Business IT spend is starting to recover

Despite ongoing market uncertainty, the need for new IT is becoming pressing in many organisations, says Philip White

Office of National Statistics (ONS) data shows that employment levels are rising while GDP continues to stutter, with the UK on the brink of an unprecedented triple-dip recession. Is this a result of past underinvestment in technology and infrastructure by businesses?

Each UK worker has long been responsible for less economic output than his or her German and other European cousins. This productivity gap is now widening; economists are starting to refer to a “productivity puzzle”, and are wondering what other factors are at play.

Many businesses slashed spending in the wake of the financial crisis. It is still below pre-2008 levels, and well behind global competitors. Despite ONS figures showing that overall business investment in Q4 2012 rose 3.8 per cent to £1.1bn versus the previous quarter, forecasts suggest it will fall in 2013 in real terms.

Clearly, while the economic situation remains uncertain, businesses are still wary.

This has been exacerbated by a lack of affordable funding. High borrowing costs have made investment less attractive for businesses, which then miss out on potential opportunities. Many are struggling to remain competitive because of their underinvestment in new equipment and technologies.

Businesses which last made major investments in technological infrastructure in the 2008 period will now be reaching the end of the product’s life cycle and will require updated technological infrastructure to remain competitive, and maximise output. Yet IT resellers have noted businesses remain resistant to increasing their spend.

However, this may be starting to reverse. We believe there is increasingly strong underlying demand for new software and hardware. Businesses that have been sitting out the last few refreshes due to economic fears are now keener to get up to date.

Further, KPMG Global Pulse research has suggested that reporting and analytics apps are among the hottest must-haves at the moment, as organisations ready themselves for future upturns in demand. They hope such software will help them make better business decisions faster.

The government is very aware of the need to encourage businesses to invest. In the pre-Budget statement it boosted the Annual Investment Allowance to £250,000 for two years.

That is a useful step, although we would like the chancellor to encourage businesses to start developing long-term investment plans by making it permanent.

The last couple of years saw it raised from £50,000 to £100,000, then reduced back to £25,000. This suggests that short-term incentives have only a limited impact on businesses’ spending plans. Increased certainty concerning tax allowances would give businesses more time to develop major investment plans.

Business investment should also be on the agenda for the incoming governor of the Bank of England, Mark Carney. Appearing before the Treasury Select Committee in February, Carney indicated that he would consider guidance on how long interest rates might stay at current ultra-low levels. This is something that we have been advocating for some time. Greater certainty over the long-term cost of finance would certainly help.

Despite significant public money being put aside for various schemes, we have not seen more lending to small businesses either. In fact, last year, bank loans to businesses fell 2.8 per cent. This has led to many businesses pursuing other options, such as asset finance, including leasing. Over the past year, £1bn in asset finance was used by UK businesses to buy IT – a rise of 26 per cent. Asset finance itself rose by only three per cent in the period.

This also adds to the evidence that technology has moved to the top of business shopping lists.

There are some advantages in relying less on banks. Bank-provided lending instruments such as overdrafts can be discontinued at short notice, strangling cashflow. Even long-term loans can be withdrawn if a company’s turnover or profitability falls below a threshold set by the bank. Lease finance, however, stays in place as long as the business is able to make payments, and also gives more scope to retain cash reserves or borrow money in future.

Any sign that businesses are getting fresh finance to invest in IT hardware and software is very welcome.

It may take years for the UK economy to fully recover from recent underinvestment, but the signs are that a recovery is starting to take shape. Businesses increasingly understand that they cannot wait for bank lending to return to pre-financial crisis levels. Underinvestment has really started to hurt – opening up an opportunity for the channel and, of course, its partners.

Philip White is chief executive officer at Syscap