By CIOinsight

Technology Spending 2002




The budding economic recovery doesn't mean that the nightmare budgets of 2001 are gone for good. Yes, the average IT budget has increased by 9% in 2002, but our second annual spending survey shows that the purse strings have been loosened only in larger companies, in certain industries, and for a select few IT budget areas. IT budgets at small companies have actually dropped by an average of 8% since last year. Still, many projects that were put on ice last year are back, and IT executives continue to spend on a variety of new technologies. The bottom line: 2002 won't hit the 7.8% compound growth levels of the pre-Y2K days, but it sure beats 2001.

Far fewer projects are being put on the back burner in 2002 than in 2001. Only about three out of 10 respondents say they are delaying or de-ferring spending on IT projects in 2002, compared with about three quarters of respondents in 2001. Likewise, just half as many firms are cutting or eliminating spending on IT initiatives this year as last.

Two thirds of IT execs say the IT budget is under closer scrutiny this year than last. Perhaps in response, companies are requiring that IT align itself with business strategy more closely, and more firms are adopting metrics to assess their IT investments.

The spending outlook for 2003 is far brighter than for 2002: Close to two thirds of smaller firms and 46 percent of larger companies are projecting IT budget increases. If they are right—and many IT execs doubt actual spending will match their budgets—IT budgets at smaller companies will rise 17% on average and 11% at larger companies.



It's been tough out there, what with companies battered by the worst recession in 10 years and the economic fallout from the Sept. 11 terrorist attacks. And last fall's budget season arrived when the general feeling was at its gloomiest. Yet the results of this month's spending survey show that many companies bucked the trend, upping their 2002 budgets for IT spending. And many are confident that their budgets will hold through the year, and aren't just empty wish lists. But it's still unclear whether this is because companies feel they need to strategically position themselves for the hoped-for recovery or because they need the added capabilities—and potential cost savings—offered by the new IT systems.

Consider Argo Turboserve Corp., a privately held distributor of turbine and power generator parts based in Carlstadt, N.J. Many of Argo Turboserve's customers are in the hard-hit aerospace and nuclear power generation industries, yet the company plans to boost its IT spending 29 percent this year, to $1.8 million, with much of the increase going to new Web-based supply chain management systems that will help attract new customers. The lure? Argo Turboserve hopes to help customers better forecast demand so clients can order parts only when needed, thus cutting inventory costs, says Vice President of Information Systems and CIO Art Johnston.

Other companies are upping their budgets in hopes of preparing themselves for the recovery. As the economy slowed in the second half of 2001, the mandate for David Buzzell, CIO of The Sedona Group, a $75 million professional staffing firm in Moline, Ill., was "let's hold steady and keep costs down," he says. This year, Buzzell says, "it's just time to upgrade and get ready for the rebound of the economy." His $600,000 IT budget is up about 25 percent over last year, and the money will pay for a move to a new accounting platform, and to Web-enable some of its applications. That will help the company produce the customized reports and invoicing paperwork it prepares for its clients without the expensive manual labor now required, he says. The business benefits: reduced operating costs and new, better services for its customers.

Rochester, N.Y.-based Chase-Pitkin Home & Garden, a home improvement retailer with $275 million in revenues in 2001 and a division of Wegmans Food Markets Inc., is spending 8.5 percent more on IT this year to get more detailed, real-time information on product sales.

The chain has seen low double-digit sales increases for the first four months of 2002, says Controller and CIO Chris Dorsey. The Sept. 11 attacks actually helped business, he says, because of the "nesting factor"—consumers seem to be spending less on travel and more on big-ticket home purchases.

However, faced with steep competition, retailers must "carve out as much waste as they can," says Dorsey. He is confident his spending increase will hold up because the chain needs new and upgraded IT capabilities to get the store-by-store and item-by-item information it needs to boost productivity and profits. The tough economic times, he predicts, will actually "put more of an emphasis on making sure that happens."

In some areas, such as the recession-resistant medical field, spending increases are even higher. The company owners at Panorama Orthopedics, a clinic and surgery center in Golden, Colo., believe "we've got to move forward," says CIO Christine Wilson, who reports that her IT budget is up 100 percent this year, to $1.2 million. The new funding will go to upgrade the firm's computerized imaging system and for a new electronic medical records system.

But scrutiny over IT spending is as strong, if not stronger, than ever, especially at organizations still under financial pressure. General Cinemas Theaters Inc., a Chestnut Hill, Mass.-based theater operator that was recently acquired by AMC Entertainment Inc., is playing "more of a devil's advocate role" on IT spending than in the past, says CIO Jim Barry, asking questions like: "Can we get a quicker return?" "Can we reduce expenses?" "What happens if we don't do it?"

