InformationWeek Purchasing Survey:

The Money Machine

Our annual look at corporate technology budgets shows spending will get a boost

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By Clinton Wilder
Issue date: Jan. 8, 1996

Good news for technology managers: Your budgets are rising, the money is flowing to client-server systems and the World Wide Web, and the information systems group has strengthened its grip on corporatewide technology spending decisions. These are just some of t he surprisingly upbeat findings from InformationWeek's annual information technology purchasing survey. More than 180 technology managers were surveyed by telephone and fax during late October and early November and asked to discuss their spending plans for the coming year.

Key findings include:

• Spending will grow. Nearly 60% of the respondents plan to increase technology purchases this year.
  
  
• Recentralizing will continue. More than half the respondents say their central IS group will account for 75% of total corporatewide technology purchases. But one in five say their IS group will account for no more than 25% of total corporatewide technology purchases.
  
  
• Equipment purchases will shrink. More than half of the respondents say at least 75% of their 1996 budgets will go to items other than equipment.
  
  
• Networking will rule. Technologies slated for spending increases include networking hardware (cited by nearly 90% of respondents), PC systems (mor e than 80%), imaging systems, applications development, and E-mail systems (each more than 50%).
  
  
• Hot technologies will get hotter. Nearly 75% of respondents say they'll use the World Wide Web and online services this year. All respondents say they'll use client-server. The Internet will be used by half.

The big news: For a majority of IS departments, the budget will grow in 1996. Survey respondents were asked to compare their planned '96 IS budget with 1995's, and 58% foresaw an increase. Nearly 30% expect budget levels to stay the same next year. Fewer than 15% say their budget will shrink. Among those boosting spending, most expect increases of 10% to 15%, though many will enjoy IS budget growth of 20% or more.

"The money is there, even if it is subject to total accountability for business justification," says Thornton May, VP of research and education at Cambridge Technology Partners, an IT consulting firm in Cambridge, Mass. "These days, you simply can't genera te a high-margin product or service that doesn't have a significant IT component. To out-customize your competitors, you have to beat them on IT."

Case in point: Massachusetts General Hospital in Boston. The hospital's overall IT budget in 1996 will increase by 20% over 1995 levels. "We have some pretty ancient systems that need upgrading," says Sam Miller, Mass. General's chief information officer.

Similarly, Rockwell International Corp. in Seal Beach, Calif., riding a bullish outlook in its semiconductor business, will see its first IT spending increase in roughly eight years-a 10% jump in its IT budget. A significant chunk of that rise will fund replacement of Rockwell's 286 and 386 PCs, bought five years ago, with Pentium-class machines. That's no small project: Rockwell's PC population already numbers 45,000, and the manufacturing giant plans to boost that figure by 6% this year.
TRW Inc., a manufacturing giant with 30,000 PCs and Macs, finds itself in a similar cycl e. The company will replace thousands of 286, 386, and 486 PCs with Pentium-based systems, as
well as replacing older Macs with top-of-the-line Power Macs, says Pete Janak, VP and CIO of TRW in Cleveland.

Although TRW's IT budget will remain virtually flat-it's keyed to 2% of corporate revenue-the company will shift dollars to spend more wisely. Janak assumed corporatewide IT responsibility last February. His challenge: Eliminate duplication of effort and bring more standardization to what had been a highly decentralized operation across many different lines of business. For example, the company wants to consolidate 23 manufacturing resource-planning systems now used.

Effective Spending
"I think we're spending enough, but it needs to be spent more effectively," says Janak. "Each division did very good things on its own, but we ended up with more diversity than you could ever want. Through standardization, we hope to cut down redundant initiatives and also gai n more leverage with the vendors in purchasing."

In health care, legislative reform and competitive pressures are serving as a business wake-up call, and technology is viewed as a key component. "A lot of the things we're doing are catch-up," says Tom Fleishman, VP and director of IT services at Kaiser Permanente's Southern California headquarters in Pasadena. "Historically, IT spending increases were modest in health care. But as the pressure mounts on health care to run as a business, we're getting pressure to spend more to modernize and upgrade."

Kaiser Permanente plans a 12% IT spending boost for 1996. The planned increases are practically across the technology board-mainframe, PC, networking, applications development, E-mail, and telephony projects.

Despite reports that enterprisewide technology spending is moving from the central IS group to nontechnical business units, many survey respondents say they're holding on. More than half of the respondents say three-quarters to all of their company's budgeted 1996 technology spending has been allocated to the central IS group.

That's not to deny that some technology spending has moved to business groups. Slightly more than 20% of the respondents say their central IS group was allocated only one-quarter or less of their company's total technology spending for next year. In other words, at least three-quarters of their companies' technology spending will be done outside the IS group. Similarly, slightly more than 10% of the respondents say their central IS group will handle only one-quarter to one-half of their companies' total technology spending. Just over 15% say their IS group will handle half to three- quarters, leaving the remainder to nontechnical business groups.

"There is a recentralizing of spending control, and senior management is behind it," says May of Cambridge Technology Partners. "CIOs are saying to departments, 'We'll let you spend money, but it's coming throug h me.' They've learned that distributed systems should not mean anarchy."

