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News In Review

September 7, 1998


IT Execs Bullish Despite Market Turmoil

Many plan double-digit increases in their 1999 budgets, new survey reveals

By Marianne Kolbasuk McGee

L ast week's roiling stock markets reflected investor concerns about the strength of the U.S. economy, President Clinton's political problems, a deepening political crisis in Russia, and continuing economic woes in Asia. Despite the uncertainty, IT managers are bullish about their businesses' prospects for 1999 and are boosting spending accordingly.

The Dow Jones industrial average has fallen 20% since July, punctuated by a 512-point plunge last Monday. But an InformationWeek Research survey conducted last week among 100 IT executives involved in budgeting found that 82% expect 1999 will be better for their businesses than 1998. Only 10% said they expect 1999 will be a tougher year.

More than half of respondents (56%) are formulating their 1999 IT budgets, and 18% have completed them. About 57% said spending will increase in 1999, and 27% said their budgets will remain at the 1998 level. Only 15% of respondents plan to cut IT spending.

Of those increasing their budgets, half said spending will rise 5% to 15%, and 21% said their budgets will increase more than 15%.

The optimistic budgeting is somewhat surprising given that economists are forecasting that economic growth will slow in 1999 to about 2.2%, from 3.4% this year. They also predict industrial production and corporate profits will weaken, due in part to the weak Asian market, which is unlikely to improve much in 1999.

Some of the increased IT spending is being driven by the need to resolve the year 2000 date-field problem. But many companies are boosting their IT budgets for strategic reasons. Princess House Inc., a Taunton, Mass., maker of crystal glasses and other housewares, plans to spend 40% more on IT in 1999. The bulk of the increase will go toward new projects, including data warehousing and making sales applications accessible via the Web.

"During 1998, we had to make changes to our IT budget in part because year 2000 work cost more than we expected," says senior IS director John Mannix III. "But in 1999, we'd like to see the extra money spent on new developments to help us grow the business."

A further decline in the stock market could reduce consumer spending, which would affect retailers. "We'll trim the budget if consumer confidence ebbs and our sales increases flatten or turn into declines," says Mike Prince, CIO of Burlington Coat Factory Warehouse Corp. in Burlington, N.J. "If things were to really go to hell in a handbasket, that would have some impact."

If that happens, Prince says Burlington Coat Factory wouldn't lay off members of its IT staff, but would cut back on some capital IT projects, such as an initiative to replace in-store terminals with Linux-based PCs or, possibly, network computers. "We have a lot of initiatives, so we have a lot of room to squeeze if we have to," Prince says.

Travel companies could be affected by international instability. Joe Durocher, CIO of Hilton Hotels Corp., says that if the uncertainty in Asia and Russia begins to affect international travel, Hilton hotels in travel hubs such as New York might be hurt.

In that case, any decline in Hilton's revenue and profits might translate to cutbacks in the company's spending, including IT. The first IT cuts would likely be in projects with "the low-

est return on investment," Durocher says. He declines to give examples, saying each project would be analyzed individually.

While the rocky stock market hasn't affected IT budgets, CIOs admit a recession in 1999 would. In that event, new initiatives would be scaled back or placed on hold.

Paul LeFort, CIO of United HealthCare, a Minneapolis health-care provider, expects his IT budget to rise 3% to 5% in 1999, with most of the increases going to new projects, particularly related to the Internet.

But if the economy turns sour in 1999-something LeFort doesn't expect to happen-new projects would be most affected. "Half our IT budget is for keeping the lights on," he says. "The other half is for new developments. You have to keep the lights on."

Bill Friel, senior VP and CIO of Prudential Insurance Co. of America, says the role of Prudential's IT department is to help "increase revenue or decrease costs," so IT budgets and project priorities shift as the business demands. If the company is affected by outside factors, such as a recession, IT would support any shift in business objectives.

If necessary, Prudential's less-strategic new projects would become a lower priority. "Projects that are under way aren't likely to be put on hold," Friel says. "You don't have a long shelf life with IT."

For some companies, an economic downturn actually represents an opportunity to boost sales. For instance, global professional services firm PricewaterhouseCoopers says economic instability in various regions of the world can increase demand for its services.

The IT budget would be boosted "to provide operational support to our constituents in the 152 countries we operate in who need to respond to their clients," says Ellen Knapp, chief knowledge officer and global CIO for PricewaterhouseCoopers. Knapp says her company's 1999 IT budget, which is being worked out now, will increase over this year's, primarily as a result of merger transition costs, including infrastructure "harmonization" costs.

Michael Erbschloe, director of research for Computer Economics Inc. in Carlsbad, Calif., says continued turmoil in the financial markets could force IT managers to rethink their spending plans. "The fourth quarter tends to be budget justification time," Erbschloe says. "If market fluctuations continue, it could affect not only IT budgets, but capital budgets as well."

--with additional reporting by Beth Davis, Jennifer Mateyaschuk, and Clinton Wilder


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