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It's a buyer's market

It's a buyer's market

This much is true: US companies have slammed the brakes on IT spending in the past year and a half

This much is true: US companies have slammed the brakes on IT spending in the past year and a half -- a fallout from the recession, 9/11 and a stock market suffering from an onslaught of questionable accounting methods, outright fraud and jittery investors. The technology engorgement that commenced in the late 1990s has so satiated companies that requests by CIOs for even a few crumbs -- a new Java programmer, a desktop upgrade -- now get as much scrutiny as a request to fly first-class to the Cleveland office. "I don't think there will ever be a return to what happened -- the perfect storm of Y2K, ERP and the Internet," says Paul Hoogenboom, vice president of operations and CIO at Medina, Ohio-based RPM, the maker of Rust-Oleum and other specialty coatings.

But there may be some light peeking out from under the dreary haze: According to "IT Planning for the Economic Recovery," a recent CIO Research survey of 251 IT executives, nearly 60 percent of technology executives see IT spending picking up either this year or by the first half of 2003. And 18 percent said their spending never slowed down.

Investing wisely in technology now can help grow the business and give you a jump on the competition still ensconced in their foxholes. Fact is, it's still a buyer's economy out there -- vendors are practically trampling over each other to earn or maintain your business. To sweeten the pot, they're offering deep discounts on hardware and software, performance-based contracts, and flexible pricing plans. Taking advantage of this reversal of fortune between buyer and seller, plus continuing to invest in technologies that can help you get closer to your partners and customers, may be just the cure for your recessionary ills.

Get a Jump on the Competition

Despite the mixed signs of a recovery, this could be the best time to convince senior management to increase IT spending, especially if your IT budget has been heading south instead of north. That advice may sound counterintuitive to some, but if your competitors are lying low, waiting for a turnaround, jump-starting your technology investments can put you in the passing lane while the competition continues to ramble along at 55 mph. "If your competition is risk-averse, if you dare to innovate, the risk is higher but the payoff can be fantastic," exudes Howard A. Rubin, executive vice-president at Stamford, Conn.-based technology consultancy Meta Group. At the heart of his logic lies a trend he's seen in IT management for the past two years: Technology is being managed more like an investment portfolio -- sure, you need conservative investments, but the only way to generate big payoffs down the road is to take a few risks.

Rubin cites Blockbuster, which -- instead of pulling in the reins while in the face of the online digital entertainment onslaught -- is investing in new technologies, such as self-service checkout (akin to Mobil's Speedpass). He also points out that British Airways, which is building a new, innovative facility at London's Heathrow Airport, is planning to use technology (for example, radio frequency tags to track baggage and self-service check-in areas) to make the flying experience more efficient and pleasurable. "The winners in IT will be determined by managing risks and not following the pack," Rubin says.

At Boston-based MFS Investment Management, home of America's first mutual fund, CIO Peter Noll enthusiastically agrees with that line of thinking. In fact, he sounds downright cheery when discussing the effects of the recession. "We see it as an opportunity to leapfrog competitors in areas that we think are going to be high growth when the market turns around," he says, mentioning its institutional marketplace and global investing unit as high-value opportunities. Technologies that will help support those initiatives include a high-capacity 100MB network across the enterprise, and a new real-time messaging infrastructure (IBM's MQ series) to support the company's global operating model, and it will implement a storage area network. "We're hunters, not farmers," he says. "During a down time, we keep hunting."

Riding Out the Storm

A number of IT budgets took swan dives in 2001 and 2002, in tandem with a drop in corporate revenue and income -- according to our survey, 43 percent of companies saw their 2002 IT budget decline. Consumer product companies were hit particularly hard. Aydin Onur is vice-president of e-business at Sunnyvale, Calif.-based Philips Components (a division of Koninklijke Philips Electronics), which manufactures components for the OEM market as well as for consumer electronics, such as cell phones. Onur watched his actual spending in 2001 drop a precipitous 42 percent from what was budgeted at the beginning of the year. For 2002, his spending will decline 25 percent from 2001. "The recession had a big effect on all the market segments we play in," he says. Some projects were terminated and some staff was let go. And a number of projects were put on hold, including a product data management system, an ERP consolidation program and a CRM system.

However, for all the harsh numbers and gloomy macroeconomic reality that ushered in 2002, a good chunk of companies increased their IT budget this year. For instance, at Ryder System, the recession had little effect on IT spending because senior management believes that IT is critical to staying competitive and serving its customers. "In reality, we didn't take a hit or go below a certain budget line," says Eduardo Vital, executive vice-president of IT services and CIO of the Miami-based global transportation and logistics company. In fact, the IT budget for 2002 at Ryder rose about 12 percent over 2001, an increase similar to those in the previous four or five years.

As Spending Picks Up, Where Will the Money Go?

Our survey showed that IT executives are conservatively optimistic that spending will pick up -- 30 percent said that it would happen in the first half of 2003, and 86 percent said that company performance is an important factor when making decisions about IT, which may be a sign that they have confidence their company will benefit from the economy's gradual recovery.

