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January 4, 1999

Outlook '99

IT organizations will resist making changes as the year 2000 looms--but look for budgets to keep growing anyway

By Justin Hibbard

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fter years of hard-fought year 2000 remediation, many IT organizations this year will lock down systems and resist making changes as the most notorious date in computing history approaches. But because business won't stop, IT budgets will keep growing and companies will keep buying and deploying new technology--albeit with more caution than in previous years.

An InformationWeek Research survey finds that more than three times as many organizations will increase rather than decrease IT spending in 1999 over 1998 levels. But the 54% that will boost spending is down from 65% last year--and the 16% that will cut spending is up from 9%. The rest will keep spending at about the same level.

On average, IT budgets will represent 6.8% of companies' total revenue, and three-quarters of IT executives expect 1999 revenue will grow more than last year's revenue. "The business outlook is relatively positive," says Hank Leingang, CIO at Bechtel Group Inc., an $11 billion engineering and construction company in San Francisco.

Ironically, the most strategic technology investment companies will make in 1999--year 2000 conversion and testing--is also a major reason analysts cite for slower growth in IT spending this year. Slightly more companies will increase rather than decrease year 2000 spending in 1999. But once they've achieved compliance, many will balk at deploying new technology that could destabilize systems. "There's going to be a lot of clamping down on projects by the second quarter," says Dale Kutnick, CEO and research director of Meta Group Inc.

Bechtel will instate a lock-down during the fourth quarter of next year, during which it will permit only emergency changes. But Bechtel is also minimizing new technology deployments throughout 1999. "This is not a year to be disrupting the portfolio in any major ways," Leingang says.

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As a result, Bechtel's IT spending is likely to stay the same or decrease slightly this year. During the past two years, the company invested heavily in developing an intranet and Web-based applications. This year, it expects to reap returns from those investments and spend less on building new systems.

But companies whose core business hinges on IT will have a hard time keeping their hands off software. Equifax Inc., a $1.4 billion credit-reporting agency that provides outsourced data mining and other IT services to its customers, aims to finish all system changes for customers by Sept. 1. But it must remain flexible. "I'm not going to tell you that if some big business comes in and requires us to make changes to our systems, we're not going to do it," says Rich Crutchfield, corporate VP and chief technology officer at Equifax, in Atlanta. "But to do it would require approval from the highest level of this company."

Indeed, few companies say they can stop introducing new technology for several months and remain competitive. That's one reason customization and deployment of packaged software still ranks high on IT executives' checklists this year. Enterprise resource planning software is the second most strategic technology investment companies will make in 1999, according to InformationWeek Research. Other high priorities are data warehousing, Web development, and electronic commerce.

Boise Cascade Office Products, a $3 billion distributor of office supplies in Itasca, Ill., is pushing ahead this year with plans to deploy ERP, E-commerce, and customer service systems. "We won't do a long-term lock down," says Larry Gunther, the company's CIO. "Our business is too dynamic." Boise Cascade will freeze systems only during the fourth quarter and won't place an absolute ban on changes. Throughout the year, the company will build new links with suppliers and let customers order more products and services through its Web site. It will roll out an ERP package from Prometheus Software Developments Pty. Ltd. at its European locations. And it will add two call centers in the United States, based on equipment it's now evaluating.

Many companies will try to cope with new software installations by running extra-stringent tests. Fingerhut Cos., a $1.5 billion retailer in Minnetonka, Minn., will subject new software to a series of so-called regressive tests, which make sure new code doesn't affect repairs already made to installed code. Fingerhut's total IT spending will likely match last year's level because of tighter cost control. But even after the company completes year 2000 remediation this quarter, it will free up funds as needed throughout the year for strategic IT investments, especially in E-commerce. "It's very important we don't disable the business or limit our ability to take advantage of new market opportunities," says CIO Alan Bignall.

Nevertheless, Fingerhut will not change its infrastructure software, such as operating systems and databases, unless absolutely necessary. The IT department will exercise extremely tight control pro-cedures, says Bignall.

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No Upgrades, Please
Other retailers are more adamant. Last June, several of them joined with the National Retail Federation in asking IT vendors not to release upgrades in 1999 other than minor year 2000 patches. "We've already seen some violations," says Don Gilbert, VP of IT at the federation. "Most of the software and hardware suppliers understand that large companies are going to lock up their code after they've tested their systems." And that means IT vendors will experience a suspension of revenue, he adds.

