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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