In addition, 45 percent said they plan to accelerate spending on infrastructure upgrades, such as servers; 30 percent expect to invest in CRM; and 29 percent plan to increase desktop upgrades and replacement expenditures. Other popular areas for increased spending include security and legacy system migration (25 percent), and e-commerce and software upgrades (24 percent). Rubin says that he sees infrastructure consolidation as a popular trend.

At Irving, Texas-based Flowserve, a provider of flow control products and services, Vice-President and CIO Rory MacDowell says it's too early to tell what his 2003 spending will be. However, he knows that three of the top priorities will be integration (including a planned CRM project), standardization (hardware and software platforms, tools and processes) and digitization (which includes e-business and internal productivity projects). MacDowell says one of the main goals of his standardization efforts will be reducing the array of different manufacturing systems, which currently number more than 40. He also hopes that standardizing will help achieve an internal goal of $15 million in revenue per IT employee.

Philips's Onur says his division will be aiming to restart the projects it put on hold this year, including product data management and CRM projects. Onur hasn't finalized his 2003 budget yet, but he believes it will be flat, or at best, may see a slight increase.

At Ryder, Vital is shooting to increase next year's IT spending by more than the 12 percent growth it has been averaging in recent years. Part of what attracted Vital to the job was the increasingly important role IT plays in the company. "The IT organization has a new charter to act as a business strategy partner; [to act] in a consulting capacity to business areas," he says. "It's a different perspective on how IT can bring value to the organization." Major areas of focus next year include EAI projects, its warehouse management system and leveraging the Web in its third-party logistics business. Vital may also add another 20 to 30 IT staffers. He notes, however, that there will be cost-containment initiatives in the operating budget in areas such as network bandwidth and phone coverage.

Some companies ply their trades in industries that are immune to consumer-driven cycles. Los Angeles-based Northrop Grumman Corp., for example, has benefited from a cornucopia of defense dollars, partly fueled by increased spending on the military since President Bush took office. Keith Glennan, who is the CIO for the IT sector, thinks it's likely that his IT budget will increase slightly. He's committed to reducing the recurring budget for things such as IT support and increasing the nonrecurring budget. Projects he'll be focusing on include integrating recent acquisitions, such as Litton Industries and Newport News Shipbuilding, onto its SAP AG platform and doing more business electronically, such as Web-based collaboration with suppliers.

Work with Your Vendors

When CIOs are able to boost spending, one factor makes it a lot easier to take on a predatory role: receptive vendors. As IT spending has stalled, the vendor community, which a few years back had no problems selling large, expensive enterprise packages to CIOs flush with funds, is now cutting deals faster than a Big Three automaker. "Vendors are more willing to be creative and look at alternative ways of achieving the same objective," says Flowserve's MacDowell. "They're looking for new and creative ways to get a bigger piece of the IT wallet."

Noll wholeheartedly agrees. "From a pricing perspective, they're willing to do almost whatever's necessary to get the business," he says. Before, says Noll, the menu was à la carte -- companies were charged separately for software licenses, training and consulting, for example. "Now we can bundle training, license fees and consulting all in one and hold [the vendors] accountable for the success of the product," he says. Noll also notes that his vendors are providing -- free of charge -- jump-start programs in which they train his staff on how to install and configure an application or system and get it up and running in two months.

Rubin reinforces that there's been a sea change in the technology marketplace. It's a buy-side economy, he says, in which the buyers don't have an imperative to upgrade. Rubin sees massive discounting on initial software licensing fees and deals on hardware and storage, and also notes that there's a move away from fixed-cost pricing to variable pricing for goods and services, which he dubs "cell-phone economics." That is, companies can now purchase storage and processing power by prepaying -- or paying by the minute -- for example, flexibility they didn't have as much of in the past. He cites IBM as an example, which is offering variable pricing on its mainframes -- you don't pay when you're not processing.

Al Case, a senior vice-president and analyst at Stamford, Conn.-based IT consultancy Gartner, adds that companies are also making sure outsourcing agreements include performance benchmarks. Now, contracts include language that says, In X point in time we'll do a formal benchmark, then revisit the contract if that benchmark isn't met. "I don't think we're seeing fewer long-term contracts, but more renegotiation and repricing points, based on service levels and market conditions," Case says. Rubin views benchmarking in general as key to cutting the best deals with vendors. He throws out a litany of categories, including price, cost, performance, labor rates and transaction rates, which should be looked at when negotiating.

Ryder's Vital also likes the fact that vendors are ditching the thou-shalt-do-what-we-command approach and are more willing to act as partners. "Before, vendors came in with the answer," he says. "Now they take the time to understand our business." Vital admits he used to play that role; he joined Ryder six months ago from Accenture (where he worked closely with Ryder).

Even with pliable vendors, however, many CIOs willing to invest in growth areas face significant and understandable hurdles -- their company may be suffering from stagnating revenue and income; the business side (and some IT executives) still feel burned from the zealous IT spending of recent years; and many execs just want to focus on getting the most from the huge investments in ERP systems and the like that they made in the go-go days.

Is the US economy undergoing a gradual recovery? It depends on what statistics you believe and what day of the month it is. Whatever your view, it makes a whole lot of sense to not get caught flat-footed when it happens. To use Noll's metaphor, there's a time and place for gathering, but at some point you've got to pick up a spear, leave the cave and head out for the big game.

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