What's surprising is how mild the cuts to spending for research and product development have been despite the fact that companies are wrestling with unprecedented sales declines. A review of the financial statements of some of the industry's biggest companies shows that in the majority of cases, R&D spending as a percentage of sales has increased -- in Computer Associates' case, for example, to almost 23%. That growth is in large part a result of steep drops in sales (see chart, p. 4). For Computer Associates' fiscal 2002 ended March 31, that 23% of sales for R&D spending compared with 17% one year earlier. But CA's actual R&D spending declined in that time from $695 million to $678 million. That's a 2% drop in R&D when sales fell 29% year over year.

The IT buying slump has taken a heavy toll on the R&D spending of some IT companies, especially those whose sales have dropped significantly. Commerce One Inc. cut its product-development expenses by 25% in the first six months of this year to $44 million from $58.6 million in the same period last year as sales of its procurement applications skidded from $271.5 million to $59.6 million. Competitor Ariba Inc. slashed its R&D spending by 32% to $48.6 million in the first nine months of fiscal 2002, ended June 30, from $71.7 million in the same period last year.

	EMC has been shifting its R&D focus from hardware to software; 75% of its R&D budget is devoted to software development, chief technology officer Lewis says.

Still, most vendors are trying to avoid those kinds of cuts. "We all try to get more efficient, but we understand how important R&D is to our overall business," says Mark Lewis, chief technology officer at storage-system manufacturer EMC Corp. "Will we constantly look for efficiencies? Yes. But we're not going to do anything draconian. Obviously, as the downturn comes to an end, we want to remain in a competitive position."

To do that, EMC spent $929 million on R&D in fiscal 2001 ended Dec. 31, up from $783 million in 2000. But EMC is lowering R&D spending as the economic slump drags on: In the nine months ended Sept. 30, the company spent $595 million on R&D, or just over 15% of sales, compared with $712 million, or nearly 13% of sales, in the same period one year earlier.

Oracle increased its R&D staff 10% to 15% a year during the last two years, CFO Jeff Henley says. Today, almost one-quarter of the company's 40,000 employees are in research and development. R&D as a percentage of sales has crept up from the 10% to 11% range from 2000 to 2002 to more than 14% in Oracle's first quarter of fiscal 2003, ended Aug. 31. The company's R&D spending in that quarter was up 13% from the year-ago quarter to $286.1 million, while sales and marketing costs were trimmed 12%. If not for the poor economy, Oracle would likely be increasing its research and development spending even more aggressively, Henley says.

Meanwhile, the nature of R&D spending appears to be more focused. "During the dot-com boom, people were throwing a lot of money at things that were not part of their core business," BEA's Helleboid says. The risk is that the pendulum is swinging too far the other way. Consolidation in markets such as application servers means fewer startups with innovative ideas. "That could limit some new technologies," Helleboid says.

BEA can't afford to fall behind on innovation, because IBM is making steady progress in the market for application servers. So BEA is taking a middle-of-the-road approach to R&D. It's focusing its efforts on expanding beyond its core application server technology into areas such as software for application integration, portal technology, and lowering the cost of developing and deploying Web applications. In the first six months of its current fiscal year, BEA increased its research and development spending more than 5% to $63.3 million over the same period one year before, even though revenue dropped more than 14% year over year.

In good times, a lot of new technology comes from venture-funded startups. But venture capital has slowed. So where a hot startup in the past might have pushed the innovation envelope, today the onus is on established vendors to carry the innovation ball for the IT industry, IDC analyst John Gantz says.