InformationWeek

Where Does All That Money Go?

InformationWeek's annual budget survey shows spending moving up and out

By Scott Leibs
Issue: 2/28/94

"What's the bottom line?"

People often ask that question when they want to cut through the clutter and get a straight, simple answer. But when it comes to corporate spending on information technology, that bottom line may not exist.

InformationWeek's annual survey of information systems (IS) budgets, which polled more than 150 technology managers at America's largest corporations, reveals a host of contradictions. The budgets controlled by senior IS executives, while up substantially at some companies, a re flat or declining at just as many others.

Total spending on information technology (IT)-the amount allocated by all corporate departments, not just the IS group-is poised to grow dramatically as companies prepare to invest in more powerful desktop computers and networks.

A greater portion of this spending will be diverted from centralized IS budgets to departmentalized IS groups and business units. In fact, nearly 45% of respondents to the InformationWeek survey expect technology spending outside their IS group to increase this year over last. About 40% say technology spending outside the IS group will hold steady, whileless than a fifth expect non-IS spending to drop.

By department, most technology spending outside the IS group is being done by engineering, which was cited by nearly a fifth of respondents. Other non-IS groups mentioned as heavy technology spenders are operations (cited by 14% of respondents), sales and marketing (12%), and finance and accounting (12%).

About half the responde nts say the budget for just the IS groupis flat or declining from last year, while nearly half of the others say the IS budget is bigger this year. At the same time, technology executives are being asked to initiate a range of new projects.

Clustered In The Middle
While roughly the same percentage of companies is enjoying IS budget increases this year as last, in more cases those budget jumps are larger than they were a year ago. Similarly, fewer companies are suffering large cuts this year. Despite the good news at both ends of the spectrum, most companies are clustered in the middle, seeing small budget increases or cuts. Similarly, a recent survey by a consulting arm of Computer Sciences Corp. found the typical IS budget up by just 2.3%, the smallest increase in the survey's seven-year history.

Charles Bowerman, executive VP and CIO at Phillips Petroleum Co., is typical of many InformationWeek survey respondents. His budget is down about 3% this year, largely because Phillips management reacted to a drop in oil and gas prices by forcing all departments to cut spending. In fact, Bowerman says that due to several downsizing efforts and outsourcing of data processing work,his budget is only half of what it was a decade ago. But back then, the IS budget represented what Bowerman calls a "significant majority" of all IT spending at Phillips; today it represents only about a third of the Bartlesville, Okla.-based company's technology spending.

"It's an almost devious trend," adds Dan Moore, data-center director at Arvin Industries Inc., a $2 billion auto parts manufacturer in Columbus, Ind. Moore says that while spending at his company is declining for expensive equipment such as mainframe systems, it's rising sharply for less costly items such as PCs.

Indeed, the InformationWeek survey reveals that server hardware, desktop hardware, and desktop software are the three areas most likely to command a larger slice of IS budgets this year(see chart, p. 2 5). They're also the areas that dominate the technology shopping lists of all other departments in a company.

Three Personalities
Despite the new preeminence of the desktop, the size of a company's investment in workstations and PCs may not be fully appreciated by the top bean counter. "A $2 million mainframe creates a huge bubble in anyone's budget," says Moore of Arvin. "And though 500 PCs bought piecemeal are less noticeable, the cost adds up."

What that sum represents is a major challenge for managers throughout any large company: ensuring that money spent on smaller systems earns the best possible payback. "It's a dilemma," says Gerald Loev, president of CSC Impact, the Cambridge, Mass.-based IT consulting arm of Computer Sciences and a former CIO of the Prudential Insurance Co. of America. That's because CIOs often have to perform three very different functions: execute information strategy, audit and monitor IT investment, and produce innovative solutions to company problems. "Those three roles call for three different personalities," Loev says. As bad as that can be in a company with a centralized IS group, it's even worse, Loev adds, when significant levels of IT spending are controlled by small departments or even individuals.

This movement of dollars into business units and smaller IS divisions is further complicated because it often coincides with IS-group overhauls. A recent study by consultants at the GartnerGroup Inc. in Stamford, Conn., found that 120 of 140 IS managersinterviewed last year said their groups were either going through areorganization or had been through one in the previous 18 months.These projects often involved establishing smaller IS groups that were aligned with business units. Budgets for these groups will grow by more than 25% a year over the next three years, predict IS managers surveyed by the Gartner Group. The CIOs also believe that much of this spending will be hidden from what Gartner calls an "ITchart of accounts."

`Employees Are More Knowledgeable'
At the heart of that budget growth is the desktop. "Employees are far more knowledgeable and culturally prepared to work with PCs today than they were even two or three years ago," says Ken Bochenski, VP of operations and IS for Spiegel Inc., the mail-order retailing giant based in Downers Grove, Ill. Spiegel's IS budget is up by about 15% this year, due largely to the cost of consolidating systems following several acquisitions. The increasing technology demands of end users are boosting Speigel's overall technology spending, Bochenski says, though he doesn't have a firm fix on the growth of non-IS spending.

Curiously, only slightly more than 5% of respondents to the InformationWeek survey whose IS budgets declined between 1993 and1994 cited the shift of technology spending to business units as the reason for the drop. That may point up the difficulty of quantifying the spending shift: IS managers may intuitively sense that other areas of the company will spend more on I T. And that would account for the nearly 45% of respondents who say that non-IS spending will increase but who are hard-pressed to say what specific percentage decline in their own budgets is attributable to this migration.

