Techs Soft Landing In Rough Economy - Page 4

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Pain Before Gain

Even if the year doesnt turn as bleak as many fear, things will likely look worse before they get better. Many dot-com companies — particularly those on the e-retailing front — were holding on through the Christmas season, hoping that strong sales would be enough to see them through another year, or through another round of financing.

Expect many of those that did poorly over the holidays, or did well but continue to operate at a loss, to give up the fight. More layoffs, failures and pink slip parties are inevitable through the first two quarters of the year.

Likewise on the business-to-business commerce front. While not dependent on holiday sales, B2B firms are facing a cash crunch of their own. Many were founded on shaky business plans that required subsequent financing rounds to eventually reach profitability. Venture financing is drying up, and the industry is poised for a wave of mergers and consolidation. While some will find buyers or partners, a great many will simply go out of business.

After the first two quarters of the year, however, the tech sector should be back on track. The transformation that is taking place throughout companies based on Internet technologies is real and will only accelerate as companies begin to achieve the first big results. Even if a downturn in the economy does come into play, many in the industry believe tech spending could come through relatively unscathed, for the simple reason that investing in new technology and Internet applications is one of the easiest ways to shave costs.

"Everybodys talking about a downturn, but IT spending doesnt go away — it gets more bottom line-focused," said Ariba CEO Keith Krach. Ariba, which supplies software to help companies automate their purchases of goods and services over the Internet, has been experiencing phenomenal growth. In its last reported quarter, sales reached $134.9 million, compared with $17.1 million for the same period a year earlier.

In an interview in late December 2000, Krach said his company had yet to feel any impact from a feared recession. Even if the economy continues to slow, Krach figures Ariba will be able to capitalize on a shift in focus to controlling costs. "If you know your revenues are slowing, then the easiest way to boost EPS [earnings per share] is to cut your costs," he said.

Netscape Communications co-founder Mark Andreessen is betting on the same game plan. Andreessen expects to push ahead with an initial public offering for his latest venture, Loudcloud, a company that builds, hosts and maintains the back-end plumbing for e-commerce sites and applications.

"All of a sudden business fundamentals matter," Andreessen said. "People were allowed to get sloppy over the last two or three years because we were in an environment where capital was basically free. Going forward, youre going to have to absolutely focus on the market you are in, because theres going to be no room for people trying to do multiple things at once. We obviously think thats going to lead to a tremendous amount of outsourcing."

Of course, no matter what the vendors think, the overall growth or lack of growth of the IT sector will largely depend on the spending plans of corporate America. On that front, Interactive Week has not been able to substantiate fears of a major slowdown.

Once again, the worst-case scenario is flat IT spending. But in most cases, corporations expect increases. They also expect to dedicate more of their IT budgets to Internet projects, which could add up to further good news for the Internet sector.

"Our IT budget has been growing modestly over the last few years, and I expect that will continue," said Procter & Gamble CIO Stephen David. P&G will be reallocating its IT resources away from such areas as Enterprise Resource Planning systems into new areas such as integrating its global supply chain with new marketplace initiatives and Web-enabling many of its internal applications. "Also, like most organizations, we seem to have an insatiable appetite for bandwidth — not only here in North America, but around the world," David said.

Michael Haas, vice president of information management and CIO at Johnson & Johnsons consumer products division, said his company will likely spend more on IT projects in 2001, not less. A big focus in the coming year will be Johnson & Johnsons participation in Transora, a huge marketplace initiative involving more than 50 of the worlds largest consumer products companies. "When I look at my plate, we have a lot of activities that will be coming up in 2001 or going into full production in 2001," Haas said. "My feeling is that 2001 will continue to be a good year for IT spending. In talking to my industry peers, everybody seems to be in a similar position."

Backing up that point, Morgan Stanley found in its annual year-end survey of CIOs and CTOs at Fortune 500 companies that just 16 percent of respondents believe they will spend less on IT projects in 2001. The majority expect IT budgets to grow an average of 8 percent. GartnerGroup also conducted a survey of 510 international companies and found that 65 percent planned to increase their IT budgets in 2001. Analyst Kurt Potter said more of that money will be dedicated to e-commerce projects —16 percent in 2001, compared with 13 percent in 2000 and 10 percent in 1999. The 16 percent forecast for e-commerce projects may be an underestimate, he added.

"IT has morphed and changed from overhead into something that generates business, increases productivity. Its not just about cost anymore," Potter said.

A more cautious tone was set by Merrill Lynch & Co., which said it found in its year-end survey of 150 CIOs that only 56 percent believed their IT budgets would rise in 2001 — by an average of 12 percent. Earlier in 2000, Merrill Lynch polled the same executives and found that 78 percent were expecting to see their IT budgets increase in 2001. The brokerage firm said fear of an economic downturn is the main culprit for the more sober outlook.