The technology industry also remains tight. At Fortel Inc., a Fremont, Calif.-based developer of software that monitors the performance of networks, Web servers and other parts of the IT infrastructure, losses grew to $1.8 million for the fiscal first quarter ending Dec. 31, compared with a loss of $1.6 million one year earlier. Fortel is keeping its IT budget level at about $800,000 and cutting its maintenance costs for Oracle's business applications by 40 percent, says CIO Dave McCandless. Fortel is using Oracle Corp.'s accounts receivable module to do the work of the order entry module. "You lose some functionality, but you get the job done, which is to sell your product to your customer," says McCandless.

Even in companies with strong commitments to IT-based strategic change, the questions remain tough. IT spending at Zurich North America, a Schaumburg, Ill.-based provider of business insurance, part of Zurich Financial Services Group, will rise close to 9 percent this year, to $243 million, says David Patterson, vice president of governance for IT. Much of the increase is going to CRM, Web development, security and privacy-related projects, says Patterson, as part of a three-year overhaul of the IT infrastructure designed to make the financial services firm more efficient and profitable.

But even as spending on new projects rises, CFOs, corporate steering committee members and business managers at all levels are putting operational costs under a microscope. "Managers ask, `What if your capacity is growing? What are your internal labor rates, and how are they changing year over year? What is your cost per user?'" says Patterson.

Where there are genuine spending increases, security is one common item on the shopping list. Dorsey of Chase-Pitkin Home & Garden is spending more on security not only to defeat outsider hackers, but also to protect its internal data.

Another common area for new spending is to upgrade an organization's communications infrastructure. Companies also report spending more on storage. Argo Turboserve plans to boost storage spending 15 percent to 20 percent, says Johnston, to hold both e-mail and data produced by its CRM systems.

As the economy wobbles out of recession, CIOs and business managers are taking a harder, more business-like approach to IT spending than during the boom of the 1990s. For some companies, that means holding the line. For others, 2002 is the year to cautiously resume their investments in IT. "They realize that to make the money, they have to spend the money," says Panorama Orthopedics' Wilson. "In the past it's worked, and we're banking on it again."—Robert L. Scheier is a freelance writer in Boylston, Mass.

Research Results

The results are available in Adobe Acrobat PDF format. To download the free Adobe Acrobat Reader plug-in, click here.

  • Spending

Conclusion 01

Conclusion 01: Spending Trends

The average IT budget for 2002 is increasing—up 9% over last year—but the rising tide is by no means lifting all boats. Most of the spending increase is at larger companies, and just a few of them at that, while budgets are dropping at smaller firms, which don't seem to have the strength to continue spending in the downturn. Meanwhile, hard-hit industries like financial services remain cautious. Still, the budget slide is expected to reverse in 2003.

Larger-company budgets rose from $49 million to $55 million, while budgets at smaller companies declined from $7.0 million to $6.4 million.

Nonfinancial service industries such as retail, entertainment and computer services saw budgets rise 27% over last year, though much of that is thanks to increases at a handful of very large companies. But IT budgets at nonprofits, including government, education and associations, are down 1.7% in 2002. Financial services budgets, the highest-spending category, remained essentially flat.

CIOs are not changing how they divide up spending between hardware, software, staff, services, training and maintenance. IT personnel remains by far the highest line item in the IT budget, at 38% of the budget in 2002.

IT execs expect a far rosier spending picture in 2003. Fully 62% of CIOs at smaller companies and 46% at larger firms believe overall spending will rise next year. Even in companies where IT budgets declined in 2002, only 34% think it will decrease again.

Conclusion 02

Conclusion 02: Technologies and Projects

Not surprisingly, following the events of Sept. 11, 47% of all respondents are increasing funds for security software for 2002. And overall, the red light has changed to yellow for a variety of IT projects, especially technologies that can generate revenue, such as CRM, and strengthen the infrastructure, such as networking and communications hardware. Meanwhile, many respondents continue to experiment with cutting-edge technologies such as XML and Web services.

In 2001, 74% said they were delaying or deferring projects, technologies or services. This year, it's only 30%. And last year, 42% said projects were completely cut or eliminated, compared with only 20% in 2002.

CRM, CORPORATE PORTAL, DATA warehousing and e-business initiatives are the ones most likely to be included in 2002 budgets, ranging from 52% to 57% of respondents. In actual dollars, spending is clearly trending up in CRM, data warehousing and marketing.

forty-seven percent of IT execs are spending more on security software, more than any other technology. A variety of infrastructure categories—networking, communication, storage and servers—came next, all falling in the range of 37% to 39%.

Among newer technologies, IT execs showed the greatest interest in PDAs, Web services, Gigabit Ethernet, storage area networks and XML, with 43% to 46% investing in 2002. Fifty-five percent of larger companies were also investing in storage area networks. Keep an eye out, too, for wireless networking, where investments are increasing at 30% of respondents.