Next year will see the continued flow of IT dollars away from equipment and toward software, services, consulting, and especially personnel. More than half of survey respondents have earmarked less than a quarter of their 1996 IT budgets for equipment purchases. Another third say 25% to 50% of their IT spending will go for equipment. Together, that means nearly 90% of respondents will spend less than half their budgets on gear. Only 5% plan to spend more than three- quarters of their budgets on equipment.

Part of the reason: Prices of both mainframes and PCs are falling, says Mark McManus, a senior financial analyst at Computer Economics Inc., an IT consulting firm in Carlsbad, Calif. "It's definitely becoming a smaller piece of the pie and a smaller line item," he says. "At the same time, software is becoming more expensive and increasingly the key component for IT success. The computer industry re venue model is starting to look like a razor blade company that gives you the razor for free and you have to pay for the blades."

Still, serious money will be spent next year on IT equipment. Spending increases for five classes of technology were cited by more than half of all survey respondents: networking hardware, PC systems, imaging systems, applications development tools, and E-mail systems.

Reflecting the growth of client-server technology, nearly 90% of respondents say they'll spend more on networking hardware next year. PC systems will get more spending at over 80% of respondents' shops. Imaging systems, applications development, and E-mail were each cited by slightly more than half the respondents.

Mass. General, for example, plans to move its core financial systems from legacy applications on a mainframe to PeopleSoft's financial suite running on a client-server setup from Hewlett-Packard, Data General, or Digital Equipment. In the first quarter, Mass. General will also migrate to the new client-server version of its cost-accounting software. The hospital is also replacing five different clinical laboratory applications with an HP-based package from SunQuest Systems in Tucson, Ariz.
Surprisingly, one-third of respondents say they'll spend more on mainframes next year, indicating that the mainframe indeed has a role as a network server.

Anyone who still thinks the Internet is primarily the province of hackers and Generation X Web-surfers should think again. The cost-effectiveness of the Internet's World Wide Web as an internal communications and external marketing vehicle gives it a prominent place in the purchasing plans of thousands of corporate IT departments. Sixty percent of survey respondents say they're working on technologies related to the Web. Add in those respondents who plan to get started on the Web next year, and the figure jumps to nearly 75%.

"For the first time, we'll see some some formalized IT budget items for Internet spen ding," says McManus of Computer Economics. "A lot of companies are finding there are a lot of different uses of the Internet within the IS umbrella of responsibilities. In the past, quite a bit of Internet spending in departments wasn't being tracked at all, which is a lot like what happened with client-server a few years ago."

Jugglers
Take Denni Interliggi, IS director at diversified manufacturer GenCorp Inc. in Fairlawn, Ohio. Interliggi and his corporate staff are currently juggling at least four Internet projects at the $1.7 billion company: an internal Web server already in use by employees at GenCorp's Aerojet division in Sacramento, Calif.; a planned similar "Intranet" for 230 employees at corporate headquarters in Fairlawn; a Web site for the company's automotive design center in Troy, Mich., to share computer-aided design drawings online with the auto industry; and a public home page to raise awareness about GenCorp and its products among millions of Web surfers around the world. "We see [the home page] as an excellent public relations vehicle, because people don't know who we are and what we do," says Interliggi. "A lot of information can be gathered and dispersed at a very low cost."

Similarly, Kaiser Permanente has earmarked 3% of its 1996 IT budget for an extensive World Wide Web site, with the prototype slated for January. With its huge member base, Kaiser faces a formidable customer communications challenge. "It's going to be a major initiative for us," says IT director Fleishman. "We'll see where it makes sense and where it doesn't. There are scores of potential benefits, but we're going into it with our eyes open, because I think [the Internet] has been a bit overblown. How many of our 2.2 million members would access it, we don't know."

Among the features Kaiser plans to include on its site are health tips, detailed Kaiser organizational information, and possibly a level of interactivity that will enable members to schedule their medical appointments.

Spending on client-server technologies and applications development will continue to dominate corporate IT in 1996, with 91% of survey participants currently working in this area. All of the companies surveyed will spend IT dollars for client-server projects in 1996.

A good example of the continued megatrend of client-server migration can be found at Charles Schwab & Co. in San Francisco. A healthy chunk of the discount brokerage'sincreased IT budget in 1996 will fund new applications servers from IBM and Sun, says executive VP and CIO Dawn Lepore. Schwab is shopping for packaged client-server applications for sales management, customer tracking, and other functions. But it's not a complete migration: Schwab will also invest in additional mainframe capacity this year. "The mainframe still plays an important role," says Lepore.

Schwab is extremely bullish on the Net and electronic commerce. Use of the Web for both internal and external communications will see considerable investment this year and drive much of the company's new server purchases, accord-ing to Lepore. Schwab is piloting an online customer trading system in Florida called E-Schwab. "We've found that electronic customers are great customers to have," says Lepore.

Online services are also commanding more dollars. About 60% of the respondents say they use such services now. Including those who plan to start using online services in 1996, the total will come to 72% of respondents. Pure Internet use-excluding the Web-is on the increase, too. Just over 35% of respondents say they use the Net. Another 10% plan to get online this year.

Even though companies expect healthy IT spending increases, the question remains: Will it be enough? With the Internet presenting enormous business opportunities on top of client-server migration, PC upgrades, demands for more servers and more bandwidth, and ever-increasing personnel costs, there' s no lack of projects on which to spend money.

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