Save Or Spend?

The uncertain economy calls for caution in IT spending, but companies must also guard against cutting back too much.
This will be a year of tough choices for business-technology managers. After years of unprecedented support for their investments, IT executives face mounting pressure to pick and pay for only those technologies that offer a quick and measurable payback. And most will need to do so with budgets that are at best equal to what they had last year.

Uncertainty about when the recession will end has put a stop to steady increases in IT budgets. In InformationWeek Research's Outlook 2002 study, based on a survey of 300 IT executives completed last month, 33% of respondents expect to increase their IT budgets this year, while 17% will decrease them and half will spend the same amount as last year. Looking back, InformationWeek Research data shows that IT executives in the recent past had been increasingly bullish about investments on the eve of each new year. In last year's survey, 72% planned increases and just 5% were cutting IT spending. For 2000, 62% planned to increase spending, and 54% planned bigger budgets for 1999.

Jane Aboyoun

TMP is hiking its IT budget about 10%, but CIO Aboyoun is only pursuing projects with a measurable ROI.
What's changed? Technology risk in those years centered on a fear of getting left behind, and managers worried about spending enough to take advantage of the Internet revolution. Now, caution is the guiding principle. With sales and earnings down, CEOs are asking everyone, including IT departments, to look for ways to cut costs. But this caution creates a different risk: Is a company scrapping a project that would have sharpened its competitive edge? Executives cutting spending must wonder if their rivals are among the 33% that are increasing IT budgets. The questions weigh heavily as business-technology executives must decide what gets saved and what gets dumped.

At Eastman Chemical Co., the choices include continuing to spend on an SAP enterprise resource planning system and implementing a collaborative planning, forecasting, and replenishment system to improve its supply-chain efficiency. The company scrapped plans to add a customer-relationship management software suite, and it will cut back on IT consulting services.

The CRM project wasn't worth the risk and cost, says Jerry Hale, director of global business systems for Eastman. "There have been too many failures and implementations that haven't gone well," he says. But he knows the tough decisions have just begun. The recession has hit the chemicals industry hard, and Eastman sales were down 1% in the third quarter of last year. "We realize it's important for us to continue to make investments, even in these difficult times," Hale says. "But we're being very careful to apply them to important strategic issues." Eastman CFO James Rogers hasn't seen anything to convince him a recovery is coming soon, so the Kingsport, Tenn., company plans to spend no more, and probably a little less, than last year's IT budget, which was less than 3% of sales.

Doubts about the future are at the heart of companies' caution with IT spending--and who can blame them? Even economists used to dealing with uncertainty say the forecast is cloudier than usual. "It's somewhat unusual for such disparity among views. They run the gamut from highly optimistic to highly pessimistic," says Christopher Wiegand, an economist at investment bank Salomon Smith Barney. InformationWeek Research found that most managers are optimistic--six out of 10 predict higher revenue for their companies this year. And the Conference Board's Consumer Confidence Index jumped in December after three months of decline.

Yet the future is rife with uncertainty about macroeconomic issues. The Institute for Supply Management reports that manufacturing output shrunk in December for the 17th straight month and order backlogs are still falling. While military action in Afghanistan has gone well, concerns linger about how the economy and the consumer psyche would react if terrorists attempted another large-scale attack in the United States this year. Unemployment is up. And the faith of IT and business managers has clearly been shaken: InformationWeek Research's IT Confidence Index--a quarterly measure of confidence in the economy, companies, and IT budgets--fell 40% from the beginning of 2001 ("No Rebound In Sight", Dec. 17, p. 22).

Even growth companies are treading warily. TMP Worldwide Inc., the $1.5 billion-a-year parent of job board, is hiking its $75 million IT budget about 10% and adding staff. Yet CIO Jane Aboyoun is still pursuing only those projects with a definable return on investment, such as a data-warehouse project that will be judged on whether revenue increases as a result of giving salespeople more customer information for better cross-selling. "When the economy was good, there was less focus on cost," she says. "This year will be focused on smart spending."

Former TMP CFO Bart Catalane called the New York company's short-term outlook "guarded." TMP expects revenue to grow no more than 3% this year, but it's projecting an increase in earnings of as much as 39%. That pressure to deliver profit has Aboyoun looking at where she can make cuts, including zeroing in on IT maintenance agreements. "We're looking at renegotiating or revisiting our contracts," she says.

Many IT executives don't have much choice about whether to cut their budgets. But there is such a thing as too much caution. Meta Group analyst Shawn Bohner is concerned that IT executives are considering stopping maintenance agreements to free up money for technology initiatives this year. Companies can only go so long without maintenance for their IT systems, and those that put it off until next year may find themselves renegotiating at higher prices. The issue is more than maintenance agreements: Companies that are too tentative about technology investments will lag behind the competition once business picks up, and they risk losing market share, Bohner says. "The world hasn't changed in one year. It's not as if we don't need IT all of a sudden," he says.

What may have changed is IT managers' credibility. Exuberant IT spending in recent years and poor tracking of the returns IT delivered have created a lot of skeptics, says Scott Dinsdale, executive VP at the Motion Picture Association and former CIO of BMG Entertainment. "Those people in IT who don't believe that are kidding themselves," he says. "The main task this year is to restore credibility." Dinsdale, who works with film companies and their technology executives on IT strategies and standards, says CFOs at many companies aren't happy that IT spending has dramatically outpaced sales growth in recent years.

