InformationWeek

November 27, 2000

IT Budgets Expected To Rise In 2001

ales are slowing for some computer companies, dot-coms are failing, and the Nasdaq hit a 52-week low last week. But businesses will do their part to keep the technology industry healthy next year: IT spending is going up. At least that's the forecast from several analysts and users looking ahead to next year's budget plans.

So far, IT spending plans for next year appear unfazed by Wall Street's jitters: They're estimated to grow at a healthy double-digit rate, fueled mostly by the continued drive to put E-business initiatives in place. "E-business is a priority," says Kurt Potter, research director at Gartner Group, which estimates that IT spending for North American companies, excluding salaries, will increase by 11% next year.

Companies don't appear to be worried as they draw up next year's budgets, Potter says. During the recession in Asia two years ago, "CIOs would call me to ask, 'What do I do to cut my budget?'" he says. "I'm not getting those calls now. The questions I'm getting now are 'How should I devote funds for my E-business initiatives?' and 'Am I spending enough?'"

Ruesch International Inc., a $250 million developer of global payment systems in Washington, D.C., is on the leading edge when comes to spending initiatives. Ruesch increased IT spending by 30% for its last fiscal year, which ended in April, mainly because of its push into E-commerce, says senior VP and CIO Ron Szoc. For the privately held company, the IT budget "is the next-largest budget line item after salaries and rent," Szoc says.

In May 1999, the company launched RueschLink, a transactional Web site offered to 30,000 customers for managing their business-to-business financial needs. With use of RueschLink growing at around 15% a month, Szoc says Ruesch gets 10% to 15% of its revenue from the Web site. To boost this revenue stream, Szoc plans to add another 30% to next year's IT budget. He'll spend the money on hardware, infrastructure, security, and product development, all aimed at E-business efforts.

Earlier this month, New York investment company Wit SoundView Group Inc. published results from a survey of more than 1,100 midsize and large companies on their IT spending plans for next year. The results show that companies will increase E-business technology spending by about 8% from last year. Much of the spending will be on infrastructure and Web-based customer-relationship management applications, says Wit SoundView managing director Kris Tuttle. "Many companies need to develop sustainable, scalable infrastructures for today's Internet traffic," he says.

According to Wit SoundView, CRM vendors such as Siebel Systems Inc. and BroadVision Inc. will benefit and see a rise in sales because of higher spending. On the infrastructure side, he expects BEA Systems Inc. and Microsoft to see a boost in sales.

Most of next year's projected 20% increase in the IT budget at Video Products Distributors Inc. will be spent on Web-based software for its video and DVD wholesalers, says IS coordinator Gregg Glass. Additional IT spending at the Folsom, Calif., company will go toward bringing Web hosting needs in-house and improving infrastructure security. The company brought in $250 million in revenue last year, and hopes a significant Internet venture it's planning will bring a good return on investment for the IT spending increase. Glass declined to provide details about the project.

A study released last week on IT spending by the Grocery Manufacturers of America also shows IT spending in the food, beverage, and consumer products industries on the rise. It increased to 1.5% of total revenue this year, up from 1.4% last year, and is expected to go up next year. The higher spending is a direct result of new E-commerce opportunities.

In an AMR Research study released in October, 59% of the 868 respondents from small, midsize, and large companies plan to increase IT spending next year. The financial-services sector (10% increase), and education (9% increase), have the largest planned IT budget hikes planned, according to the report. The survey also found that midsize companies are spending more for hardware (31%) compared with their big-company counterparts (26%).

"A lot of that investment is funneling into E-business, particularly for E-commerce software on both the supplier and customer side," says Bob Kraus, AMR's VP of quantitative research.

Also planning to spend more on IT next year is $8.5 billion Nationwide Insurance Cos. Last year, the Columbus, Ohio, insurer devoted $390 million to IT spending. Company officials declined to say how much spending would increase next year.

While Nationwide is focusing on E-commerce strategies, Steven Tien, associate VP of claims and head of E-commerce strategies at Nationwide, says new spending will be dispersed: A high percentage will be used to upgrade, maintain, and support legacy systems.

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