Economic jitters are sending a wave of uncertainty through the technology sector as IT managers fashion more conservative, recession-wary budgets for the new fiscal year.
When it comes to technology spending, few companies now undertaking their annual budget review are willing to wager on anything but a sure bet.
And it comes at a time when the industry continues to absorb the fact that the Sept. 11 terrorist attacks further delayed hopes for the IT comeback that had been in the making.
“We’re seeing almost a complete halting of discretionary spending [for IT], and a great amount of scrutiny and a desire to prepare,” said Barb Gomolski, research director at Stamford, Conn.-based Gartner Inc.
Revised estimates for growth in IT spending in 2001 list a meager 3 per cent, increasing to 5 per cent in 2002, according to research company International Data Corp., based in Framingham, Mass.
Still, IT managers say money will be spent on projects that show likely ROI. Certain industries such as health care and the U.S. government were added to the list of big IT spenders after Sept. 11 and are apt to outspend their 2002 IT budgets.
Storage vendors, companies offering Internet conferencing services, and a wide range of technology outsourcers could see sales rise as companies take advantage of their services, analysts said.
“IT spending is shifting as companies are getting a lot more conservative,” said John Dillon, president and CEO of salesforce.com, a San Francisco-based online customer relationship management (CRM) vendor. “The economy is part of it, and the tragic events of Sept. 11 are causing companies to focus [spending] on infrastructure, backup, and disaster recovery,” Dillon noted. “Things that work aren’t getting a lot of attention.” He added that CRM has ROI value as companies seek to retain customers.
Companies selling such technology services still face a hard sell as customers keep a tight hold on their wallets. Hardware vendors could be hit the hardest of all. “Companies do not want to commit to something that will require ongoing investments,” Gartner’s Gomolski said. “Companies are trying to be more flexible and nimble. They’d rather buy IT as a service because they can get out of those agreements more quickly. If they buy equipment, they’re committed for four to five years.”
In the heart of Silicon Valley, the city of San Carlos, Calif., is developing its 2002 IT budget conservatively. “Based on where the economy currently is heading – in a negative direction – I think the chances are pretty high that one or more of our higher-profile IT projects will be delayed as a result,” said Brian Moura, San Carlos’ assistant city manager.
Companies that rely on new technology to deliver the latest features to customers, such as New York-based Internet content provider Screaming Media Inc., have little choice but to plan on new IT purchases – a budgeting act that requires even closer scrutiny. “Our network expenditures are going to scale with our customer requirements,” said Steve Spencer, CTO of Screaming Media. Network redundancy will also be an expenditure for Screaming Media, an idea brought back to the forefront following the attacks. Spending for redundancy will all but eliminate the budget for what Spencer called “next-generation enhancements to core systems that are not immediately revenue-generating.”
Michael McHugh, IT director at a large utility company in Gaithersburg, Md., said his company will probably look more at easy-to-do, “lower-hanging fruit” in terms of projects. “If something is expensive or time-consuming and doesn’t look like it will yield a strong ROI, say, by the end of the year, we may take our foot off the pedal,” he said.
Some larger IT shops are pushing back final decisions on their IT budgets for at least a month to buy more time to see which direction the economy is going to move.
Not all market sectors are cutting back on IT spending. For instance, some telecommunications companies are investing the same amount of money as they did last year, if not more, as a way to gain a competitive advantage in emerging markets, such as wireless networks. “It is an interesting situation in telecommunications where some of the underdogs have pressure to invest, not just to stay even with the market leaders, but to gain an advantage by better leveraging IT,” said Mike Drips, an IT executive at Sprint Corp. in Kansas City, Mo.
Some professions, such as consulting, actually flourish during an economic downturn, said Bill Cornfield, president of the Windows Users Support Group in New York.
“Some of the consulting firms we deal with tell us a recession helps their business because many companies who lay off technical staff turn to them for supplemental staffing and other outsourcing needs,” Cornfield said.
A senior technology executive at a Fortune 10 company with headquarters close to New York’s Sept. 11 “ground zero” said the company’s technology infrastructure was already almost complete. This executive said that, for 2002, storage networking and security and authorization services were on the company’s IT budget, with CRM breaking into the top-five budget priorities, but “cutbacks will continue in the areas of e-business, even though this is a core business focus.”
Amerisure, an insurance company in Southfield, Mich., plans to cut back spending in the area of what they call “new development.” “We went through an infrastructure refresh last year, going more to Windows NT- and Unix-based distributed systems and basing our policy processing systems on Oracle Corp. But we’ll spend a little less on that next year as we feel our way through what is happening in the industry,” said Frank Petersmark, Amerisure’s vice president of information systems.
Despite the US$1 billion of marketing and promotion to be spent on Windows XP by Microsoft Corp., Intel Corp., and their business partners, many users say they will be even more cautious than they had planned before Sept. 11 about buying PCs with the much-anticipated bundled OS.
“Some of our users worry that discretionary spending will be put on hold and things like XP could be considered discretionary. The question for most users is not if they will go to XP, but when. ‘When’ could be sometime next year,” Cornfield said.
“Users are not spending on PCs and not as much on some servers, but they are still spending on e-business projects, particularly those involving CRM, some ERP, and supply-chain automation,” said John Gantz, director of research at IDC.