Conclusion 03

Conclusion 03: 2001 Revisited

2001 was clearly one of the most parsimonious years ever for IT spending. The long-term legacy of 2001 is likely to be greater scrutiny of IT budgets, more attention to alignment, a move from stand-alone marketing systems to CRM, and a decline in knowledge management spending.

In last year's survey, two thirds of CIOs expected spending for 2001 would come in below budget. But such a drop occurred in just 42% of the companies that we surveyed.

Budget decreases aren't projected to be quite as frequent this year as they were last year. In 2001, 42% of CIOs say their budgets decreased from their original projections, against 35% projecting decreases this year.

When the budget ax swung in 2001, many high-visibility IT projects weren't immune: While 30% of companies that budgeted for CRM wound up raising their actual spending, 22% of companies budgeting for marketing automation software spent less than originally planned. At 37% of larger companies, knowledge management actual spending dropped below the 2001 budget. This year, CRM will continue to rise, at 36%, and knowledge management will be reduced further or eliminated at 29% of companies.

The recession led 66% of comPAnies to increase the scrutiny of their IT budget in 2001, and 62% to ensure that their IT spending is better aligned with business strategy. The push for alignment is consistent across large and small companies as well as companies that were increasing or decreasing their IT budgets, showing that alignment remains a universal concern among IT executives.

Conclusion 04

Conclusion 04: the Budget Process

Things certainly look better for 2002, but many—if not most—IT execs remain cautious, and they have little confidence in their budget numbers. Facing greater scrutiny from the CEOs, CFOs and COOs who watch their budgets, CIOs are reviewing their budgets frequently. Those who do so are much more confident about the numbers that result.

Forty-three percent say they lack confidence in their 2002 budget projections, and that's borne out by how few feel their spending will match their budget. Thirty-three percent of larger companies believe their spending will increase over their original projections for 2002, while 41% expect a decrease. Thirty-eight percent of smaller companies see an increase over their current budget, but 30% are anticipating a decrease in the months ahead.

Approximately two thirds follow a conventional annual budget approval cycle. However, they review the budget more frequently, with 37% revisiting the budget every three months or less, and just 25% saying they do so once a year.

Many IT execs are seeking or using ways to more closely manage the budget process. Of these, continuous budgeting, incrementally adjusting spending along the way, is the most popular method, favored by 39% of IT departments. There's also a clear shift toward more performance-based budgeting, with 35% saying they will consider these techniques in the future.

Conclusion 05

Conclusion 05: Hopes and Concerns

CIOs hope to raise revenues for their companies—not just cut costs. But they feel that they need to spend more on IT to make more money for their companies. This might be behind the optimistic projections for the 2003 budget.

We may be living in uncertain—and hopefully post-recessionary—times, but CIOs' priorities remain solidly oriented to making money. Forty-seven percent say their organization's top priority is revenue enhancement, and another 17% cite customer satisfaction. Only 20% say cost reduction is their main goal.

However, IT execs are worried that they won't be able to meet these goals in the current budgeting environment. More than half (56%) believe IT isn't spending enough to keep up with this year's strategic goals for the organization. And 41% believe the company isn't spending enough on strategic initiatives.

IT executives do not feel that their departments are being singled out for budget tightening: 32% said their budgets were increased more or cut less than other internal groups in 2002, versus 21% who said their budgets were cut more or not increased as much as other departments.



In retrospect, 2001 wasn't quite the train wreck for it that it could have been. Cutbacks weren't that far off from the cutbacks projected for 2001, and some important initiatives made it through relatively unscathed. 2002 is clearly going to be a better year—how could it not be? But CIOs remain cautious in most of their projections for budget growth. Perhaps most troubling, however, are concerns that the organization isn't spending enough on strategic initiatives. IT execs would do well to ensure that the non-IT CXOs watching the budget have the information they need to understand how specific IT initiatives are linked to supporting the direction the organization wants to go. Improving the budget process so that they are confident that their budget figures are accurate, and their investments are providing value, would also help CIOs win the spending increases they are seeking and expecting in 2003.



How the survey was done: CIO Insight designed the IT spending survey together with Advantage Business Research Inc. (www.advantageresearch.com), a Lake Success, N.Y.-based supplier of custom research services. CIOs, chief technology officers, and vice presidents of information technology and services gathered from a number of sources, including third-party lists and other Ziff Davis Media publications, were invited to participate in the study by e-mail. The questions were posted on a password-protected Web site, and 357 qualified respondents replied from March 22 to April 2, 2002. All qualified respondents described themselves as knowledgeable or very knowledgeable about their company's IT budget.

This article was originally published on 06-14-2002