IT budgeting has been a zero-sum game for the past few years as CIOs search high and low for technology investments that will drive down costs while driving new business. As CIOs budget for 2004, the focus will continue to be on cost cutting. Keeping an eye on economic volatility and uncertainty through next year, many CIOs say they plan to maintain their goals of improving technology alignment with business, keeping budgets down and increasing productivity.
“Weve done a really good job of driving costs out and taking that savings and continuing to invest it in technology,” said Tim Ferrarell, senior vice president of enterprise systems at W.W. Grainger Inc., in Lake Forest, Ill. “Were expecting our budget to be roughly flat this year and over next year. At the same time, we are making sure we get more for our money.”
While the economy shows glimmers of improvement, most IT decision makers said theyll continue to budget conservatively, with the expectation that 2004 IT budgets will remain flat.
Rather than invest in the latest and greatest technologies, many organizations will spend their discretionary dollars on finishing large projects that will deliver the most impact to the business quickly. This includes such projects as improving upon an existing enterprise resource planning system by adding a module or investing in a new collaboration application that will quickly meet business needs.
In a survey of 133,000 IT managers, research company Wendover Corp., of Haverford, Pa., reported that IT spending declined 14 percent in the second quarter of this year. This drop signals that IT spending will remain flat through the end of the year, Wendover officials said.
“Peering into the pipeline of new IT dollars, we see a cautious trickle, not the bold flood others predict,” said Wendover analyst Larry Dillon in a statement.
Chris Hagler, national managing director of strategic services at Resources Connection Inc., said that although the specialized staffing company has seen continued investment in improving existing systems, it has not seen an uptick in new IT spending.
IT budgeting is not all about doom and gloom, however. Research company International Data Corp. estimates that vertical industries worldwide will continue to invest in IT through 2007, despite the sluggish global economy. In fact, IDC reports that the manufacturing and banking sectors are expected to be among the biggest overall IT spenders. The company also estimates that ongoing investments by the manufacturing industry will represent a $225 billion market by 2007.
Although IT spending forecasts vary widely, analysts agree that enterprises are getting more bang for their buck—mainly by squeezing their suppliers and vendors for deep discounts and increased services and maintenance.
At Grainger, Ferrarell said he has been able to lower spending on items such as maintenance, software and hardware. How? The $4.8 billion distributor of business maintenance products negotiates aggressively for additional service and maintenance packages while pushing vendors to provide the best discounts possible, Ferrarell said. “There are a number of things that you can, if youre negotiating well, buy better, and weve really managed to do that,” he said. “Our general strategy has been to push vendors to give discounts.”
The economic impact of offshore outsourcing has been hotly debated, but some analysts say the practice is not as widespread as its detractors would have people believe. Only 29 percent of North American IT shops tap offshore service providers as a way to control costs, according to research company Forrester Research Inc. And only 9 percent of companies not yet working with an offshore provider will pursue this strategy in the coming year, according to Forrester.
Graingers Ferrarell said he has outsourced some application development to offshore companies to cut costs, but the company has found that it is more cost-effective to “in-source” tasks such as production support.
Tight IT budgeting means organizations are also working to finish the large enterprise projects they already have in the works.
At Cerner Corp., Eric Siley, director of technology of the companys Technology Transformation Group, said he will spend the latter half of this year deploying Microsoft Corp.s Office Live Communications server. Next year, the Kansas City, Mo., company will build on that communications platform by adding collaborative work-space technologies such as Microsoft SharePoint.
In addition, Siley said, Cerner will continue to extend its investments in front-office applications tied to the companys Siebel Systems Inc. customer relationship management implementation this year and into next year.
Tighter IT budgets are not keeping organizations from investing in new enterprise projects. The investments, however, are small. Forrester found that only one in five IT dollars goes toward new investments, excluding operations, maintenance and minor enhancements.
Cerners Siley, for one, is looking at implementing projects in small, manageable chunks: “We are breaking spending down into smaller, faster-moving projects, where we are able to respond to pressing business needs.”
One technology area that continues to excite many enterprises is wireless. Grainger and Cerner, for example, are looking into the deployment of wireless technologies.
Cerner deployed wireless technologies this year and now has one of the largest wireless implementations in Kansas City, Siley said. As part of the wireless deployment, Cerner is purchasing laptops with integrated wireless capabilities.
Graingers Ferrarell said he has no problem spending money on projects and technology that will really cut costs and will differentiate the company from its competitors. Siley agreed, saying that in a time when CEOs have begun to question the value of IT, its these types of projects that will put those questions to rest.
“The days of multimillion-dollar spending binges are clearly over because no CEO is going to have the patience to wait for those kinds of never-ending projects to come through,” Siley said. “These days, you either have a centralized IT group provide services to the business or be prepared to lose your IT dollars.”
Senior Writer Anne Chen can be contacted at anne_chen@ ziffdavis.com.