Outpaced By Inflation
Other surveys also bear out the shift in corporate IT spending. The Gartner Group survey, for one, found that more than half the140 executives believe the slow growth of IS budgets-which has actually failed to keep pace with inflation during this decade-is attributable to a new emphasis on spending by business units rather than a centralized IS department.

Gartner Group analyst Stacey Flynn believes that overall corporate spending on IT will increase dramatically over the next five years, from 5.5% of an average company's revenue today to 8.3%by 1998. But she thinks most of that growth will come from thebudgets of end users or decentralized IS departments that don't report certain expe nditures through a centralized IS budget. "Noone really knows the degree to which dollars are migrating fromcentral IS functions to the desktop," Flynn says. "There are simply too many gray areas and too much overlapping responsibility to accurately track expenses."

Should IS executives even try to track such migration, either in dollars or specific technologies? That's emerging as a keyquestion. For example, what about conducting software audits to see which applications are running on every PC in a company? The enormity of the aggregate expenditures and anxiety about whether that money is being spent wisely would seem to make a case for somesort of accountability. "I have people asking approval for PCs thatcost $7,000," says James Halsey, VP of IS at broadcaster CBS in NewYork. "When I ask them what the business justification is, they just wave their hands."

Loev of CSC Impact points out that the declining cost of desktop equipment is causing companies to treat PCs as an expense,"like office supplies, rather than as a capital investment." As a result, he says, companies may spend far more to track spending than they'll save by bringing any economies of scale to bear.

The wiser course for IS managers may be to ensure that money spent on desktop and network computing, regardless of which department's budget it comes from, achieves what Spiegel's Bochenski calls "a greater payback for the investment."

The InformationWeek survey suggests strongly that executives are aware of this concept. While hardware and software for the desktop and network take the top spots on a list of budget priorities, end-user support and training are scheduled to get a bigger slice of the pie at about 55% of companies, far outpacing items such as outsourcing, consulting, and even personnel.

When companies do add personnel-an activity that puts them in the minority-hiring additional staff to cope with PC and end-user support is second only to new applications development. In many cases, the latter is yet another acknowledgment of the new preeminence of the desktop, as many respo ndents indicate that the applications they most want to develop are those for client-serverenvironments.

Downsizing Takes Toll
This year's InformationWeek survey also suggests that business reengineering and downsizing, activities that have occupied corporate America for the past several years, are taking a toll on IS staffs. Last year only one in five respondents said they planned to cut staff; this year the figure has more than doubled, to nearly one in two. And among respondents who say their budgets are up this year, nearly 60% say one reason for the increase is their need to support their company's business reengineering effort.

That poses a different challenge for IS executives. The days when an enormous staff stood by, ready to produce a complex new system that would stifle competition, may be over.

"Rather than achieving any competitive advantage, we're just holding our own," Bowerman of Phillips Petroleum says, "and ourcompetitors are doing the same."

Instead, any str ategic advantage provided by IS these days is more likely to center on boosting productivity and cutting costs. A recent survey by Computer Economics Inc., for instance, shows budgets and cost control to be IS managers' No. 1 concern. While IS departments are no longer insulated from fluctuations of the bottomline, that doesn't mean they can't try to control them. Software resellers such as Corporate Software Inc. in Canton, Mass., say they see demand growing for products that let IS staff manage the desktop by tracking PC-based assets throughout the organization. Although the market for such software is still fragmented, many people in the industry think Microsoft's forthcoming Hermes product will galvanize the market. Hermes, which will let users distribute software and track inventory of PC hardware and software over a network, is scheduled to ship by mid-year.

Hermes should also give IS execs an opportunity to manage technology even when someone else buys it, those observers say.

Some technology man agers welcome the shift of technology spending into the business units. Moore of Arvin, for one, says "it frees up IS professionals to focus on complicated issues, like arranging and managing enterprisewide data-making sure that data is distributed to the people who need it.

Mainframe Still Alive
Moore also sees an opportunity to redefine the role of the mainframe. While the InformationWeek survey found that mainframe and minicomputer hardware is the only area in which more respondents plan to cut costs than increase them, Moore says the mainframe is far from obsolete: "The mainframe makes sense as a data hub and a communications hub. It's still the most economical way to handle those functions, even if most applications are being moved to other platforms."

Moore adds that the mainframe's declining popularity has actually saved him and many other users money because it has forced IBM to license software based on usage rather than on processor size. "Now it's a sliding scale, like the taxcode," he quips.

It says something about the former state of mainframe software prices when a comparison to the tax code is offered favorably.

While no one denies the emergence of desktop and networkcomputing, some companies are finding new roles for the trusty old mainframe. Bochenski of Spiegel says his company is doing what might be described as a reverse migration; it's moving some applications from an IBM AS/400 minicomputer up to a mainframe.

What's in store for the future? The respondents, when asked to gaze into their crystal balls, were sanguine. Only a quarter predicted a decline in their budgets over the next three years.

About half t he respondents expect their budgets to rise, albeit in the low single digits. That's less optimistic than respondents were last year, when nearly 60% predicted budget increases for the next three years.

Nonetheless, experts say IS managers have nothing to fear. The rise in total corporate IT spending predicted by the Gartner Group, and the need for some unit within the corporation to demonstrate how steep investments in desktop technologies can best be leveraged, guarantee an important and sustained role for IS.

The bottom line for IS? It's true what they say: Money isn't everything.
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Photo: Daron Rosenberg