The FindingsBy Allan Alter | Posted 01-14-2003
Spending 2003: How Bad is the Bite in Your Budget?
This year's budget numbers are in: IT spending will be down, if slightly, with large companies taking the brunt of the hit. Large-company CIOs responding to our annual spending survey report a 0.5 percent decline in budgeted spending for 2003, while small companies are looking to increase spending by 5 percent. The decrease is leading to lower levels of spending in a variety of technologies and business initiatives.
Especially hard-hit: infrastructure, emerging technologies, and a number of efforts corporations clearly consider luxuries in tough timesincluding collaboration, distance learning and marketing automation. The big surprise? The added caution on the part of large companies. Significantly more large-company respondents attribute their cost-cutting to their current financial position than their small-company counterparts, and almost 50 percent more of them cite "reducing operating costs" as the primary motivator of their IT projects in 2003. The numbers suggest they're in worse financial shape, and the many stakeholders they must answer to, including public shareholders and Wall Street, appear to be forcing them to watch their pennies more carefully.
Finding One: Growth in IT spending will decline in 2003. Even though companies of all sizes are looking for quite healthy revenue and earnings growth this year, the era of tightened budgets will not be over soon. Thanks mostly to the trials and tribulations of larger companieswhich are anticipating a contraction in both capital expenses and operating expenses this yearIT spending will be down 0.2 percent in 2003, and then rise somewhat in 2004. Software will take the biggest hit, suggesting that IT departments expect to begin fewer projects this year.
Finding Two: A significant number of technology categories and initiatives will be reduced in the 2003 IT budget. Infrastructure was hit particularly hard in this year's budgets, with communications and networking hardware down by double digits. But things are looking up for several technologies that haven't yet reached the saturation point, among them wireless networking, open source and packaged e-business apps. Meanwhile, few companies are willing to stick their IT necks out on new spending initiatives. Among the decliners for 2003: disaster recovery and security, no doubt because investment was so strong in 2002. Yet the continued investment in CRM initiatives suggests the bottom-line value of pinpointed customer-focused strategies.
Finding Three: Interest in new technologies is down, but not out. Despite the tough spending environment, corporate users remain committed to several emerging technologies. Interest in blade servers has doubled, while many of the more popular technologies, such as network intrusion software, storage area networks and XML, continue relatively strong, perhaps because of their potential security, productivity and cost benefits. Interest in more experimental technologies, such as grid computing and peer-to-peer computing, is much weaker.
Finding Four: Poor financial results are the primary cause of budget cutbacks. This is particularly true of large companies, perhaps because they are more likely to have public shareholders to answer to. "Changes in business priorities" was a relatively distant second last year, but its influence on budgetary issues is growingan indication that companies are looking to better align their business and IT efforts.
Finding Five: Successful companies are linking IT spending more closely to strategic business goals. While all companies agree that demonstrating value is critical in a tough environment, companies that do well at meeting strategic goals areperhaps inevitablyless obsessed with cost, and more concerned with business value. They are less likely to look to outsourcers for help and to require approval from higher layers of management, and somewhat more likely to worry about productivity and customer satisfaction. Is it the chicken or the egg?
Finding Six: Corporate budgeting processes have improved, but little more than half of our respondents believe it results in an accurate assessment of needs. And while no cutting-edge technique is used by more than half of our respondents, some work better than others. The top three: collaborating forecasting, rolling forecasting and the balanced scorecard, with performance-based budgeting not far behind. The upshot: It's time to break out of old budgeting habits and speed up the process on all fronts.
What Do You Spend
on When Money is Scarce?">
What Do You Spend on When Money is Scarce?
When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully," wrote Samuel Johnson. The recession has had much the same effect on CIOs. The results of our latest spending survey drip with ROI anxiety: IT budgets are being scrutinized more carefully, infrastructure investments are now tougher to justify, and fewer initiatives are being given the green light. With less ammunition at their disposal, IT executives are now concentrating their fire. Instead of experimenting and taking risks, they're targeting a few, select projects that should bring sure, swift savings.