PeopleSoft Inc. put off releasing version 8.0 of its namesake ERP package until the first half of 2000 partly because customers requested it. "Our existing customers would not want to receive a major release in the second half of 1999 because they'd be too busy focusing on year 2000 issues," says Rob McKelligan, PeopleSoft's VP of product strategy. PeopleSoft at first expected the ERP market to grow by 40% in 1999 but revised the estimate to 20% based on customers' year 2000 plans. PeopleSoft hopes to offset the dip in demand with sales of its new E-commerce and data mining software.

Other software companies are forging ahead with product releases in 1999. Microsoft says it will ship its long-awaited Windows 2000 (formerly known as NT 5.0) this year despite many critics' doubts. Microsoft doesn't expect year 2000 issues to hurt sales of the product, though customers may not deploy it immediately. "Even in a normal product release cycle, our customers are going to take six months or so before deployment," says Jonathan Murray, general manager of worldwide enterprise technical marketing at Microsoft.

The millennium bug isn't the only reason IT budgets will grow slightly less this year than in the past. Despite most IT executives' optimism about revenue growth, various global economic crises will put a crimp in technology spending in certain industries. The most likely outside event that could affect IT spending in 1999 is an economic slowdown in the United States, InformationWeek Research finds. Large companies are particularly concerned about ongoing economic trouble in Asia, though its effect on the U.S. economy is still uncertain.

U.S. Steel Group, the $6.8 billion steelmaking unit of USX Corp. in Pittsburgh, will cut IT spending by 5% this year as part of an overall cost-cutting effort driven by competition from foreign imports. "The imports are coming from Russia, Japan, and other Far East countries," says Gene Trudell, general manager of computer services at the steel- maker. "Steel is being dumped at prices below the manufacturers' cost to produce it. That's caused us to drop certain projects that perhaps didn't have enough return on investment to be considered."

U.S. Steel is evaluating which products in its technology portfolio it can live without and which vendors could do better on price. In particular, the company is looking to renegotiate some maintenance agreements, Trudell says.

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In other sectors, business and IT spending are on the rise. At Carlson Cos., a $6.6 billion travel company in Minneapolis, the IT budget this year will increase about 2 percentage points more than it has historically, matching growth in the company's revenue. The most important technology the company will roll out is a custom client-server application that lets businesses manage their own travel. "It will completely change our business," says CIO Rex Carter. Initial versions of the system will access inventory in computer reservation systems from vendors such as Sabre. But by year's end, it will also connect directly to travel suppliers' databases--in some cases bypassing the reservation systems and their transaction fees.

Increased Spending
In other industries, the economic effects of deregulation are spurring growth in IT budgets. US West Inc., a regional Bell company, will increase IT spending this year by about 20% over 1996--the year the U.S. government passed the Telecommunications Reform Act. Since the act passed, US West has boosted IT spending each year to help it compete in newly opened markets. This year, US West will reengineer its billing systems to improve customer service and offer more attractive product combinations. "The objective is to bundle products and services across multiple lines of business and provide all our services on one bill," says CIO David Laube.

Deregulation is also requiring power utilities to spend more on IT. The IT budget at Enron Corp., a $20 billion power company in Houston, will grow by 22% over last year's budget. The company has several deals in the works to sell electricity in states that are opening their markets to competition this year. Depending upon which deals go through, Enron will have to develop new billing and meter-reading systems. In addition, it will install new IT infrastructures at companies it has recently acquired or invested in.

Meanwhile, Enron this year will roll out SAP R/3 to its operations worldwide--reversing its decision last year to halt all IT development, including the R/3 installation, during the last quarter of 1999 and the first quarter of 2000. "We felt that posed a risk of losing some key people on the SAP project, so we reevaluated our schedule," says Alberto Gude, VP of IS at Enron. Instead of stopping for two quarters, Enron's SAP team will deploy the ERP system at recently acquired companies that have no legacy systems and little chance of encountering year 2000 problems.

Winding Down
Some observers maintain that momentum for new technology projects will build this year as year 2000 projects begin winding down. "This is the catch-up year," says Howard Anderson, managing director of the Yankee Group. "The year 2000 has robbed IT departments of their application development money for the past three years, and there's an enormous gap in things that should have gotten done." In particular, companies this year will race to catch up with early leaders in electronic commerce and Web development, Anderson says. "In the short term, you can delay some application development," he says. "In the long term, you can't because your competition is going to eat your lunch."

