2001 Takes Toll on IT Budgets

While many IT executives noticed the economy slowing and recognized the need to rein in technology spending long before Sept. 11, the uncertainty resulting from the terrorist attacks in New York and Washington forced IT budgets down further and faster.

While many IT executives noticed the economy slowing and recognized the need to rein in technology spending long before Sept. 11, the uncertainty resulting from the terrorist attacks in New York and Washington forced IT budgets down further and faster. "What is wild is its almost like last-minute stock selling," said Howard Rubin, executive vice president and research fellow at Meta Group Inc., in Stamford, Conn. "Were seeing an end-of-the-year adjustment in IT spending."

In fact, in recent weeks, Meta has further lowered its projections for IT spending in 2002. Meta, which in October projected that IT average spending as a percentage of revenue would drop between 2 percent and 5 percent, increased that expected drop to 11 percent. Still, many IT executives are continuing to invest in what they see as key strategic technologies. And many are taking advantage of the dormant market to renegotiate with IT suppliers in search of lower costs. Meanwhile, experts say overall IT budgets could begin to rebound in the second half of 2002.

Typical of enterprises re-examining IT spending levels and priorities is logistics company FedEx Corp., based in Memphis, Tenn. Beginning early in 2000, the company—which typically spends about $1.5 billion per year on IT—conducted a senior-management review of technology spending priorities. As a result, said Laurie Tucker, senior vice president of global marketing, FedEx moderated core IT infrastructure spending and spending on new e-commerce-related initiatives that had been slow to pay off. At the same time, FedEx continued to funnel capital into key projects, particularly customer-facing applications on its popular FedEx.com Web site.

FedEx, Tucker said, reduced some legacy application maintenance spending and deferred some PC upgrade plans. In addition, the company halted new investment in e-commerce initiatives such as its e-Commerce Builder product, an online set of Web site construction tools targeted at small-business customers. Tucker said e-Commerce Builder has attracted fewer users than expected.

Besides reducing spending on some IT infrastructure and low-payback e-commerce projects, IT managers such as Paul Tinnirello have been putting pressure on IT suppliers to lower costs and looking for bargains created by the slow market. Tinnirello, chief technology officer at an insurance-industry-related company in Oldwick, N.J., and an eWeek columnist, is taking advantage of rock-bottom memory prices by upgrading memory, hard drives and processors ahead of schedule—this year, instead of next. This puts the company in good stead for its 2002 planned migration from Windows 98 to Windows XP. In addition to these spend-to-save strategies, Tinnirello is putting every contract and vendor relationship under the microscope to determine the real return on investment and value proposition of all licensing and service agreements. Cutting out the cost of software support for products that arent being used heavily, for example, can save companies a healthy chunk of change, he said.

"A lot of companies are paying for maintenance on software that has nominal returns," Tinnirello said. "[You can] pay between 15 percent and 20 percent of the products cost to keep the product alive."

Pinching IT budgets is not, however, universal. R.R. Donnelley Sons & Co., in Chicago, for example, is continuing to increase its IT investments despite the slowing economy. The $5 billion commercial printer is expecting to increase its IT budget between 7 percent and 10 percent for 2002 compared with 2001. That comes after even-larger boosts the past two years, said CIO Gary Sutula. The company typically spends between 2.5 percent and 3.5 percent of its overall revenues on IT.

IT spending is increasing because the companys executives view IT as core to the companys strategy. Sutula credits R.R. Donnelley Chairman, CEO and President William Davis for refusing to waver on the companys technology needs. Sutula was appointed as CIO shortly after Davis took the reins of R.R. Donnelley in 1997, and the two focused on revamping the companys IT by standardizing its infrastructure—including desktops and servers—so it could support continuous improvement in the companys operations. Now the company is rolling out a major system in all its plants that will help it manage the printing process, from taking orders and printing and binding to shipping and invoicing, Sutula said.

"Theres an absolute commitment [on IT] because the business case is good," Sutula said. "Bill [Davis] has the courage to protect those things that are absolutely strategic to the business."

Despite the continued downward pressure on technology budgets at most enterprises, IT executives dont expect the cost cutting to go on forever. In the short term, some said economic stimulus legislation such as the Economic Security and Recovery Act of 2001—a bill now under consideration by Congress that would grant special depreciation allowances for certain business equipment acquired after Sept. 10, 2001, and before Sept. 11, 2004—could cause them to accelerate some spending if it passed in some form. Tinnirello, for example, is already planning to use the depreciation boost to accelerate planned server consolidation investments.

At the same time, many IT executives said they want to be poised to pump up technology budgets again quickly when the economy begins to shake off its torpor.

"Going into 2002, the range of assumptions is broader, mainly because we dont know which way the economy will go," said Tony Scott, CTO at General Motors Corp., in Detroit. "That means that we will have to be able to react faster as conditions move up or down." Getting ready to restore dormant IT projects quickly when times get better will prove a key competitive advantage for some enterprises, Metas Rubin said.

"You cant freeze time for too long before turning into a fossil," Rubin said.