InformationWeek: The Business Value of Technology

March 19, 2001

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Positive Thinking

In spite of budget cuts, many business and tech managers are still confident in IT's ability to bolster the bottom line

By Cheryl Rosen   (crosen@cmp.com)

More on IT spending:

sidebar:Sun Reprioritizes IT Projects As Demand Slows The Shrinking IT Budget 3/5/01 Outlook For 2001 1/8/01 TechWeb Finance: Corporations Rein In IT Spending 01/03/01

arch came in like a bear rather than a lion this year, with companies from automakers to retailers warning Wall Street of slumping sales and earnings. Many IT and business executives had been holding onto the hope that the month--or at least the quarter--would turn into the proverbial lamb. But after last week's market performance, that hope may be dimming.

InformationWeek Research's latest Priorities study, which surveyed 300 IT and business executives last month, found that half were positive about the economy based on economic conditions at that time. Another 35% had a wait-and-see attitude. Nearly three-quarters of respondents said their companies were prospering, and 68% expected that to continue through the next quarter.

But when assessing the next three months, only 41% of survey respondents had positive expectations of the economy, and 47% saw their industry sectors as flat or declining, according to the InformationWeek Confidence Index, a new quarterly measure of IT professionals' economic views. Fewer than half saw their IT budgets increasing (compared with 72% in the November Priorities study), and only a little more than a third anticipated IT staff increases in the near term.

But whether they now see the economic cup as half full or half empty, IT and business executives are monitoring the economic indicators and sorting out projects that will help steer their companies into the future from those that will squander their resources. They say this is a year for CIOs to focus on the return on investment of every IT project, to initiate change when necessary, and to hold onto control of their budgets.

Among the optimists is Jim Hawken, VP of finance and IT at Dennen Steel Corp., a distributor in Grand Rapids, Mich. "We're seeing a slowdown in the economy, but I don't think it's as drastic as some people think," Hawken says. "People's confidence is slipping because of the whole dot-com thing, but [President] George Bush still can get the economy rolling again," primarily through tax cuts, he says.

Hawken keeps things in perspective by taking the long-term approach to economic and IT issues. Even if the auto industry, Dennen's biggest customer, slows further, it still will produce 15 million cars this year. That's down 1 million from last year's record-breaking total, but it's still a lot of cars, he says.

Hawken is aware that the business side of the house is watching those sales and forecasts figures. Instead of waiting for the business side to act, he's paring down his list of projects. His staff is intact and his 2001 budget is up 5% from last year, to slightly more than $500,000. But that's about 5% less than he had envisioned in October, when the budgeting process began.

Amtrak also is optimistic about the future and expecting an increase in both passengers and revenue--at least it was when company executives set the 2001 IT budget, CIO Bob Galey says. With 10% of its tickets sold online, the railroad's E-commerce initiatives are beginning to yield noticeable results in cost-cutting and efficiency. That helped Galey win a double-digit increase in his 2001 budget.

This year's agenda includes an upgrade to Amtrak's Web site and an E-ticketing project that will replace paper tickets with a reservation number. Amtrak will E-mail the numbers to customers, saving the cost of paper, envelopes, and postage. Also in progress are upgrades to Amtrak's back-end systems. Its E-commerce initiatives are still linked to a 20-year-old reservation system; Galey's staff will rewrite the software code to better interface with the Web-based applications. He's also issued a request for proposals for an E-commerce purchasing package. Rather than having operational data locked up in a legacy system, an intranet upgrade will make that information available throughout the organization for scheduling, marketing, and reservation operations.

While many executives say it's still business as usual, a noticeable frisson of anxiety has some looking over their shoulders for falling revenue and shrinking IT budgets. Mesaba Airlines Inc., a Minneapolis company with $400 million in revenue last year, is doing a booming business as a subcontractor that provides planes and crews for Northwest Airlines, IS director Scott Ficek says. But watching the economy as whole, Ficek is concerned. "We're already seeing a yearlong slowdown ahead, though I don't know that we're going to go into a full-blown recession," he says, adding that the airline business likely will stay flat.

That's enough to prompt harder-than-usual questions from the business office about various purchases, Ficek says. He also expects further resistance when he asks for items not in his original budget. Funding is secure for certain projects, including infrastructure improvements, disaster recovery, and enterprise resource planning, because they're expected to improve operations and cut costs.

The IT budget, which represents 2% of revenue, is also flat at TRW Inc., a $17.2 billion manufacturer of automotive systems in Cleveland. Though slumping auto sales have hit the manufacturing sector hard in recent months, CIO Mostafa Mehrabani is going forward with E-commerce initiatives, including a Web-based supply-chain management system that will be funded by streamlining IT processes elsewhere. To that end, TRW will consolidate its worldwide data centers to six from 86 and move its North American and international networking system into one global wide area network--a project expected to save $7 million during the next three years.

Most business and IT executives seem to be crossing their fingers over the impact of the slowdown on their companies. Half said their companies have yet to be affected, and 16% said it's too early to tell. Of those whose companies are feeling an impact, the most common areas are budget restructuring (60%), drop in sales revenue (48%), and hiring freezes (43%), according to the InformationWeek survey.

That doesn't mean there isn't budget pressure from above. "IT is reflecting the rest of the economy, and virtually everybody I talk to is getting cost pressure," says the CIO of a well-known fast-food company whose IT budget is down 8% from last year. Nonetheless, he's optimistic that even with overall revenue down, this year's IT projects are safe. Having already been "scrubbed really hard" to ensure their rate of return, current projects will deliver a full payback within five years, the CIO predicts confidently. "Even if we have to borrow money to fund them, we'll still come out ahead," no matter what happens to the economy, he says. "When you have high internal rates of return like that, it doesn't make a lot of sense to cut the projects out."

Photo by D.A. Peterson

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