over 12 months, lowest in 2003– Source: CIO Magazine Tech Poll, 9-2-03

Commercial Sector IT Spending Improving IT demand will grow in 2H ‘03 2003 estimates for IT growth are 5-7% IT investments up 2.8% Q/Q in 2Q ’03 Software and services up .9% Q/Q in 2Q

’03 IT investments outgrow other cap-ex in 5

of the last 6 quarters

Source: Precursor Group, 8-1-03

Commercial Sector IT Spending Improving 12-Month IT Services Demand Outlook

Maintaining Moderate Up Tick Transportation and Federal Sectors Lead

in New Business Opportunities Billing, Wage Rates and Operating

Margins Flat for IT Services Firms Big 4 Consulting Perceived as

Competition by Twice as Many Respondents as Offshore

Source: ITAA/Input/Legg Mason Monthly IT Services Pulse Survey

Public Sector IT Spending Improving Federal IT spending will have CAGR

of 8.5% from 2003-2008 Public Sector IT services to grow

11% a year through 2007 Federal IT outsourcing will have

CAGR of 18% from 2002-2007 Source: INPUT

Public Sector IT Spending Improving FY 04 Federal spending decisions in

Congress now White House IT budget request was 14%

higher than FY 03 Spending bills have slowed and face

uncertainty in Senate DoD IT budgets are being cut in exchange

for weapons House cut $321M from DoD IT Senate would cut DISA funding by $100M

Public Policy Trends to Watch

Public Policy Trends Business Immigration Backlash L-1 Visas under scrutiny

Isolated abuse cases spawn negative press Hearings in Congress ITAA issues guidance on “specialized

knowledge”

H-1Bs face criticism in current job climate H1-B Cap set to return to 65,000 on October 1 No push to raise cap in current climate

Public Policy Trends Outlook for IT Customer

Productivity Rates Booming Corporate Bottom-Line Cost Cutting

Trumping Top-Line Revenue Generation Pace of Technology Introductions

Slowing Global Sourcing Alternatives Growing Global Business Opportunities Opening

Public Policy Trends See, Understand, and Appreciate

Bigger Picture…Some Jobs are GoingConvergence of Demographic, Economic and Technological Trends

Evolution of Work and Logic of Outsourcing

Education of the American Public on Net Effect of Global Economy

Public Policy Trends Apply Logic, Not Emotion to Difficult Issue

Percentage of Work Going Offshore is Small Small but Growing “Emerging World” IT

Workforce vs. Vast, In Place “Developed World” IT Workforce

Market research predictions conflate “services” and IT jobs Outsourcing takes place across a range of

job categories, not just IT Forrester 3.3 million count includes less than

one million IT jobs

Public Policy Trends Apply Logic, Not Emotion to Difficult Issue

(Continued) Nine of Ten U.S. IT Workers Employed by Non-

IT Companies Statistics Show Most Firms Prefer to Keep

Work In-House Eight of Ten U.S. IT Workers Employed by

Small Firms Least likely Employment Cohort to Site Work

Overseas

Public Policy TrendsIT Jobs Remain among the Most Highly

Compensated

0

10

20

30

40

50

60

70

80

$Thousands

2001 Mean Annual Wages

Source: Bureau of Labor Statistics

Public Policy Trends Sophisticated IT Solutions are not Shoes or

Textiles Proximity and Domain Expertise Matter

for Many Complex Projects Full Economic Impact of Offshoring Still

Emerging Econometric Studies Needed Overseas Competitors will also be hit by

talent gap

Public Policy Trends Apply Logic, Not Emotion to Difficult

Issue (cont.) Benefits of Strategic Growth, Investment,

New Business Development Unknown Economic modeling required

Current “Jobless” Recovery will Relent Downward Pressure on Salaries Infusion of IT in New Domains Integration of IT in Other Fields of Study Investment Attracted Back to Emerging

Growth Opportunities

Public Policy Trends Realize that Demographics of Looming

Talent Shortage Remain Fixed Baby Boomer Generation Retiring Next Wave of US Knowledge Workers

will be Smaller Total Workforce Size will Plateau Skilled Worker Gap to Reach 14

million by 2020

Source: Business 2.0

Public Policy Trends Rise of Protectionism “Buy American” provisions added to

Congressional spending bills Outdated depression era idea applied to

sophisticated IT doesn’t work Country of origin requirements 65% made in USA doesn’t fit the US IT

business model Creates “unicorn”

Public Policy Trends Rise of Protectionism Anti-outsourcing bills in states NJ, MD, CT, Michigan and others

entertaining similar language Preventing state government

contractors from outsourcing Could spurn backlash against our

industry – China software policy

Public Policy Trends Political climate heating up Election year on horizon (presidential, 1/3

senate, house, many governors and state houses)

Jobs are major issue Jobless recovery thus far Congressional hearings on loss of white-collar jobs Unions and others engaged Political pressure to save/create jobs – steel and

manufacturing are examples

Public Policy Trends Political climate heating up Bipartisan interest Regulators increasingly interested in

offshore (national security/privacy/economic security)

GAO and CIA charged with studying economic, workforce and national security concerns related to offshore

Potential statutory restrictions on offshore

Conclusions Economic Indicators are positive Commercial IT spending predictions are

cautiously optimistic Federal IT spending continues to rise, but

uncertainty prevails for FY 04 Policy Trends will dictate some outcomes Offshore Outsourcing is a fact of global

competition Protectionism harms industry and creates

backlash in the long run Politics is about jobs

CONTACT

Anders HalvorsenSenior Program ManagerITAA703-284-5333ahalvorsen@itaa.org www.itaa.orgwww.witsa.org