The 2003 IT Budget Pinch: Belts Get Pulled Even Tighter

By Anne Chen  |  Posted 2002-09-23

The 2003 IT Budget Pinch: Belts Get Pulled Even Tighter

If Irving Tyler had known two years ago that the economic recovery would go AWOL and his company, like most, would need to trim expenses, he might never have launched a multimillion-dollar global enterprise resource planning system rollout. But he did, and when hard times hit, it was too late to turn back.

Now, having pressed on with deployment of the OneWorld ERP system from J.D. Edwards & Co., Tyler, vice president and CIO at Quaker Chemical Corp., is looking to squeeze spending wherever possible. That means looking for deals from smaller IT vendors and renegotiating software licenses and telecommunications deals. It also means limiting new projects to those that deliver quick return on investment.

"This year was a tough year for our company, and next year looks to be the same," said Tyler, in Conshohocken, Pa. "We started an ERP project last year, and that ship has sailed. To really benefit from our investment, we have to complete the process. ... But there probably wont be a lot of new initiatives over the next year."

Faced with some of the worst economic conditions in 10 years and wary of recent Federal Reserve reports that the economic recovery has lost steam, many enterprises are, like Quaker, deferring any increase in IT spending beyond next year. While a select few companies are going against the tide, boosting IT spending in anticipation of a recovery, most CIOs say they will continue to budget conservatively and avoid large, long-term projects in favor of quick hits.

CIOs say theyll be spending their precious dollars on finishing large projects such as ERP and CRM (customer relationship management) deployments already in the works. Theyre also paying more attention to projects that provide quick improvement in existing systems and, in relatively short order, could have a large impact on the business. That includes videoconferencing and VOIP (voice-over-IP) deployments. And, conscious that some technologies require long-term investments, organizations continue to spend briskly on a few infrastructure items, including security and storage technologies and application integration middleware, in preparation for Web services and Web-based systems.

To be sure, as enterprises wrap up their 2003 budgets, not all is doom and gloom on the IT spending front. The good news is that, at least according to some researchers, the spending outlook for the second half of the year is a bit brighter than it was in the first half. In a survey of 1,001 IT buyers, Forrester Research Inc., in Cambridge, Mass., found more companies (19 percent) will increase their IT budgets than cut them (12 percent) during the second half of this year. However, where cuts are planned, they will be significant. Of those expecting to cut their budgets, at least one-third foresee more than a 10 percent downward shift, according to the Forrester survey.

Not a terribly rosy outlook. But the Forrester research is on the optimistic end of the spectrum of budget forecasts. In a survey of more than 1,000 companies in 46 countries, for example, research and consulting company Meta Group Inc. found that spending will drop by around 12 percent this year compared with last year and could fall an average of 15 percent further next year.

"We definitely see a downward trend in IT spending in 2003," said Howard Rubin, an analyst at Meta, in Stamford, Conn. "IT executives are spending less and are being forced into making strong choices. They are putting their money into technologies that provide tangible business value in the short term."

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While IT spending forecasts vary widely depending on which organizations are releasing the results, analysts agree on which technologies IT executives will be betting in 2003. Web-based technologies such as portals and Web services development tools, for example, remain particularly strong. Half the companies polled by Meta are spending more on developing Web-based programs this year than they did last year, compared with just 18 percent spending less.

By contrast, 45 percent are spending less to develop computer applications that are not tied to the Internet, compared with just 14 percent that are spending more this year.

If IT budgets are relatively static and CIOs are increasing spending in some categories, they must be cutting spending in others. And, in fact, in the survey by Forrester, 39 percent of executives said they plan to take budget dollars away from outside consultants. In addition, 38 percent said they expect to move dollars from another IT budget category into application development and software licenses.

The zero-sum nature of IT budgets these days means that some CIOs are attempting to take a more scientific approach to managing what theyve got. Many are turning to portfolio asset management, a technique borrowed from financial analysts who use it to balance risk and reward across a wide range of investments. At Cap Gemini Ernst & Young U.S. LLC, John Parkinson, chief technology officer of the consultancy, said his New York-based company is not only aggressively using the approach in-house but is recommending that its clients do so as well.

Cap Gemini Ernst & Young is also using cost analysis and budgeting systems to keep an eye on and hold down costs.

"Were seeing more interest among our clients in doing asset management and budgeting," Parkinson said. "Many organizations roughly know what they spend money on and which machines are leased but have not really done aggressive analyses. Tight IT budgets are forcing them to see that they need to have effective budgeting and analysis systems in place."

