Half of IT Budget Will Be Spent Outside Enterprise

The time is fast approaching when businesses will spend half their IT budget on supporting processes outside the enterprise.

They must make the transition in order to compete in a world where businesses are increasingly focusing on their core competences, analysts from Gartner Group told attendees in Cannes Monday at the company's ITxpo Europe conference.

"If you're not spending fifty percent (of your IT budget) on managing external resources, you're probably missing the point," said Andy Kyte, Gartner's vice president of research for EMEA.

This transition from spending on the back office to outside the organization, Kyte said, will be driven by three economic forces: globalization, virtualization and transparency, all of which will increasingly require businesses to integrate their IT systems with those of their partners.

The process of creating a virtual enterprise is as much about taking things out as adding them on. "You have to strip away the layers you have accumulated and ask, is this really vital?" he said.

Demands from shareholders and partners for increased transparency mean that businesses must increasingly be able to reveal details of their functioning at every stage in the business process: not just inventory, but capacity too, said Kyte.

Such demands are putting IT departments under greater pressure to perform, when many already feel they are fully stretched. To overcome this problem, the key is to deploy resources in new ways, Kyte said.

"This year, I've been to every European country except Luxembourg, and everywhere I go people say 'We can't get the staff.' All these organizations are using critical technology to provide low value-added tasks which could be done more effectively by someone else," Kyte said.

One area in which businesses will have to invest in supporting external IT processes is that of electronic marketplaces.

"By 2003, electronic marketplaces are going to account for US$1 trillion of economic activity," Kyte said. "That's $1,000 billion of economic activity being managed by businesses that are so immature today that they can't even tie their own shoelaces."

Some 70 percent of business relationships will be "nontraditional" by this date, he said, and businesses not prepared for this switch will increasingly see online marketplaces eating into their margins.

Governments, too, are worried about online marketplaces and online commerce eating into their margins, according to Kyte's colleague Alexander Drobik, vice president of e-business management at Gartner. The current truce over Internet taxation is likely to end soon.

"In Europe, 36 percent of tax revenues come from VAT (value-added tax).... Do we really think we are going to see governments let this money wash away?" Drobik said.

The situation is clearer in Europe than in the U.S., he said, thanks to the directives issued by the European Commission. But it may be two or three years before companies can look at the online tax situation and understand what they have to do to stay out of prison, he noted.

If tax accounting is still a grey area, other areas of financial reporting will speed up and be simplified, Drobik predicted. "By 2005, the first company will announce its quarterly earnings before the end of the quarter," he said. This will come about as companies increasingly have up-to-date information at their fingertips to manage their organizations.

Ken McGee, a research fellow at Gartner, went one step further: "During the next three years, some company out there is going to announce its earnings per share on a daily basis. It makes absolutely no sense to have the power of IT that we have today, and continue to report financial performance three months out."

The importance of such day-by-day monitoring was reflected in McGee's predictions of the most powerful individuals in the transformed business of tomorrow. Top of his list: a new CxO, the chief monitoring officer, who will be responsible for monitoring the health of the enterprise to deliver earnings per share on a daily basis.

The Gartner ITxpo Europe continues through Thursday afternoon.

Gartner, in Stamford, Connecticut, can be reached online at http://www.gartner.com/.

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