Information technology today is commonly held to be a $1.4 trillion industry. It includes computing hardware, software and services for business and consumer buyers. In the view of many analysts, that industry will likely approach $1.8 trillion or more in global revenue as early as 2008, assuming annual growth rates between 4 percent and 7 percent. While this rate is slightly below the industry’s long-term historical growth of approximately 1.5 to 2 times global gross domestic product, it would be competitive with or outpace growth estimates for several other industries.

Although this growth rate for IT is similar to that of the early 1990s, we believe that the drivers of growth — and of the most attractive profit opportunities — are very different today and will remain so for the foreseeable future.

The IT industry today is moving into a new era, characterized by a new architecture of computing and the new business models it enables. IBM calls this “On Demand Business.” Since 2002, we have made significant investments in strengthening our company’s capabilities to help clients become on demand businesses, and to communicate our understanding of the concept to them and to our employees and partners. Not everyone uses the term “on demand” (though an increasing number of people, companies and even competitors do), but the essential ideas about the trajectories of technology and business are clearly taking hold. These changes are driven by the convergence of three historic developments:

In less than a decade, the Internet, the most visible evidence of an increasingly networked world, has reached about 800 million people, and is projected by some analysts to reach more than a billion people by 2007. The Internet has not only connected people and opened up access to the world’s information, it is rapidly becoming the planet’s operational infrastructure. It is linking people, businesses and institutions, as well as billions, ultimately trillions, of devices — not only computers, satellites and telephones, but also cars, medical and production equipment and household appliances. It is at once facilitating and transforming transactions of all kinds — from commerce, government services, education and health care to entertainment, conversation and public discourse.

New business designs and a new computing architecture, both fully exploiting network ubiquity, will displace existing models in the years ahead.

Technical and transaction specifications, mundane but vital, underpin all industries. When they become standards — that is, when they are widely adopted — they unleash growth by spurring the creation of many new kinds of products and services. Standards made possible electrical, telephone and TV networks, CDs, DVDs, credit and debit cards and global financial markets — and by extension, all the other business and public services these systems enabled. Today, standards are truly taking hold in information technology. They determine how computers operate and software applications are developed, how digital content is produced, processed, distributed and stored, and how transactions of all types are managed. These standards are “open” — that is, not owned or controlled by any one company or entity. (The Internet itself, for example, is built on open standards.) This is common in other industries, but a radical departure for IT.

Companies that innovate on top of open standards are advantaged because resources are freed up for higher-value work and because market opportunities expand as the standards proliferate.

The simultaneous emergence of a networked world and open standards is enabling entirely new business designs, giving CEOs and other decision makers options that were previously infeasible. Companies can now be far more flexible and responsive to changes in the economy, buyer behavior, supply, distribution networks, consumer tastes, geopolitical realities — even the weather. This is because their business operations can be integrated horizontally, from the point of contact with customers through the extended supply chain. Because vital information is captured and managed enterprise-wide, networked companies can anticipate and respond much faster (hence, our term “on demand”). Their computing infrastructures are similarly responsive and flexible, and the open standards on which they are based enable integration at a much lower cost.

In the recent past, IT “applications” for businesses largely entailed installing and deploying software packages. But now, to gain the competitive advantages of On Demand Business, companies are designing and implementing business processes and operations unique to their needs and industries. That is why for IT companies, deep expertise in industries and business processes — coupled with a deep understanding of technology — is essential to capture the highest-value growth opportunities.

Clients are increasing their investments across these specific areas of business and technology: hardware and software based on open standards that support high-performance, highly flexible infrastructures; and services that help companies fundamentally change and manage their business operations for competitive advantage.

At the same time, these shifts are creating significant growth opportunities beyond the traditional IT industry. These new opportunities lie in what the world’s companies and institutions spend on sales, general and administrative costs (SG&A), as well as some costs of goods sold, and research and development (R&D). Industry analyst IDC estimates that companies spend $23.6 trillion on these business processes annually. Of that, $1.4 trillion is currently being spent with third parties, and is projected to increase through 2008 by more than 9 percent a year (versus 6 percent for the traditional IT industry).

Some of that $1.4 trillion is in areas such as supply chain management, engineering design services, human resource management, after-sales services and customer care: business operations and processes that are critically dependent on information technology, or that can be radically transformed and improved through the application of IT.

We call this market Business Performance Transformation Services. And within this $1.4 trillion marketplace, we see opportunity in excess of $500 billion that can be addressed by both IT and non-IT companies — provided they have the right combination of expertise, advanced technology and the ability to deliver both with adequate scale. This market for transforming business processes and, in some cases, operating those processes for clients has thus far seen little penetration by traditional IT providers.