InformationWeek: The Business Value of Technology

March 19, 2001

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Positive Thinking

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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

A bad economy may even have a positive effect on some IT budgets, as companies determined to reduce costs turn to technology for the productivity enhancements that will keep them competitive. "Sometimes when companies are focused on expense reduction, as we are, they recognize that IT is the way to get there," says John Kirincich, director of IT at Matheson Tri-Gas Inc. in Montgomeryville, Pa. Matheson, a subsidiary of Nippon Sanso in Tokyo that sells specialty gases to high-tech manufacturers such as Intel, is conducting a feasibility study on an end-to-end E-business system to link its sales and ordering systems with those of its customers and suppliers. "Many of the ways in which we want to cut costs are ending up as IT proposals," because of the economic slowdown, he notes.

Predictably, it's not just companies selling goods and services to traditional manufacturers that are feeling the squeeze. The troubles that have befallen online retailers and exchanges are taking a toll on the suppliers for those types of companies as well.

Advertising agency Young & Rubicam Inc. in Detroit will slash IT spending in half this year--in part because it completed a number of infrastructure upgrades last year. But the cuts also reflect a dearth of advertising from high-tech clients such as troubled auto exchange Covisint LLC, which remains without a CEO.

Young & Rubicam officials say they can't continue building advanced E-marketing tools for clients that do business online until they know whether those customers will want to, or be able to, buy them. "It's a chicken-and-egg problem," says chief technology officer Robert Doroshewitz. "We need to build the capability in order to sell it, but we can't justify building the capability until we know we can sell it." The upshot: Doroshewitz has, among other things, canceled plans to install a high-end integrated E-mail marketing application.

Going forward, Doroshewitz says he expects a tougher time winning approval for advanced IT projects from Young & Rubicam's board. "In this climate, they'll want to see exactly how the ROI is going to play out," he says.

David Yakimischak, chief technology officer at Medscape, a supplier of medical systems for hospitals and physicians, and parent of the CBSHealthwatch Web site for consumers, also is concerned about the cascading effect of cutbacks by clients. New federal privacy regulations are expected to divert millions of dollars from general IT spending into systems aimed at compliance. "Our IT spending is on hold and declining," he says. "We're focusing on profit-and-loss instead of doing things at any cost." Likely to go in case of further troubles are consultants and R&D, Yakimischak says.

IT managers might do well to focus on projects that can bring tangible benefits in the near term, many technology executives say. "You'll likely see less long-term, vision-type projects and more emphasis on things like enterprise application integration that can provide an immediate return," says George Szabo, VP for interactive marketing at Answer Financial Inc., a privately held online insurance broker in Encino, Calif. Answer Financial consolidated some IT facilities during a "right-sizing" earlier this year, but no deep cuts were made. Still, Szabo thinks the climate has changed. "A year ago, you were chastised for not spending money fast enough because everyone's priority was to grow quickly and be the first mover," he says. "Now everyone's taking a breather."

So what's a CIO to do? Focus on projects that improve customer service and cut costs--such as ERP, supply-chain optimization, and customer-relationship management--even at the expense of other projects, says Mike Surface, KPMG Consulting's managing director. The firm has noticed a recent decrease in spending on projects with a less-certain return, such as exchanges and portals. But businesses continue to spend money on strategic projects.

Amherst Computer Sales & Solutions, a $500 million a year business-to-business supplier in Merrimack, N.H., has been watching the economy carefully since the last quarter, shortly after company officials noticed a much more pragmatic approach to purchasing among its business customers and a slowdown in E-commerce initiatives. "Customers right now are much more focused on the here and now," CEO Ron Dupler says.

Amherst's original IT budget for 2001, developed during the third quarter of 2000, included significant increases. But the company began to rethink its spending in the fourth quarter, as manufacturing partners and analysts began predicting a slowdown. By November, December, and into January, Amherst was taking a hard look at top-line expenditures and cutting back capital expenses. IT took a hit of about 20%, leaving the IT budget at about 1.5% of Amherst's revenue.

