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It's Still A Tough Call For IT Spending In New Year

Security and disaster recovery are up, but as economy weakens, possible decline looms.
Predicting IT spending trends is a lot like being a New England meteorologist tracking a nor'easter. Success, to a large extent, depends on which computer model a forecaster relies. Charles Rutstein likes the analogy. He's a research director at Forrester Research, which, he says, uses various computer models that all point toward a delayed economic recovery and a delay in any upturn in IT spending. But as-yet-unknown variables make the specifics "TTTC," as one Boston meteorologist says, for Too Tough To Call.

It's impossible to predict the outlook for this year without considering the impact of the events of Sept. 11. Rutstein and other analysts say technology spending began to drop at the beginning of 2001. When Forrester ran its standard midyear data check, surveying 1,000 companies with $1 billion or more in revenue per year, findings were consistent with expectations: Spending was slowing, but not substantially. The firm went ahead and published its findings on Sept. 1, as scheduled.

Then came Sept. 11, and "we wondered, is the data any good?" Rutstein recalls. Conventional wisdom was that the world had changed, and IT along with it. A new Forrester survey conducted after Sept. 11 confirms those beliefs. Projections for IT spending went from flat to a drop of 5% on average. Research firm Meta Group also projects a decline in IT spending, the first in years, of 2% to 5%. Meta says half of all CIOs have already cut next year's budget.

Other forecasts are somewhat more optimistic. A recent Morgan Stanley survey of 225 CIOs predicts a slight increase in IT spending, up around 2% for 2002. Research firm The Yankee Group estimates that IT spending will increase by 3.3% this year. The company says IT spending dropped by 1.1% last year, which it says was the first decline in IT spending since 1954. Yankee says software and services will lead an economic recovery sometime in the second half of this year.

While Morgan Stanley predicts that spending will climb this year, the IT spending plans at the brokerage firm itself more closely matches Forrester's report. Morgan Stanley's IT budget is expected to remain flat, or drop by as much as 5% to 10%. That's a big change from the years 1995 to 2000, where the annual increase in IT spending averaged 20%. Morgan Stanley's chief technology officer is prepared to cut the technology budget by 10% should the economy worsen significantly.

It isn't much of a surprise that IT budgets, which spiked during the E-business craze, have taken a hit as the economy and the stock markets have plummeted. IT spending isn't expected to rebound until the economy and company profits do. Charles Phillips, managing director at Morgan Stanley, says he expects financial services to rebound this year. But airlines, another IT-dependent industry, will not, he says. Overall, he's looking for a modest recovery. "Companies are thawing out," he says. "People are moving ahead with selected projects-smaller projects and projects of shorter duration."

At Evergreen Funds in Boston, the IT budget will remain flat, VP of IT Mitchell Hodus says. But its $2.5 million line item for capital investments should be able to buy more this year, even though the dollar amount is the same as last year. "PCs and software prices continue to drop," he says. "You get more with less."

A recent CIO panel convened by Morgan Stanley concludes that "spending in 2002 will be focused on business continuity and disaster recovery," which might not have been a focus if the events of Sept. 11 hadn't taken place. In fact, Morgan Stanley analysts say, spending on business continuity, including communications such as phone and E-mail, may skyrocket to the point that it eclipses all other forms of IT spending.

Spending on security and disaster recovery went up 5% and 9%, respectively, following the terrorist attacks, Forrester says. The one post-attack surprise, Rutstein notes, is in remote meeting technology. While analysts expected sharply curtailed business travel would fuel a strong increase in videoconferencing and other remote meeting technologies, it's just the opposite: That line item dropped 6% while travel budgets went up 6%. Yet the planes are still empty, Rutstein says. "Companies are ready and willing to send people out, but not all of them are willing to go yet."

At Evergreen, disaster recovery is a high priority, but there won't be any increase in spending. Well before Sept. 11, Hodus and his team had set up a disaster-recovery site about an hour away from the company's Boston headquarters. "We dropped significant money on disaster recovery, so we're completely set up," he says. "We don't have to do it now." But there will be some funds allocated for routine integration efforts around disaster recovery.

The planning process has already shifted and will become increasingly dynamic, focused on short-term wins. In some cases, companies are re-budgeting each quarter. At Morgan Stanley, IT budgets will go into quarterly review for at least the next 12 months, and likely for the next 24 months.

"Companies are changing the way they buy technology," Forrester's Rutstein says. They're favoring measurable efforts like supply-chain improvements and CRM. Gone, at least for now, are more-speculative efforts with less-quantifiable results. Says Rutstein, "No one wants another ERP death march."--Diane Rezendes Khirallah