The terrorist attacks have raised tension in an already-uncertain economy, forcing IT execs to focus on only the brightest ideas
Information technology managers' confidence in the overall economy and the future of IT investment was flagging badly even before the Sept. 11 attacks on the World Trade Center and the Pentagon. Now, even those strongly committed to business technology have their doubts.
West Group president Michael Wilens knows that freezing IT spending isn't an option. The Eagan, Minn., company delivers legal archives and books electronically to most major U.S. law firms, so IT is deeply woven into the company's fabric. Yet Wilens considers this a time for caution. "We continue to increase our IT commitment," he says, "but we'll not take any bold, giant initiatives until we see where the economy is heading."
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IT is deeply integrated into the fabric of West Group, but company president Wilens says the legal publisher isn't undertaking major IT initiatives now.
The thousands of lives lost on Sept. 11 did immeasurable emotional damage. But how the terrorist attacks will hurt the economy, and particularly IT investment, is unclear. Companies that have grown dependent on the Internet may see a need for a burst of IT spending to bolster network reliability and security. While that spending alone is unlikely to pull the IT industry out of its slump, some economists, such as Conference Board chief economist Gail Fosler, thought there was reason for optimism in the overall U.S. economy before the attacks. The question is whether this will derail that progress.
"The United States, and by implication the global economy, remains in a state of heightened vulnerability," Fosler says. "Only time will tell whether the magnitude of the impact of these tragic terrorist actions is large enough to reverse the positive forces already in place."
Wilens' concerns for West Group show that the factors affecting IT decisions go beyond a reaction to violence and economic uncertainty. West Group, part of a $2.62 billion-a-year legal-publishing division of Thomson Corp., is also facing a question of IT digestion after several years of binging on infrastructure. It spent more than $50 million during the past 2-1/2 years putting in an SAP enterprise resource planning system. To make it easier for law-firm customers to access its information via the Web, West Group has also shifted 50 terabytes of data and related software from mainframes to Sun Enterprise 6500 servers. Next year, the business and IT staff will focus on developing applications that wring value out of those investments. "It's time to drive the business benefits of these products," Wilens says. "There are zillions of little things to do."
At some businesses, this month's catastrophic events could serve as catalysts for new IT spending, especially for backup storage and security systems and services. Network security ranked No. 2 on companies' list of technology priorities before the attacks, cited by almost nine of 10 respondents. "When word gets out that every corporation is looking at its disaster-recovery plans, I can see that driving both hardware and services sales, perhaps restoring that sector faster than otherwise believed," says Norbert Ore, group director of strategic sourcing and procurement at paper and lumber manufacturer Georgia-Pacific Corp. in Atlanta. Ore also chairs the survey committee that oversees the widely followed Purchasing Manager Index, a monthly measure of the business-investment outlook.
Avnet Inc. in Phoenix is considering just such an investment. The computer-marketing unit of the electronics components and computer distributor is exploring whether to build an off-site computer center to back up the unit's systems and data. The department recently bought hardware to improve availability, but its disaster-recovery plans call for moving data from one Avnet site to another, says Barbara Martensen, a senior VP and global information officer for the company's $3 billion a year computer marketing unit.
"I've given a lot of thought in the past couple of days after the World Trade Center disaster about having multiple avenues of backups," she says. "We're thinking differently about it now." The costs for off-site backup systems might be held down, she says, because there's still a lot of used servers and storage devices available from failed dot-coms, and because application service providers that offer backup services have a lot of excess capacity.
Even before the attacks, only four out of 10 IT managers had a positive outlook on the economy for the coming three months. "Economic activity has been slowing down since the beginning of the year, so lower confidence would have happened regardless of what occurred on Sept. 11," says Ralph Kauffman, a purchasing program coordinator and an assistant professor of management at the University of Houston. Perhaps worse, only 47% had a positive view of where their industry was headed, the first time this year that number dipped below 50%.
IT managers had remained largely positive about their employers' prospects--68% of them considered it positive--though that number was down 10 percentage points from three months earlier. However, that confidence sank when it came to IT budgets, where only 35% had a positive outlook.
