Spending 2001By Mike Perkowski | Posted 06-01-2001
CIOs and top IT strategists appear to be dodging bullets when it comes to widespread and debilitating technology spending cuts throughout their organizations, according to a May CIO Insight survey. The majority of respondents said they had not cut IT expenditures from their original 2001 budget since the beginning of the year. Still, many CIOs have seen their budgets affected in some way by the economic slowdown, particularly in larger organizations.
Among the 426 CIOs and senior IT executives surveyed, just 43 percent said their original IT budgets for 2001 have been reduced. Of those facing reductions, 74 percent said they've come in the form of delays, while only 42 percent also faced outright cuts or elimination of projects.
Among CIOs who saw their budgets reduced, the average reduction during the first quarter, compared with their original IT budget, was 30 percent. That figure is expected to stay relatively flat, at 28 percent, in the second quarter.
Some CIOs who have faced budget reductions said they expect a reasonably healthy resumption of spending in the second half of the year. Of those who said they'd suffered budget cuts so far this year, about 30 percent said they expect IT spending to wind up matching their original budgets by the end of the year.
The news on the economic front remains decidedly mixed. Unemployment jumped to 4.5 percent in April, the highest rate in more than two and a half years, yet the stock marketseven the tech sectorsaw a bit of a recovery. Consumer confidence remains low, yet there are signs that the downturn is nearing a bottom.
Charles Phillips, who heads up enterprise software projects for Morgan Stanley and tracks trends among CIOs, believes that companies have overspent on technology, and absorbing all that is in part what's slowing the economy down now. "Because you had good growth across the economy for five years, you get fat, and now there's a lot of excess cost in the system that can be taken out," he says. "We expect continued weakness for this year, with modest recovery not showing up until next year, and even that could be mild and still tentative."
The mixed messages are reflected in CIO Insight's May survey on IT spending and during follow-up interviews with some of the respondents.
"We had a down third quarter, ended March," says Andrew Lippo, director of MIS at Salem, N.H.-based Standex International Corp., a diversified manufacturer with $637 million in 2000 revenues. "Sales were down, profits were down. As we go into our fourth quarter, the CEO and the CIO have put a hold on all capital outlays for the remainder of this fiscal year and the first quarter of next year, which would bring us through September. We will probably stay put and spend no major dollars until the beginning of next year."
What does the slowdown mean for Standex? Says Lippo: "We're putting all ERP application acquisitions as well as a major supply-chain project on hold. But we're not expecting to cut any more staff than we [already] have; I don't think we can get any leaner."
Lippo's experience is typical of CIOs surveyed at companies with more than 1,000 employees. Sixty percent have faced slowdowns or outright cuts to their 2001 budgets, compared with just 39 percent at companies with fewer than 1,000 employees. Why the discrepancy? Perhaps because larger companies have taken on more fat during the recent good times, or because more of them are public, making the need to preserve their numbers more urgent. Lippo sums it up succinctly: "We're in a real cost-cutting mode in order to weather the storm and maintain our profits."
Echoing Lippo, Michael Johnson, vice president and CIO at management consultancy A.T. Kearney, a division of Electronic Data Systems Corp. based in Plano, Tex., observes that at his firm softening in client demand has led to across-the-board reductions. "But it's been nothing that would cause great pain," he insists. "Instead, we're postponing some spending to the following year."
When asked where cuts are being made, Johnson points to wireless. "We've been using wireless selectively for a while, because it's extremely convenient for people who do a lot of traveling, and for keeping down cabling costs at our newer facilities. But it's been put on the back burner for at least the next couple of quarters," he says. "Still, it's just a matter of time before we build it out further."
Johnson agrees with many of the survey respondents, who are quick to point out that spending cuts have typically been across the board. "IT is not being singled out or picked on at all," he says.
The overall response from CIOs at the smaller firms was more positive. Says Kurt Potter, a research director at Stamford, Conn.-based Gartner Inc.: "It used to be that smaller companies spent more per person on IT than larger companies. But with the advent of e-business, that's changed. Smaller companies have less to cut." Meka Krammer, Potter's colleague at Gartner, who researches small and midsize companies, agrees. "They're spending the bare minimum anyway, and they've never been very frivolous as to their IT spending," she points out.
Still, some continue to feel the pain. Eamon Allbee, CTO at Dollens and Assoc., a Chicago-based marketing intelligence outfit with about a dozen employees, has seen his budget trimmed by about 10 percent so far this year. The biggest hit was to his proposal for beefing up his company's Internet connection, a decision that was based solely on cost. But other areas have also suffered. "New equipmentPCs, servershas taken the brunt of the slowdown," he says, "and that's what will be increased first."
From where Allbee sits, much of the economic downturn was the result of an overreaction to the demise of so many Internet businesses last year. "I think a lot of people just got scared when a lot of the dot-coms were crashing. Face it, you really can't keep up that kind of 300 percent or 400 percent growth without slowing down."
Allbee attributes the improvement he's already seeing in his business to renewed confidence on the part of his clients, and that has given him hope for the rest of the year. "I think our spending for the year will actually be up," he says, "thanks to a lot of new business we've already gotten."
Don Graham's outlook is even brighter. He's the vice president and director of product development at Cocoexchange Inc. in Newport Beach, Calif., a developer of back-end transaction software for business-to-business exchanges. "Business has been very, very good," says Graham.
