Running The Numbers

Companies hold different views on whether now is the right time to increase IT budgets, cut them, or hold steady
The next time Greene will open his wallet for capital spending on IT will be to buy clustered Linux servers to run the Oracle9i database, he says. And he expects to get a bargain. "That's kind of a commodity choice -- who has the best price and support?" he says. Other IT managers also are interested in cheaper open-source technology: A third of companies in the Priorities survey have Linux-based servers on their technology wish lists.

That's because regardless of how they shape their IT budgets, cutting core infrastructure costs is a top priority at most companies, even among the most progressive IT users. Companies on this year's InformationWeek 500, a ranking of innovative IT users published last week, spent 34% less on average on technology than those on the 2001 list. Tim Shack, CIO of PNC Financial Services Group and president and CEO of PNC subsidiary PFPC Worldwide Inc., says his bank has cut core IT infrastructure costs 5% to 10% in the past year by consolidating systems of the companies it has acquired. Shack expects PNC's $500 million IT budget to hold steady in 2003 as new spending requirements, such as improving network security, eat up infrastructure savings. Spending on security was rising disproportionately for all financial-services companies even before last year's terrorist attacks and has picked up since then.

Bob Krestakos, IT director at Steelcase Inc. Photo by Bridget Barrett.

New technology also can help to cut costs. Bob Krestakos, IT director at office-furniture maker Steelcase Inc., is researching whether to invest in a mix of technologies next year that could cut the cost of running regional sales offices by 30% or more. "I think everyone's agenda is finding ways to drive down costs," he says. Each of Steelcase's 22 regional sales offices has a few dozen employees and the usual costly mix of telecom and IT gear such as an on-site print server, a LAN, and a PBX phone system with dedicated lines connected to headquarters. By blending wireless networking, voice-over-IP, and virtual private networking technology, Krestakos hopes to replace much of that costly infrastructure and create what he calls the "lightweight regional office." Steelcase is exploring leading-edge technologies such as wireless voice over IP. But it's not a voyage into the unknown: The company uses most of those technologies elsewhere, and a "convergence team" is exploring how to put them together to make a more flexible, less expensive small-office system.

Some expenses could go up -- bandwidth for voice- and data-over-IP traffic, for one. But savings would come from lower equipment costs, less staff time spent rewiring remote offices, even reduced rent by eliminating a room for routing gear. Steelcase hasn't done much budget planning for its fiscal year, which begins in March, but Krestakos isn't worried about funding for the initiative. If the research bears out the savings he expects, the project is likely to go forward. On the other hand, "if it's much less than expected, I'm not sure it's worth the risk and disruption of taking out a lot of proven technologies," he says.

St. Joseph Health System is already into its 2003 fiscal year, which began in July, and the IT budget rose to around 3% of revenue, which is estimated to be $2.4 billion. That's up from 2.5% of revenue last fiscal year. It's putting $10 million in capital spending toward projects aimed at boosting productivity, such as document-management and digital-imaging systems. Another project, an electronic order-entry system for physicians, is a multiyear, large-scale process redesign. The aim is to let doctors more accurately and efficiently order everything from medications to patient procedures. A doctor using the system to schedule a hernia operation for a patient could automatically order all the elements involved in the surgery, from reserving an operating room to notifying relevant staff to securing a surgical kit. The plan is to test the system in one hospital by July and have it running in the rest of St. Joseph's facilities by 2005.

Key Business Priorities

Larry Stofko, VP of IT strategy and architecture, says the effort will deliver a return only if doctors use it. He expects some to be reluctant, because electronically ordering a drug, for example, might not seem to be much of a time-saver compared with handwriting a prescription. Those doctors have to be convinced the new procedure will save time and improve the rest of the process by, for instance, reducing calls from pharmacists.

While most companies are increasing or freezing IT spending, 21% plan to cut. General Motors would be proud to count itself in that crowd. "We've been on a path since 1996 to reduce IT spending every year," says Dianne Smock, director of IT planning in GM's information systems and services unit. That's when CIO Ralph Szygenda joined GM and started cutting costs by consolidating IT systems. The process of creating an IT budget, which was around $3 billion last year, starts in early summer and runs through November. Smock won't say what projects are on tap for 2003, but GM so far has managed to lower costs while creating IT systems that let it cut car-development time by more than half. And that's during dramatically changing economic conditions. Still, GM doesn't let the economy have a major influence on its budget process or its final IT budget. "We're pleased with our performance in a market that hasn't always been friendly," Smock says.

Therein lies the link among companies that are increasing, freezing, or cutting IT spending: They all face an uncertain future and need to find ways to progress. Technology plays a big role in their plans. Lofgren says Schneider business managers pitch an IT initiative like any other investment: "If you will give me this much money, we will give this much back to the company in this time frame." In the end, IT is a business decision.

Photo by Bob Stefko
Photo by Bridget Barrett