"During the dot-bomb phase, we had more freedom to take on high-risk projects. But in this economic climate, ROI floats to the top of what we spend our money on," says Neil Hastie, CIO of TruServ Corp., the Chicago-based parent of TrueValue Hardware.
Most companies "are hunkering down, trying to cut costs," says John Ferreira, a partner at Deloitte (soon to be Braxton) Consulting in New York. And while strategy consultants like Rudy Puryear, a director at Bain & Co.'s IT practice, concede that recessions are an opportunity to strengthen your competitive position, the high-priority projects respondents discussed with us aren't quite so ambitious.
The reason, explains Puryear, is that the timing of the recovery remains an open question, and memories of yesteryear's dot-com fantasies and liberal IT budgets still gnaw at many CEOs. Top executives are asking CIOs to generate more benefits from previous investments and focus on projects that can produce an immediate paybackpreferably through cost reduction. Those two priorities, along with information security and maintaining mission-critical systems, come ahead of market expansion and competitive positioning. "Take flat IT budgets and the first four priorities, and there's not a lot of dollars left over," says Puryear.
The projects we heard about target wasteful business processes, but they also provide opportunities to generate revenue. Take TruServ. Neil Hastie calls his high-ROI project "vendor-managed data." This system, which swung into full production in mid-2002, borrows the concept of vendor-managed inventoryplacing responsibility for tracking inventory and ordering new supplies on vendorsand applies it to managing product information and photography used in catalogs, Web sites and stores, as well as logistics and accounting. TruServ's suppliers must provide up to 256 data points about each product, including marketing photos, country of origin, wholesale price and volume discounts, and cubic feet needed for storage.
EDI-type systems can be a costly burden for suppliers, but because this system can accept and integrate data in many formatsincluding XML, ANSI X.12 and Exceleven "smaller vendors can get on the EDI train," says Hastie. He estimates the system will result in "seven-figure" savings annuallyin part by reducing the cost of producing catalogs by 35 percentwhile increasing sales. TruServ will be able to create custom catalogs for large clients in days, and introduce new products to its 6,400 stores in six weeks instead of four to six months.
Meanwhile, Toronto-based builder Brookfield Homes is rolling out a Web-based system that goes after an irksome problem: the process of ordering and installing custom features ("options" in homebuilder's lingo) such as extra electric outlets and moldings.
According to Eric Simon, Brookfield Homes' vice president of IT, sales of options haven't been as profitable as they could be. Sales have been lost because paperwork didn't reach the contractors on time, for example, and revenues frittered away when salespeople sold extra outlets after the drywall was up, forcing builders to cut holes to install the new wiring. Lost sales have amounted to $2 million annually in the past, while errors cost another $4 million. The idea for the new system couldn't be simpler: Buyers go online and select options. "Instead of four or five pieces of paper, one stream of data goes into the back office," says Simon. Annual profits from options are now up to $6 million, with more expected as the rollout continues.
Still, there are companies that have major IT projects up their sleeves, even as they're taking a machete to their IT costs. Environmental Products Corp. (Envipco) USA in Naugatuck, Conn., a $30 million unit of the Dutch maker and operator of bottle return machines, has cut $500,000 in annual IT costs and laid off or outsourced most of its IT functions. Even its de facto CIO, Ron Frederick, is a consultant.
Yet Envipco is working on a new system, scheduled to roll out in the second quarter of 2003, for tracking bottle returns and managing deposit reimbursement payments from the bottler to the supermarket. The new system, Frederick says, will reduce its operating costs (in part, by moving off IBM mainframes to a Wintel platform), but the main goal is to improve the cash flow of its customers by speeding up payments to supermarkets from 30 days to two weeks. This may be the biggest, baddest recession that most CIOs have ever experienced, but companies aren't shutting down all initiativesjust winnowing them. Says Brookfield Homes' Simon: "The more experimental projects and prototypes are being put on the back burner during the hard times. We're not focusing so much on hunkering down as on projects that have proven value."