InformationWeek: The Business Value of Technology

mployees at Charles Schwab & Co. have been taking their economic-downturn medicine since early this year: across-the-board budget cuts, selected layoffs, delayed IT projects. Budget-consciousness has seeped throughout the company so much that people have stopped making color copies of their PowerPoint presentations, and the TVs that dot the hallways are kept turned off.

This from a company that increased revenue 29% last year and profit 8%. Yet neither the cost-cutting nor anxiety about the economy have completely shut the valve on IT innovation--or on hopes for the company's success, says Beth Devin, senior VP of retail technology. "Surprisingly, morale is good," says Devin, who, like other top executives, took a pay cut this year as part of the belt-tightening. "We've cut our budget, but there's no stopping the ideas and thoughts about things we can do."

A similar attitude is at work among many IT and business managers. According to the InformationWeek IT Confidence Index--a new measure of IT professionals' economic outlook--expectations for economic growth and IT spending in particular have fallen since the first quarter. Based on surveys of 300 IT and business managers across several industries in the first and second quarters, the IT Confidence Index tracks changes in the percentage who have a positive outlook on the overall economy, their industries, their companies, and their IT budgets.

Overall, the InformationWeek IT Confidence Index fell 13.2% in the second quarter of this year compared with the first quarter. That period--the first quarter compared with the second--is the first for which the index was taken.

However, just like at Schwab, managers' faith in their employers' ability to succeed in this tougher environment remains strong, according to an InformationWeek Research survey conducted three weeks ago and released along with the IT Confidence Index. While less than half have a positive outlook on the economy, seven of 10 are confident in their own companies' prospects.

IT has been a critical ingredient in the boom of recent years, so the confidence that IT buyers and implementors have in the economy and their companies offers an important glimpse into the future. InformationWeek Research created the IT Confidence Index to track the outlook of these key decision makers on a quarterly basis. The drop in confidence reflects many factors. For instance, managers surveyed are increasingly tentative about whether their IT projects will win funding approval--only 40% report a positive outlook for their current IT spending plans, down from 49% last quarter. Only two in 10 have had their budgets cut, with another 10% facing the possibility, but that's more downsized budgets than were reported in the first three months of this year. And managers don't expect the picture to improve in the next three months.

Tom Conarty, Bethlehem Steel Corp.'s senior VP and chief procurement and information officer, needs to reduce his IT budget by 5% to 7% this year. The U.S. steel industry is struggling not just with a sales slowdown in products such as automobiles but with cheap imports, industry overcapacity, and rising production costs. Conarty is braced for tough times ahead for the $4.19 billion Bethlehem, Pa., manufacturer but sums up his long-term outlook this way: "Cautious yet confident."

Bethlehem Steel is continuing to spend on projects with quick payback, particularly in improving factory efficiency and customer communication. It's still funding a companywide rollout of the latest version of Ariba Inc.'s E-procurement software. It's also improving the selling side of its E-commerce portal by working with iPlanet E-commerce Solutions. To meet budget demands, though, Conarty is deferring projects such as infrastructure upgrades and companywide deployment of new voice and data systems.

Conarty looks well beyond his IT budget to gauge economic prospects and says he believes falling inventory offers a sign that the Federal Reserve's interest-rate cuts will pay off soon with improved business spending. The U.S. economy grew just 1.3% in the first quarter of the year, according to the U.S. Department of Commerce, but businesses cut almost $19 billion out of their inventories, creating some hope that companies have worked through their glut and will soon start buying again. "I believe we'll begin to see an upturn in consumer and construction sectors late third quarter or fourth this year," Conarty predicts.

IT managers at Charles Schwab are making tough choices about what projects to keep going, and every expense is getting closer scrutiny, particularly travel and office expenses, senior VP Devin says.

Schwab rode the soaring stock market to new heights and was hard-hit by the downturn. It started budget cuts in January, earlier than many others, and though Devin says the anxiety is starting to ease, managers are still making tough choices about whether to keep projects going. A customer-relationship-management system deemed crucial stays in the budget. Also, some initiatives are so far along that cutting would be too disruptive, including an automated telephone voice system for customers that's a pet project of Devin's. "I fought for it," she says. "It's almost done. Now isn't the time to let go of it."

Every expense is getting close scrutiny, Devin says, particularly travel and office expenses. "We have a very tight travel policy," she says. "We're minimizing capital purchases like new computers and cell phones, and there's less moving around offices." Her own group, accustomed to regular off-site meetings at the Sheraton Palace, complete with caterer and meeting facilitator, now uses a bare-bones conference room at the office. On the other hand, Devin kept a recognition event for meeting sales goals. "People worked very hard, and they earned it," she explains.