InformationWeek
Defining The Business Value Of Technology
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January 8, 2001 |
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Outlook For 2001
Despite the uncertainties of the economy, IT executives are generally optimistic about the new year. Most IT executives in our fourth annual Outlook Study say they expect IT spending to keep rising.
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lthough the pall of economic uncertainty has put a damper on the fresh promise of a new year, a majority of IT executives say they're entering 2001 with optimistic plans--providing that recent bumps in the economy don't lead to a full-blown recession, according to InformationWeek Research's Outlook For 2001 Study.Technology stocks have dragged down the Nasdaq in recent months as a number of large technology vendors, including Cisco Systems, Dell Computer, and Hewlett-Packard, reported disappointing fiscal results. And to most experts, it looks as though years of unprecedented economic growth are finally slowing down.
But business executives everywhere are hopeful that the tide won't make a radical turn. The Federal Reserve last week took the unusual step of cutting interest rates (by .5%) between scheduled meetings in a move that economists say signals Federal Reserve chairman Alan Greenspan's hope of warding off a recession. The Fed may cut rates even further in coming months. Lower interest rates are welcome news to the technology sector because they create a more favorable climate for capital spending, including spending on IT.
Despite the economic ambiguity, about seven out of 10 of the IT executives questioned late last year by InformationWeek Research as part of our fourth annual Outlook Study say their 2001 IT budgets will exceed last year's, with IT spending representing an average of 8% of their companies' total revenue. That's up slightly from 7.8% last year and 6.8% in 1999. The top 10 technologies taking priority this year: network security, PCs, Web development tools, Web server software, Windows 2000 desktops, Win2000 servers, network bandwidth, network computers, application-integration technologies, and E-commerce.
Overall, most companies are taking a wait-and-see approach before reducing IT spending in 2001, hedging their bets that the economy will have a soft landing after a few months of turbulence, says Andrew Bartels, VP and research leader at Giga Information Group. "Most companies put their 2001 IT budgets to bed a while ago," he says, "and they aren't likely to change those right away."
The majority of IT executives responding to the Outlook For 2001 survey seem to be hoping for the best. Their optimism may well be fueled by faith in their companies' 2001 prospects: Nearly 80% say they're confident that their companies' revenue growth will be better in the coming year than it was in 2000. Only 7% say 2001 will generate less revenue growth for their companies. About 15% expect revenue growth to remain flat.
Midsize and large companies tend to be more optimistic about the coming year than their smaller counterparts. Nearly 30% of smaller companies--those with less than $100 million in revenue--expect revenue growth in the next 12 months to either remain constant or dip. Twenty-four percent of midsize companies, those with revenue between $100 million and $1 billion, expect revenue growth to worsen or remain the same. Only 10% of large companies, those with revenue over $1 billion, anticipate revenue growth to remain the same or decrease.
Increased caution toward IT spending among smaller companies, as well as among consumers, is a trend that some IT vendors have blamed recently for disappointing earnings reports. "Smaller and midsize businesses are more sensitive to what's happening in the market right now," says Keith Kendall, managing director of North America at Compaq Financial, Compaq Computer's IT financing-services arm. "They, as well as consumers, are buying PCs at a slower rate than anticipated."
Tempering that slowdown, however, is the fact that larger, more-established companies take a longer-term view of their IT strategies, so IT planning is generally less affected by bumps in the road, Kendall says. Many younger companies have only known favorable economic conditions because the economy has experienced unprecedented growth over the last several years, so it's yet to be seen how these newer companies will weather a potential recession, he says.
Despite the overall optimism revealed by the survey, IT executives concur that nothing is written in stone. The majority of those surveyed admit that a number of macroeconomic factors would cause them to re-examine their IT spending in the year ahead: an economic slowdown in the United States, inflation, tightening credit, and U.S. stock market gyrations. Some companies, including General Motors and Prudential Insurance Co. of America, have already tightened their IT belts for the coming year.
IT executives surveyed by InformationWeek Research in December 1999 responded that those same factors would impact their IT buying plans in 2000. For the most part, though, 2000 was a strong economic year, until financial cracks, including a shaky stock market, began showing up in the final few months. Indeed, the U.S. Commerce Department reported that growth in the second quarter of 2000 for new IT equipment orders rose 34% compared with the same quarter in 1999; but in the third quarter, growth of these orders rose only 1.2% compared with the same quarter in 1999.
IT spending across all industries ranges from about 3% to 10% of revenue, Giga's Bartels says. Some sectors, such as banking and brokerage, have been spending 10% to 15% of revenue on IT in recent years, while the telecom industry has been spending 15% to 20%. These sectors are the most likely to cut back this year, he says. "Telecom companies have had high levels of spending over the last few years. They've made massive upgrades to their infrastructures," Bartels says. "But now, these companies are under earnings pressures," so they're cutting back on spending. Meanwhile, Bartels notes, some banks have run into problems with bad loans and other situations that are forcing them to put the brakes on spending.
As for the economy in general, Bartels anticipates that it will bounce back without any major upheavals, though the risk of a recession is higher than it was 12 months ago. Last year, Giga estimated there was a 10% chance of a recession; those odds have increased to 30% for 2001, he says.
For many Outlook For 2001 Study respondents, increasing IT spending in the coming year is related to accomplishing key business goals, including improving customer service, understanding and meeting the needs of customers, organizing and using customer data, and creating marketing advantages. Insurance and financial-services provider Cigna Corp. has aggressive IT spending plans for this year, much of it earmarked for new development work that will ultimately improve customer service, as well as contribute to revenue growth opportunities and cost savings. "IT is critical to driving top-line results here," says Andrea Anania, Cigna's senior VP and CIO, adding that the company's revenue and profits are growing at about 15% annually. Driving that growth, she says, is E-commerce and streamlining customer interaction with more self-service.
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