With three significant new contracts, Cocoexchange is busy hiring more IT help, and Graham's biggest concern has been the number of resumes he receives. "A year ago, when I sent out a request to add a person to our team, I would get 15 or 20 resumes. For the most recent request, I got 250 resumes in the first 48 hours."Edward H. Baker
The Budgeting Process Allocating Resources Looking Forward Companywide Spending
Companies with more than 1,000 employees were significantly more likely than smaller firms to have experienced reductions or elimination of projects so far this year. With more going onincluding more people, more projects, more outside IT partners, more financial exposurelarger companies have more opportunities to cut. Still, companies both large and small have cut spending more in non-IT areas than in IT.
Sixty percent of the CIOs at larger companies said they'd faced IT spending cuts this year, compared with only 39 percent among smaller companies. The same trend holds true for project eliminations: 53 percent of large-company CIOs said they'd experienced outright eliminations, compared with just 38 percent of those at smaller companies.
The numbers are significantly higher for non-IT spending: Fully 70 percent of CIOs at large companies and 46 percent of those at smaller firms reported pull-backs in such areas as non-IT staff, non-technology capital budgets, and travel and entertainment.
CIOs, particularly those at large companies, consider infrastructure-level projects, including communications, networking and databases, to be the top spending priorities for 2001. Indeed, networking infrastructure and security top the list of technology areas where CIOs say they not only are likely to preserve their original budgets, but actually expand spending this year.
Despite the economic downturn and budget cuts, 54 percent of the respondents cited networking infrastructure as a top priority, followed by communications infrastructure at 52 percent. Those priorities were echoed by CIOs of large and small companies alike, but even more so in larger organizations. Networking infrastructure was cited by 64 percent of CIOs in larger companies, and communications infrastructure projects were mentioned by 62 percent. The respective numbers for smaller firms: 51 percent and 49 percent.
Technologies that showed up at the bottom of the priority scale: Packaged softwareespecially for PCsand, despite all the hype, wireless. In fact, wireless was cited by only 17 percent of CIOs as the technology most important to continue funding at budgeted levels for the rest of the year.
Nearly 30 percent of the CIOs surveyed cited security and networking infrastructure as the areas most likely to see increased spending this year compared with their original budget. Among larger companies, network infrastructure was first, at 35 percent, followed by security and databases, at 31 percent. Smaller companies' IT executives put security and servers first, at 29 percent, followed by network infrastructure and client PCs, both at 28 percent. Larger companies, however, ranked client PCs 10th out of 11 technology categories, with only 12 percent.
When asked which area they'd be most likely to cut spending first if they had to, 45 percent of CIOs at large companies cited PCs as the first to go.
Projects most likely to continue receiving funds are those that directly support current revenue-generating efforts, according to the CIOs surveyed. Meanwhile, in keeping with the trend away from funding client PC efforts, projects enhancing employee productivity lagged far behind, especially at larger companies.
Nearly 45 percent of CIOs said current revenue-generating projects were their top funding priorities, followed by projects that generated new, incremental revenue, at 22 percent overall, though just 17 percent at larger companies.
Large- and small-company CIOs diverged on the importance of cost-reduction projects. CIOs at large companies cited cost reduction as a priority 22 percent of the time, making it the number-two priority after current revenue-generating projects. Cost-reduction projects, however, were mentioned by only 12 percent of respondents from smaller companies.
Not only are customer-facing applications such as e-business/e-commerce and customer relationship management among the ones most often budgeted for by respondents overall, they're also the least likely to be cut entirely in the current economic climate. That only confirms the result that CIOs consider revenue-generating projects a top priority.
E-business/e-commerce was the number-one application for respondents overall, mentioned by 51 percent as being a specific budget line in their IT departments. That number rose to an impressive 63 percent among larger companies. Only 5 percent of all respondents said they'd been forced to eliminate their e-business/e-commerce initiatives so far this year, and none of the large-company respondents said they'd been forced to do so. Larger companies were also less likely than their small-company counterparts to either delay or reduce expenditures for e-business applications.
Similarly, only 5 percent of respondents said they'd been forced to eliminate their CRM projectswhich ranked as the fourth most important application in respondents' IT budgets this year. In fact, 10 percent of the respondents said they actually intend to increase CRM spending this year beyond their initial budget levels.
Although knowledge management was the fifth most important applications area (out of 11) in the CIOs' original budget plans, 25 percent of CIOs with knowledge management in their budgets said they'd already eliminated it from this year's revised plans. Enterprise-resource planning was the second most likely to be eliminated, cited by 12 percent of CIOs. And supply-chain management one of the least-cited applications areas in CIOs' current budgets was mentioned by 10 percent of those CIOs as a candidate to be cut if it was already allocated.
Despite highly publicized warnings from top IT vendors about IT spending slowdowns during the past several months, the majority of CIOs are not seeing budgets decimatedat least not yet. While larger companies are taking more pronounced measures to rein in their IT spending, what appears to be happening is a reordering of priorities, with money being pulled from less essential applications and technology areas and more of it being put into areas that drive top-line growth.
How the survey was done:CIO Insight designed the spending survey in partnership with Survey.com,a San Jose,Calif.-based supplier of custom online research services.The study was e-mailed to CIOs, chief technology officers and vice presidents of information technology and services from a number of sources,including third-party lists and other Ziff Davis publications.The survey was posted on a password-protected Web site,and 432 people responded from May 3 to May 10.