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No Rebound In Sight

A barometer of the mood among business-technology execs declines again, but not everyone is pessimistic
CIOs who have managed through this long downturn are a toughened bunch. As layoffs and profit disappointments continue with dulling regularity, a growing number of IT executives have developed a negative outlook regarding the U.S. economy-one affecting their spending plans-and they're no more sanguine about the near term. But while there's virtue in cutting costs to meet corporate budget goals, there's also risk. Which cutback is the one that might hobble a company once a recovery arrives?

According to InformationWeek's business-technology mood barometer-our quarterly IT Confidence Index-confidence continues to drop as the end of the year approaches and IT professionals reflect on their budgets, project plans, companies, and industries. Progressively fewer expressed optimism during each quarter of 2001. The index, based on answers to 10 questions that are then aggregated and weighted, declined 11% when 300 business-technology executives were surveyed in recent weeks. For the year, it's down 40%. The index gauges attitudes about current conditions and the next three months.



Vans is continuing to invest in important IT projects that provide quick payback, CIO Giles says.
Despite the decline, a majority of those surveyed still feel positive or neutral about the future. On some questions, an outright majority is positive, such as when InformationWeek Research asked respondents about their own companies' prospects: 61% view the current situation positively, and 58% have a positive outlook for the coming months. "We've got a solid product and brand name," says Joseph "Jody" Giles, CIO of Vans Inc., a footwear and apparel company in Santa Fe Springs, Calif. "Our company has a very strong balance sheet. We'll weather this storm."

The index also indicates stability for IT project starts and initiatives during the next three months. Fifty-five percent of those surveyed have a positive outlook on IT projects, compared to 52% last quarter.

That's more of a spritz of sunshine than the ray everyone is hoping for. Overall, the IT Confidence Index is still sliding in the wrong direction, as the number of respondents with negative outlooks edges higher.

"It will be a much slower recovery than some thought," says Maria Fitzpatrick, CIO of $11.5 billion health-care company PacifiCare Health Systems Inc., in Santa Ana, Calif. "We continue to see layoffs by large employers. If the turnaround was going to happen soon, we wouldn't be seeing this turn of events."

The employment picture is casting a pall over the economy. Aetna, Kroger, and Qwest Communications last week revealed thousands of layoffs. November IT unemployment figures collected by the federal government jumped one-half percentage point-to 5.5%-compared with October. A year earlier, IT unemployment stood at 2%.

Patrick Flynn, CIO of Paccar Inc., a $7.9 billion heavy-duty truck manufacturer in Bellevue, Wash., is one of the many IT executives whose project plans have been hampered by the weak economy. Paccar's third-quarter sales fell 58% compared with the same period a year ago. "Our current outlook across the commercial-vehicle industry is tied to the general economy," Flynn says. As a result, Paccar is making fewer IT investments, postponing application development, and reallocating staff rather than hiring new people.

"It's a juggling act, with a lot of discussions and negotiations, but we work as a team to put the best and brightest on priority No. 1," he says. Important projects for Paccar include implementing an SAP payroll system, consolidating servers, improving Internet security, and leveraging Web technologies to better communicate with dealers.

Making do with what you've got is now a tactical necessity. "We're doing more reshuffling within our existing resources to take full advantage of knowledge in-house and meet career-development tracks," says Rocky Parker, human-resources officer at Nationwide Insurance Systems in Columbus, Ohio.

Even growing companies are moving cautiously. Domino's Inc. CIO Tim Monteith says he's increasingly conservative about IT investments, even though the Ann Arbor, Mich., pizza chain's annual sales are projected to beat last year's record $3.5 billion.

Summing up the approach many CIOs are taking, Paccar's Flynn says, "Hard saving are important to us. [A new system] may run faster, but we have to ask, how much faster and is it going to help a critical business need?"

Near-record corporate debt is behind at least some spending hesitation, says Tom Fullerton, an associate professor of economics at the University of Texas-El Paso. "If companies are delaying their IT upgrades, it's because their balance sheets won't permit it, even if they need to upgrade."

Therein lies the rub. More demands will fall on IT departments in the coming year, says Gartner analyst Diane Tunick Morello. "IT provides the supporting infrastructure on which companies are being built," she says. "That reliance will only increase."

Which leads to a potentially troubling scenario for some companies: What happens if they cut IT spending too much? Trying to rev back up from a near standstill could spell competitive failure when the recovery happens.

One chief technology officer attending a Morgan Stanley conference two weeks ago warned of "breakage and atrophy" if IT investments are cut back too severely. "Deferring spending is a death trap," said the CTO, warning that many senior IT executives will go too far in their cutbacks because they haven't managed through such a sharp and sustained economic downturn. That concern led to this dire prediction: "In 2003, more CIOs will be fired than in the previous five years."

But not all companies are retrenching (see chart at left). Vans continues to spend on strategically important IT projects. The company recently rolled out a new point-of-sale system and a wide area network, both of which are expected to offer quick payback. For the same reason, Vans is automating its distribution center. But if an IT project doesn't promise fast returns, "we're not going to invest in it," Giles says. "Windows upgrades, desktop upgrades, flat-screen monitors. Those POs aren't being signed."

Yet companies could be pressured to undertake tech upgrades that aren't even part of a strategic plan. Harvey Pitt, chairman of the Securities and Exchange Commission, last week proposed that public companies offer not just quarterly updates on business, but real-time disclosure. In a column published in the Wall Street Journal, Pitt also called on businesses to provide the kind of "trend" and "evaluative" data culled from business-intelligence systems.

Many organizations are feeling pressure to address security and business-continuity concerns, as well. Doug Ricci, network operations manager for Johns Hopkins Medical Institutions' radiology department in Baltimore, says issues ranging from cyberterrorism to the requirements of the Health Insurance Portability and Accountability Act will keep the health-care industry focused on IT security investments for months to come. "We have a big leap to take in order to meet these regulatory requirements," Ricci says. Johns Hopkins has been adding security layers to its intranet.

Businesses that strike the right balance will be positioned for the eventual recovery. Vans' Giles is cautiously optimistic, in part, because he knows there will always be demand for his company's products. "People still need shoes," he says. The same could be said for IT.

-with Eileen Colkin and Mary Hayes