Tighter IT budgets, however, are not keeping organizations from finishing the large enterprise projects they already have in the works, even if that means shrinking investments in other areas. At EMI Industries Inc., in Tampa, Fla., Dave Hahmann, vice president, said most of his companys 2003 IT budget will be spent on finishing off an implementation of Siebel Systems Inc.s Siebel 7.04 MidMarket Edition CRM package that began in April and went live in June.

EMI, a $25 million manufacturer of food retailing equipment, allots less than 5 percent of its budget to IT. Hahmann said the companys budget for next year will increase slightly—mainly to allow him to finish his CRM implementation. Otherwise, spending will be limited to upgrading software and purchasing servers. Hahmann, who would like to replace his current ERP package with a Web-based ERP system capable of handling bar-code-scanning and shop-floor-control functions, said any such large decisions and purchases will be placed on the back burner until 2004.

In the meantime, to hold costs down, EMI has outsourced the deployment of its Siebel CRM suite to Surebridge Inc., in Lexington, Mass. While all servers are currently managed in-house at EMI, Hahmann said tighter restrictions on IT spending have him considering moving his entire IT infrastructure to an application service provider model hosted by Surebridge. The business benefits: reduced operating costs and new, better services for EMIs customers and internal users.

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Although most enterprises plan to keep a lid on IT budgets next year, a few are living a bit larger, actually increasing spending in hopes of preparing themselves for the long-awaited recovery.

At Harrahs Entertainment Inc., in Las Vegas, Tim Stanley, vice president of IT, chose to invest in new systems and other projects last year despite the economic downturn. This year, Stanley continued to spend by making improvements in existing systems, something he said will continue next year.

Harrahs, a $3.7 billion corporation, owns 26 gambling resort properties and has 42,000 employees. Last year, the company bucked the trend by posting a 6.9 percent sales gain, and Stanley said his IT budget has increased consistently over the last four years and will continue to do so.

"We have not tapered back our spending in terms of new IT investments or new development activities and will continue to increase our spending at a reasonably healthy clip year over year," Stanley said. "We continue to enhance our CRM system with emerging technologies that will allow us to grow our customer base. And, weve made significant purchases and invested energies in integration."

Unlike most organizations, Harrahs and its top management see now as the ideal time to invest in IT to stay ahead of the competition. The company, which has been recognized for its CRM system, in the second quarter of this year initiated an application integration and Web services initiative, purchasing Active Enterprise Suite middleware from TIBCO Software Inc., of Palo Alto, Calif.

Harrahs will use the technology to build out Web services, portals and customer-facing external services running on the Sun Microsystems Inc. Java 2 Enterprise Edition and IBM WebSphere platforms. The idea is to integrate new Web-based services such as hotel-booking applications with back-end systems such as CRM so that Harrahs could, for example, dynamically offer discount room rates to its best customers.

One thing that enables Stanley to invest so much money in new technologies is that he contracts for specialized staff from companies such as Resources Connection Inc., of Costa Mesa, Calif., to augment his IT staff. Stanley said that rather than employing IT managers with specific skills to manage his CRM deployment, for example, he negotiated with Resources Connection for talent to augment his 550-member IT staff.

But, while a few enterprises, such as Harrahs, are still investing freely in IT, buyers at organizations still under financial pressure say close scrutiny over spending continues. At Quaker, Tyler said executives are asking tougher questions about faster returns, reducing expenses and total cost of ownership. One reason Tyler said he decided to deploy a bandwidth optimization product from Peribit Networks Inc., of Santa Clara, Calif., this year was that he wanted to avoid having to go in front of his management team to ask for additional funds to purchase more bandwidth to support his global ERP system.

Tyler turned to Peribits caching and concentrating technologies, which look for and eliminate redundant requests for bandwidth. It was either deploy such a technology or increase the frame relay bandwidth he was buying from supplier AT&T Corp. in countries such as India.

Without the bandwidth optimization, Tyler estimated, the additional bandwidth to support the ERP deployment would have increased Quakers WAN costs by 25 percent overall and even doubled what he was already paying AT&T in some locales. With the bandwidth hes saved, Tyler said he is planning to move telecommunications off ISDN in some locations and deploy videoconferencing capabilities and VOIP technologies. Such deployments, he said, will allow his company to reap quick returns on its investments and get the most out of IT dollars during tight times.

"Were trying to be very cost-conscious," Tyler said. "Our plan for the next year or so is to really take our existing assets and push them harder to get more leverage out of them. Were really looking to do things that are closer to home and dont require major investments."

Senior Writer Anne Chen can be reached at

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