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FDX Corp., the $16 billion parent of package-delivery company Federal Express, hopes to widen its lead in E-commerce this year. The company is starting 1999 with 95% of its year 2000 repair work done. Though it will continue testing and contingency planning throughout the year, FDX will shift its focus--and much of its money--toward new technologies for supply-chain automation and package tracking. Much of the money will come from an approximate $400 million reduction in spending on wide-body aircraft. "A lot of the capital we were spending on airplanes and infrastructure will be directed to growing our information technologies," says Chris Hjelm, FDX's CIO.

For example, FDX this year will install at several sites a custom-built scanning system called Purple Lights. When employees pass a package's label over a scanner, a purple light illuminates over the bin in which the package belongs. This should speed the processing of packages and increase accuracy.

Other companies are making E-commerce a top priority, too. Eastman Chemical Co. in Kingsport, Tenn., is expanding its virtual store through which it sells chemicals to businesses. "We have a large number of customers that like a simplified way of getting technical information about our products, ordering directly, and being able to track order status," says Charles Oliver, director of IT for sites and regions at the $4.7 billion company. Eastman this year will further integrate its Web storefront with laboratory management and manufacturing systems so customers can track orders through each step of their fulfillment.

Penske Corp., a $5.8 billion transportation company in Detroit, this year will invest in Web-based electronic data interchange even as IT budgets at its operating companies are shrinking or staying flat. CIO Steve Picket anticipates that the project will be inexpensive and produce quick returns. "We're finding that with new Internet development tools, doing more business than we did in the past is a lot cheaper and easier," he says. Penske will deploy packaged Web EDI software, though it hasn't sealed a deal with a vendor yet. Rolling out the app worldwide this year will enable the company to do business in countries it hasn't been able to reach before, Picket says.

E-commerce this year will be a more strategic investment for small businesses than big ones, InformationWeek Research finds. Of companies with less than $100 million in annual revenue, 9% rate E-commerce software as their top technology investment for 1999. That's 2 percentage points more than companies with over $1 billion in annual revenue. "We see smaller companies getting more aggressive in terms of using IT," says Michael Erbschloe, an analyst at Computer Economics Inc., a research firm. Computer Economics predicts small U.S. companies will spend $92 billion on IT this year--about 24% of all U.S. IT spending.

1-800-Batteries, a $30 million distributor of mobile computing equipment, this year will increase IT spending 50% over last year. The company already does 20% of its business on the Internet and expects to do 40% by year's end. Most of its IT spending during its five years in business has gone toward its Web site and systems for sales, accounting, and logistics. Its No. 1 priority for 1999: deploying software from Personify Inc. to track responses to Web marketing campaigns.

1-800-Batteries sees 1999 as an opportunity to gain an edge on larger competitors bracing for Jan. 1, 2000. "We're going to make a lot more progress on the Web than companies that are slowed by Y2K stuff," says CEO Ken Hawk.

Network plans
Networking will top many companies' IT agendas this year. Their aim is twofold: increase bandwidth and contain costs. To satisfy those demands, telecom carriers are promoting network services that combine voice and data on the same lines. "We've been talking about voice and data coming together since the mid-'70s," says Michael Katz, director of the PricewaterhouseCoopers Technology Centre. "The cost of the technology has gone down enough to make it attractive." As startups such us Level 3 Communications and Qwest continue to build up their IP networks, established carriers such as Sprint, MCI, and AT&T will respond with low-priced integrated network services of their own, Katz says.

Jeff Chasney, CIO at Clark Refining & Marketing Inc. in St. Louis, plans to shop for integrated network services this year. "We're expecting to see dramatic reductions in cost per minute for services," he says. Reducing communications costs is part of an overall effort to contain IT spending this year at the main operating unit of $5 billion petroleum company Clark USA Inc. Clark is even looking at renegotiating its existing telecom contracts to get out of them earlier.

Overall, advisers warn companies to be careful about jumping into big spending commitments in 1999. With the year 2000 looming, unpleasant surprises could require IT organizations to come up with funds unexpectedly.

"IT managers don't have a good feeling for what they're spending in 1999," says Kurt Potter, an analyst at Gartner Group, which predicts that most companies will underestimate year 2000 spending by half. That's enough to turn a year of stability into a year of unpredictability.

next story: Y2K: Ready Or Not, Here Comes 2000