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

1. U.S. IT Industry Yesterday, Today & Tomorrow: Trends and Policy Priorities to Watch Anders Halvorsen, Senior Program Manager, ITAA October 22, 2003

2. 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

3. 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

4. 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

5. 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)

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. Public Policy Trends to Watch

13. 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

14. 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

15. Public Policy Trends • See, Understand, and Appreciate Bigger Picture…Some Jobs are Going • Convergence of Demographic, Economic and Technological Trends • Evolution of Work and Logic of Outsourcing • Education of the American Public on Net Effect of Global Economy

16. 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

17. 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

18. Public Policy Trends IT Jobs Remain among the Most Highly Compensated 2001 Mean Annual Wages Source: Bureau of Labor Statistics

19. 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

20. 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

21. 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

22. 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”

23. 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

24. 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

25. 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

26. 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

27. CONTACT Anders Halvorsen Senior Program Manager ITAA 703-284-5333 ahalvorsen@itaa.org www.itaa.org www.witsa.org