That may sound like a harsh assessment from a former CIO, but Dinsdale isn't suggesting that business-technology executives abandon risk and innovation. IT will keep a place of importance, it just won't get the free ride it did in recent years. "One general recognition that's emerged is that IT is absolutely core to business competitiveness," he says.

At Domino's Inc., the effort to balance innovation and careful spending means that of the more than $4 billion worth of pizzas it sells this year, few will be sold via the Web. Domino's has scaled back its investment plans for its Web pilot project and is proceeding slowly with it, since the incremental revenue may not be worth the cost in some delivery areas. "How many things is a home PC good at?" CIO Tim Monteith asks. "Pizza is kind of on the edge."

The Ann Arbor, Mich., pizza-delivery chain plans to keep its IT budget flat this year. One area that will get the green light is improvement in network and data security. Although security investments don't deliver a classic ROI--they don't cut direct costs or pump up sales--they do provide an insurance policy against data corruption and other costly IT disasters. "Security is a never-ending battle," Monteith says. "Like many businesses, we're putting more and more emphasis on opening up our world to franchisees and customers, and are therefore more vulnerable and exposed." Monteith's colleagues agree: InformationWeek Research's survey found that information security ranks as the No. 1 area for IT budget increases, and network security ranks as the No. 1 technology priority.

Whether the economy is up or down, taking care of customers tops almost every business priority list. Nine of 10 managers list improving customer service and understanding customer needs as their top priority. But that doesn't necessarily translate into a bonanza for CRM software vendors. Although CRM is a priority for 58% of managers, it didn't make the top 10 technology-investment priorities, trailing various security products, Web development, more network bandwidth, and E-commerce. The reason may be part of an overall strategy that many IT executives have planned for this year: Achieve key business goals without spending a lot on new technology by better utilizing existing investments.

But this strategy requires a good dose of creativity and ingenuity. At Libbey Glass Inc. in Toledo, Ohio, CIO John Zarb will have his knowledge-management team work on extracting and analyzing customer data from the company's J.D. Edwards & Co. ERP system. The tableware manufacturer expected to finish 2001 with a slight dip in sales, to around $425 million. "We have cost pressures, which everyone in the consumer manufacturing industry is experiencing right now, unless they're selling American flags," Zarb says. So, he's finding ways to capture information from the transaction systems in which Libbey has invested, rather than buying a CRM application suite. The company is still far from capitalizing on all of the investments it made in the late 1990s, he adds. "CRM exists in the systems we have today, but you have to be clever and go back and find it," he says. "We're beginning to understand better that we have the ability to both process the transactions and capitalize on the rich information base we've built."

Eastman Chemical's Hale will take a similar approach to improving customer service by focusing on existing projects--expanding its system for global online order-processing and real-time tracking of customer shipments. But Terry Jost, VP of business development at IT and business consulting firm Cap Gemini Ernst & Young, says those strategies may be shortsighted and an inefficient way to get to understand customers. "Recessionary times are a great time to get close to customers," he says. "Those organizations that want to gain on their competition are going to find ways to free up dollars so they can make investments." Even a small investment in CRM software that helps automate customer data collection can be more effective than sifting through data collected in an ERP system, Jost contends.

The debate could change dramatically if the economy picks up in the second half of the year. That will be when companies find out whether they made the right investments. Economists have wildly different views of when a recovery may arrive, but the largest group--and the one in which Wiegand of Salomon Smith Barney sits--expects a rebound beginning around midyear. Wiegand also predicts that any overinvestment in IT made during the good times will be put to use, and companies will be more confident about adding new IT initiatives and replacing aging equipment.

"Our view is the so-called overhang IT investment will be gone by spring of 2002, and that will come at the same time the broader economy will improve," Wiegand says. He adds that businesses have spent much of the past year improving their balance sheets, and many will have cash on hand to quickly ramp up IT spending later this year. "Companies will need to replace machines that are depreciating and not very functional," he says. IT executives realize this, too: PC purchases rate as the No. 2 technology priority for this year. Hardware also ranks high, particularly equipment that provides better business-continuity protection, such as backup data centers.

Amid all the tales of caution, it's important to emphasize that not every company is pulling back the reins on IT spending. Companies that plan to increase IT spending expect an average jump of 12%. USA Datanet Inc. sells low-cost long-distance calling plans to consumers. It expected to end up with $18.5 million in revenue for 2001, more than double its sales in 2000. This year, the Syracuse, N.Y., company is shooting to more than double again, to $40 million. USA Datanet's IT budget is about 7% of revenue and will increase by 50% this year, says CFO Richard Shaw. "We're in the right business for a continued recession. We sell 99-cent phone calls," he says. Shaw is in talks with Oracle about buying a data-warehouse system for customer information. Still, he's cautious about building an IT infrastructure in an uncertain economy, something software salespeople understand. "The vendors are on top of this. When Oracle was here, they spent an enormous amount of time talking about ROI," he says.

The choices are tough, but TMP's Aboyoun says the pressure is driving IT and business managers to make better IT decisions. "The pace was so frenetic up until now, there almost wasn't time to pause and sift through the details," she says. "But everyone is taking a step back and saying, 'We're in a tough economy; we want to make sure we're spending right and making smart decisions.' It's a more comfortable way to operate."

The ideal would be if managers could make choices about technology at a more comfortable pace, without the threat of shrinking IT budgets, weak profits, and the black cloud of a poor economy hanging overhead. And if the optimists are right, they'll be closer to that dream later this year.

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