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January 3, 2000

Outlook 2000
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The average company surveyed allocates 7.8% of its total revenue for IT expenditures, up from 6.8% in 1998's survey. Small companies earmark even more--9.1%, up from 8.3% in 1998. IT spending as a percentage of revenue ranges from 5.9% at manufacturing companies to 8% in the services industry to 10.8% among computer companies.

What are they spending money on? Not surprisingly, human resources are a big-ticket IT budget item. Also, salaries and benefits and new product and technology purchases will devour almost half of all IT budgets in the coming year. Another 14% will go toward implementing or maintaining E-business solutions, including business-to-consumer and business-to-business initiatives.

However, while IT salaries may be high--the median base salary for IT staff in 1999 was $54,000 and for IT managers $71,000, according to InformationWeek Research's Salary Survey--they may have leveled off for a while, and will take up a smaller percentage of the overall budget in 2000 than in 1999, according to those surveyed. Higher allocations will go to E-business solutions and new product development, while spending on Y2K date-conversion and testing efforts will decline sharply.

Prudential Insurance Co. of America is typical of many large companies expanding its businesses and grappling with the best way to offer online services. Although CIO Bill Friel won't give specific budget figures, he says Prudential's IT spending this year will increase between 4% and 6% from the more than $1 billion spent in 1999. Friel anticipates that at Prudential and elsewhere, "IT spending will go up slightly because of pent-up demand related to Y2K work."

At Prudential, additional resources will be spent on new initiatives such as E-commerce, but the bulk still goes to salaries, benefits, and software spending--which gets bigger every year, he says, partly because of major upgrades to the infrastructure. Prudential's goal is to provide "the best products, the best advice, the best information" when and where the customer wants it, Friel says.

Paul LeFort, CIO at UnitedHealth Group, a $17 billion health-care services provider in Minneapolis, predicts IT spending will go up in the health-care sector. "Y2K spending was an aberration," he says. "Companies spent all kinds of money in 1999 getting Y2K fixed" rather than starting other IT projects. UnitedHealth spends more than $400 million annually on IT.

Big companies such as UnitedHealth aren't the only ones that will increase IT spending this year. So will smaller companies, including Contours Ltd., a $50 million steel-wire manufacturer in Orrville, Ohio, that has a three-person IT shop. IT spending at Contours will rise significantly--about 20% to 25% this year, IS director Jim Griffith says. That's because the company will be replacing 90 to 100 older PCs with faster Pentium models, as well as hiring an additional part-time application support person at its plant.

Upgrading and standardizing PCs and getting network infrastructures in place are IT priorities for many other companies this year, including Chestnut Hill Systems, a provider of mental-health services in Bloomington, Ill. There, the IT focus will be on standardizing the nonprofit company's hundreds of PCs on Windows NT from the current mix of vendor platforms. "We're not planning to jump on Windows 2000 yet, but we will watch it," says Peter Bergstrom, manager of IS at Chestnut Hill, which has 500 employees across its multiple facilities in Illinois.

While Bergstrom keeps his eye on Windows 2000, many other IT executives are nervously watching their competitors' E-business initiatives. In fact, those surveyed still say--by a very narrow margin--that their toughest challenges will come from competitors' brick-and-mortar operations in the coming year. That's true regardless of company size.

Prudential's Friel says he expects the new year to bring even more E-business initiatives of all shapes and sizes--whether it's new dot-com companies or traditional brick-and-mortar companies trying out various approaches to online sales and services. Prudential is using business-to-business initiatives to reach new customers over the Internet and to broaden existing customer relationships no matter where customers are located or when they want the service.

At American Country Insurance Co., which provides insurance coverage for taxicab companies in Illinois, E-business initiatives this year will cut the cost of agents, says IS manager Frank Kasper. American Country, with revenue of about $75 million, also insures restaurants and other businesses in 11 states. Until now, the company had to hire a new agent every time it signed on a new customer. But as American Country deploys applications that let agents process accounts via the Web, it will reduce the time spent doing duplicate work over the telephone and, as a result, cut costs. "This will save us significant money in the long haul," Kasper says.

At steel-wire maker Contours, E-business means adopting an electronic data interchange format for ANX, the automotive manufacturing industry's value-added network. ANX will let Contours avoid paying per-transaction EDI fees and instead use the Internet to complete supply-chain transactions. "Traditionally, companies like General Motors and General Electric would only do business with you if you had EDI. This closed out a lot of the mom-and-pop and midsize companies that can't afford EDI," IS director Griffith says. ANX will also let Contours do collaborative scheduling with its manufacturer customers and suppliers, he says.

To support all of the E-business activity, the development of middleware and Java programs will be critical--as opposed to the front-end work emphasized at many companies last year, predicts Scott Dinsdale, executive VP and chief technology officer at entertainment Web site Firstlook.com Inc., in Los Angeles. "Now that the front end is up, we need a robust server infrastructure," he says.

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