Overview: Excellence On A Budget - InformationWeek

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Software // Enterprise Applications
02:17 PM

Overview: Excellence On A Budget

IT managers work hard to stake out their identity as innovators, not just cost centers in need of pruning

Times aren't quite as tough this year for America's CIOs as in the recent past, but the signs of economic recovery have been slow to reach their budgets. Market researchers forecast a comeback in the decimated chip sector, led in part by a rebound in corporate PC buying. Strength in consumer spending and a recovery in capital investment by businesses--signs of demand for companies' products--are fueling optimism about an expanding economy.

But during a year in which a Harvard Business Review article touched off a reassessment of whether new technology really sets companies apart from competitors, business-technology managers are finding it tough to stake out an identity as innovators, instead of cost centers in need of pruning.

"Everyone's questioning the price of everything," says Robert Egan, VP of IT at Boise Cascade Corp. The $7.4 billion-a-year supplier of paper and office products is No. 8 on this year's InformationWeek 500 list of U.S. companies judged as the top innovators in business technology and IT operations. "The general attitude in business now is to be very skeptical of the claims software companies make" about their ability to give companies new tools and save them money, Egan says. During four years of flat IT budgets, Boise Cascade has offset staff raises with declining hardware costs. Now that, too, is coming to an end. "We've been doing that for so long that we're at a point where, if we're going to give raises, our IT costs will go up," Egan says. "We're being squeezed."

Egan's story isn't uncommon. Companies on the InformationWeek 500 plan to spend nearly 3.7% of revenue on IT this year, compared with 4.3% in 2000. That's up from 3.4% last year. Meantime, though, the average revenue of companies on the list is little changed, at about $9.6 billion. Furthermore, twice as many companies--12% of those surveyed--say they'll spend less than 1% of revenue on IT this year, versus 6% of companies pinching pennies last year.

InformationWeek 500 companies are more bullish about the future. After two years of decline in average dollars spent on IT--from $484 million in 2001 to $353 million this year--InformationWeek expects the top companies to spend an average of $369 million on IT next year. For some, an environment of falling prices means an opportunity to take advantage of vendor price-cutting. John Dick, executive VP and CIO at Regions Financial Corp., which provides banking, brokerage, insurance, and mortgage services in nine Southern states, has used a budget increase and favorable buying environment to stock up.

"We've found tremendous cost economics in the market, particularly with the vendor competition in the technology space," he says. "The deals we've been able to get on technology we just couldn't pass up." Upgrades are made with an eye to the future. In just one example, Regions swapped out 13 terabytes of mainframe direct-attached storage. "The maintenance and operating costs were higher than bringing in new technology and replacing everything we had," Dick says.

But IT managers' focus this year has been mostly on cutting costs and shoring up infrastructure that got its last big push when companies were refreshing their environments to guard against the Y2K problem. Just 11% of companies on the InformationWeek 500 say their business-technology strategy is primarily to generate revenue; for 89%, it's cost-cutting or simplifying operations. E-business revenue makes up 14% of U.S. sales this year, down from 24% last year.

Where The Money Went
Average dollar breakdown of IT budgets
  2002 2003
New product or technology purchases 19.5% $62.2M 17.0% $60.2M
I.T. consulting or outsourcing 18.0% $57.4M 14.7% $51.7M
Research and development 2.5% $7.9M 3.3% $11.7M
Salaries and benefits 27.9% $89.3M 32.1% $113.2M
Applications 21.0% $67.2M 20.0% $70.5M
Everything else 11.1% $35.5M 12.9% $45.7M
Note: In 2002, the average total IT budget was $356.6 million; in 2003, it was $353.0 million.
Data: InformationWeek Research survey of InformationWeek 500 executives

Budget Overview
InformationWeek 500 IT dollars spend and 2004 spending forecast
  2001 2002 2003 2004
Average I.T. dollars spent $484M $320M $353M $369M
Average I.T. budget as a % of revenue 3.99% 3.39% 3.66% 3.65
Note: Additional data from previous InformationWeek 500 surveys.
Data: InformationWeek Research survey of InformationWeek 500 executives

"It's time to play catch-up," says Boise Cascade's Egan, noting that the company's biggest IT projects during the coming year will include rewiring networks and putting in new phones--not exactly sexy stuff. At the same time, Boise, which is closing a $1.2 billion acquisition of retailer OfficeMax Inc., is spending less time than ever upgrading its enterprise apps, Egan says, partly because of a longer lag between major product releases. "I hope that's a trend that continues," he says. "Upgrades offer no direct benefit to our business. In proportion to the amount of effort it takes, we'd rather not do it."

Automaker DaimlerChrysler AG has extracted more than $300 million from its IT environment over the last three-plus years, senior VP and CIO Sue Unger says, in part by standardizing E-mail software and middleware (on IBM's WebSphere) and reducing the number of servers the company uses. Five years ago, servers were dishing up only about a third of their capacity. "That was unacceptable," she says. Ambitious E-business plans also have been partly to blame for overspending. The world's No. 3 automaker wrote lots of contracts tied to a large number of users hitting applications and to a large amount of computing required to run those apps. "You end up thinking you'll have all these customers using it, and then you don't and you pay too much," Unger says. Since then, DaimlerChrysler has become "more clever" about writing IT contracts, she says.

Out of an average IT budget of $353 million for InformationWeek 500 companies, 32% went to salaries and benefits, 20% to application development, about 17% to buying new products and technology, and 15% to paying for IT services. Three percent went to research and development and 13% to miscellaneous expenses. Average spending on new products and technology declined to $60.2 million from $62.2 million, or 19.5% of budgets last year.

Hiring ExpectationsSome companies are looking for innovation as well as cost savings when they sign services deals. J.P. Morgan Chase & Co., a $43.4 billion-a-year financial-services company, expects a seven-year, $5 billion outsourcing deal with IBM signed this year to yield usable research and development into distributed computing, as well as shift 4,000 IT workers and consultants from Morgan Chase to IBM. "We wouldn't do the deal exclusively for economics," says head of technology John Schmidlin.

About the same number of companies as last year say their IT departments sell technology products to other companies (23% this year versus 26%), while the number of organizations selling IT services slipped to 21%, from 28%. In one notable example, The Boeing Co. last month spun off an anti-spam software company called MessageGate Inc., which emerged from Boeing's efforts to control junk mail on the company's computer networks.

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