Eric Nee: The Efficient Recovery

By Eric Nee  |  Posted 01-01-2004

A new year has begun, and some folks in the technology business are getting ready to party like it's 1999. And why not? After suffering through a prolonged—and for the IT industry a particularly brutal—recession, the U.S. economy seems to be roaring back. Productivity and gross domestic product grew 9.4 percent and 8.2 percent respectively in the third quarter, the highest rates in nearly 20 years. Corporate profits are up, factory utilization has increased and business confidence is on the upswing.

Not even President George W. Bush's most partisan supporters could have hoped for such a rapid turn of events. Economic and business prognosticators were also caught off guard, none more so than those who cover the IT industry. Just a short time ago, most IT market researchers predicted little or no growth in corporate IT spending for 2004. Now, these same researchers are scrambling to boost their outlook for the years ahead, sometimes dramatically so. It's not quite a return to the rosy predictions of the late 1990s, but it's close.

"We believe 2006 will look just as different when compared with 2003 as 2003 looks when compared with 1999," said Michael Fleisher, Gartner chairman and CEO, at the firm's annual CIO confab in October. "Companies are beginning to make the turn from protecting profitability to driving growth." Meanwhile, in early December, when IDC released its top ten trends for the IT industry, number one on the list was a "Tech Resurrection" in 2004. The research firm predicted that IT spending would rise at least 4.9 percent this year, with 6 to 8 percent growth more likely.

Despite the optimism of two of the leading IT advisory firms, don't uncork the champagne bottles just yet. There are still plenty of reasons for CEOs and CIOs to resist boosting IT budgets, hiring more IT employees and launching speculative new projects. First, the economic recovery may not be as strong or as long-lasting as it now seems. "While it's tempting to extrapolate into the future on the basis of this seemingly spectacular upturn, there's still good reason to be cautious," wrote Stephen Roach, chief economist and director of global economic analysis at Morgan Stanley, in his Dec. 1 commentary titled "Growth at What Cost?"

Much of the recovery in the U.S. is due to what Roach called a "Herculean stimulus campaign" launched by the current Administration. This includes tax cuts, deficit spending, a low federal-funds rate and a weak dollar. At the same time, consumer debt is piling up, massive federal deficits have returned and the current-account deficit continues to grow. In sum, the recovery is highly leveraged and fragile, and that "could lead to a relapse in the U.S. economy once the impacts of counter-cyclical stimulus fade," Roach concluded.

But the economy is not easily predicted, and Roach may turn out to be too pessimistic. Meanwhile, there's another reason why CEOs and CIOs should refrain from opening up the spending tap: the certainty that competition is getting fiercer all the time. That's because markets continue to be deregulated, the Internet continues to demystify pricing, tasks of all types are being outsourced, and competitors can and will arise from anywhere around the globe.

To thrive in this competitive environment, companies must relentlessly find ways to contain costs and operate more efficiently. That's how world-class organizations such as Wal-Mart Stores Inc. and Southwest Airlines Co. do business. Efficiency and cost containment are part of their corporate DNA and cut across all business functions. Management is constantly on the lookout for ways to take costs out of existing processes. And when new initiatives are launched, operating efficiency is at or near the top of the priority list.

Of course, one of the best ways a company can operate more efficiently is by using IT. But this need not mean spending ever-increasing amounts of money on IT, as so many companies did in the late 1990s. The past few years of tight IT budgets have shown that when forced to do more with less, managers could find creative ways to operate more cost-effectively. It turns out that the old adage, "Necessity is the mother of invention," is as true for IT as it is in other parts of life. And there is no better way to foster invention than by keeping spending under a tight rein.

I recently moderated several meetings attended by about 75 CIOs and IT managers from a variety of businesses, nonprofit organizations and government agencies. As expected, there were complaints about the budget constraints of the past few years. Most admitted, however, that they had found ways to cut costs without affecting day-to-day operations. Many found that these lower-cost solutions worked better than more expensive approaches. Here are three areas that were particularly fruitful.

Cut back the amount of money spent on PCs. It's time to put an end to the old joke that Andy Grove giveth, Bill Gates taketh away. One solution is to delay upgrades of PCs. Instead of automatically upgrading 30 percent of the company's PCs each year, one CIO is now upgrading PCs only when there is a demonstrated need. Another IT manager said his company had replaced all of the PCs used by customer support with thin clients using Web-based applications. Despite the cost of replacing PCs with new thin clients, the company realized immediate cost savings because license fees to Microsoft were eliminated and support costs were significantly reduced. Some companies are even dumping their Windows PCs for Linux desktops.

Reduce the amount of money spent on IT salaries. Labor remains one of the biggest line items in most corporate IT budgets. It's time for that to end. One IT manager had to cut his staff from 1,600 to 400 in the past three years, and he did it. Offshore outsourcing is one solution. There are plenty of tasks that can be done just as well and at a lower cost in India, instead of in New York or Washington. Because of all the layoffs of IT staff, there is no reason to think that IT salaries for those jobs that remain in the U.S. will go up. On the contrary, they may go down. CIOs can also get bonus points by working closely with business units to find non-IT tasks, such as accounting and HR, that can be outsourced.

Save money by consolidating servers and storage on low-cost, industry-standard platforms. Pressed to reduce costs, one firm took aim at its e-mail servers. Over the years each office had put in its own e-mail server with attached storage to serve its own users. The utilization of the servers and storage was very low, and the cost of multiple software licenses and support was high. The solution was to consolidate the nearly 100 Windows servers into just three Linux servers. At the same time, the attached storage architecture was replaced by networked storage, further reducing costs.

There are numerous other ways to save money. Replacing expensive enterprise applications with lower-cost hosted applications, such as those from Salesforce.com, is one. Moving to a single IP network for all communications in order to take advantage of technologies like Voice over IP, for example, is another. The best way to discover new cost-effective solutions is to keep IT budgets tight. You'll be surprised at how creative people can be.

Instead of celebrating 2004 with a binge, executives would do better to adopt the New Year's resolution: "I will always look for ways to do more with less." You can be sure some of your competitors are doing just that.

Eric Nee, a longtime observer of Silicon Valley, has served in a variety of editorial positions at Forbes, Fortune and Upside magazines. His next column will appear in March.

Illustration by John Kascht