This confidence will be sorely tested in companies and industries that suffer financial losses stemming from the terrorist attacks, such as airlines and insurance companies. Insurers could face claims as high as $30 billion as a result of property damage, deaths, medical costs, and lost business income and wages. One major insurer, Zurich Financial Services Group, says its net pre-tax loss could approach $400 million, or about 2% of shareholder equity. Yet David Saul, CIO of the Zurich North America unit, says IT spending at the Schaumburg, Ill., company continues to rise by 10% a year, with much of the increase earmarked for the development of Web-based systems and portals to share information with the company's independent agents and large-business customers. "If you're well-prepared during a soft market, you'll be in good shape to handle the hard market," he says.
Companies have become more cautious with their IT investments as the economy has weakened. Just over half of companies said they've been hurt by the economic downturn, and they've responded with more dramatic efforts. For example, in the first quarter of this year, 37% of companies hurt by the economic downturn cut or restructured IT budgets; in the third quarter, 64% of such companies were doing so. When they cut, companies lopped off an average of 21% of the IT budget. And one out of every three companies killed or froze some IT projects.
Such delays have been felt at Emerson, an electronics manufacturer in St. Louis with $15.5 billion in annual sales. The company cut its corporate IT budget by 10% despite being in the second year of a five-year program to develop
E-business systems for improved productivity and logistics, lower costs, and improved customer relationships. After the fifth year, Emerson projects that the Web systems should reduce spending companywide by $400 million annually.
Though pilot projects have been instituted in some smaller units, they've been delayed at larger divisions for six to 18 months because of limited resources--the money to pay for them and the users to test them--caused by recent budget cutbacks and the layoff of more than 3,000 salaried employees. One such project: a customer-relationship management system from E.piphany Inc. The pilot is under way at four divisions, but senior executive VP and E-business leader Charles Peters had hoped that as many as 10 divisions would be testing the system by year's end. Still, he's looking for a bright side in the delays. "We'll learn from the first implementations, and we expect more mature software from the vendors in 2002 than we can get in 2001," says Peters, who still expects to reach $400 million in savings on schedule in 2005.
Peters is less optimistic about the economy, and that attitude stems in part from the terrorist attacks. Emerson closely tracks factory capacity utilization, which fell last month to a weak 76.2%, compared with a relatively healthy 82.6% a year ago; this suggests business spending wasn't driving the economy. That left consumers to prop up the economy with their spending, something Peters doubts will continue in the wake of the attacks. "In spite of the crash of the dot-coms and weakness in the manufacturing economy, the consumer side still held up, miraculously," he says. "But contrast that to the night of the attacks, with panic buying at gas pumps. You get a feeling the certainty about the future has been damaged by this event."
Ninety percent of Emerson's sales go to business customers, but it keeps a close eye on consumer confidence since many of its components--such as refrigerator compressors, or heating elements for appliances--wind up in consumer products.
Other recent research backs up InformationWeek Research's findings that the economy was struggling even before the terrorist attacks, raising the concern that this will be enough to push the economy into recession. The Federal Reserve last week, in its economic report known as the Beige Book, concluded that the economy had been sluggish in August and early September and that manufacturing in particular was weak across industries and regions.
Ken Smith, CIO at chemical manufacturer PolyOne Corp. in Cleveland, says industry sales were down 20% before the attacks. Now, he's looking to break large IT projects planned for the next six months--such as an SAP enterprise resource planning upgrade--into smaller pieces that can be spread out over a longer period. The attacks "took any cautious optimism anyone had and threw it right out the window," Smith says.
Georgia-Pacific's Ore agrees that the emotional effects of the attacks dominate the economy. However, he's also convinced that those emotions will give way to more practical economic realities. Of course, that still leaves the daunting struggle of turning around a slumping business cycle, figuring out how to spur business investment, and prop up consumer confidence.
But Ore is confident businesses can do just that. "We've survived other major events, and we'll survive this one," he says. "We'll wind up being a little stronger because of it."