Like its customers, Amherst is focusing on projects that add value. Still on the drawing board: two releases of Amherst's Custom Commerce platform and a sell-side procurement application. Projects that were seen as investments in the future, including E-business and E-procurement initiatives, have been shelved for now. "Right now, we've got a good grip on the top line of our budgets," Dupler says. "But if we miss the top-line forecast and things degrade significantly, we'd have to address the budget again."

In the meantime, Dupler is tracking macroeconomic developments and announcements from publicly traded competitors and partners, as well as from industry analysts. He's also watching interest-rate changes, which affect capital expenditure decisions. Internally, Dupler is tracking revenue per day and yield per territory. He's expecting the soft economy to continue longer than originally expected. "It's clear that across the board in the high-tech space, expenditures have slowed," he says.

International Data Corp. forecasts that PCs will be affected; data storage, high-end servers, and software will remain insulated. "A lot of IT projects have a life span of 12 to 36 months. Once they're in place, they're going to be completed," says IDC chief research officer John Gantz. "Like in construction, it would cost more to stop and start than to continue to completion."

Some companies still view IT as a cost center, so IT budgets are at risk in hard economic times. That's usually a big mistake that "starves the engine that drives productivity and organizational efficiency," says Howard Rubin, META Group's executive VP. Rather than wait for the ax to fall, CIOs should proactively take their concerns to their boards and CEOs, he says. And rather than thinking about cutting important projects, they should focus on lowering IT expenses. With labor consuming 40% to 50% of IT spending, moving the IT staff to a cheaper location, at home or abroad, is a good place to start, he suggests.

IT executives should be aware of another concern. "We classically look at IT as a percent of revenue, but if you start to look at it as a percent of expense, it's growing much faster," Rubin says. In banking, for example, one of every four expense dollars is being spent on technology--a price tag that the industry won't be able to bear in a slowdown. As profitability and revenue decline, IT will get picked up by shareholder radar in many industries. CEOs and corporate boards will ask increasingly tough questions about the money companies are making, where it's going, and how it's creating value.

That's probably part of the impetus pushing big companies to be more prudent than small ones. In all, 17% of large companies polled in the InformationWeek Research study already have cut back their IT budgets--a third more than the number of small companies. Another 11% of big companies said they are considering such a move--more than double the number of small companies.

But companies seem to be protecting their IT budgets wherever possible, too: Of the companies surveyed that cited specific impacts of the current economic slowdown, 37% said their IT budgets were cut or restructured.

The boldest CIOs are blowing away the notion of an IT budget altogether. Instead of an annual figure that covers all IT overhead and projects, some companies are budgeting just the base figure needed to keep the department running. After that, projects are funded on a case-by-case basis every quarter. Like managing an investment portfolio, such an approach makes IT departments more responsive and gets them out of money-losing projects more quickly, META Group's Rubin says.

That's precisely the approach being used by the Mony Group Inc., a New York financial-services company. As he's done in the past, VP and CIO E.P. Rogers is breaking down every IT project for this year into 90-day deliverables and reprioritizing the list almost monthly. Among the tasks being juggled are E-business and CRM plans, as well as an ERP project.

This ability to switch projects at the last minute, combined with a staff that includes about 30% outside contractors and can be scaled back quickly, keeps Mony nimble enough to outlast economic storms, Rogers says. If there's a significant downturn, Mony can free up resources for the highest priority work that returns the most value to the company.

Even during an economic slowdown, most executives would agree that IT work remains a value to companies. But tough times require tough choices and the wisdom to recognize the real opportunities. Says META Group's Rubin: "Shrink your base line, fund opportunities as they come along, manage your portfolio, and you'll do quite well."--with Paul McDougall and Elisabeth Goodridge

Photo by Ken Schles

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