i On the Market: IT Spend 2002: Plans for the Unplannable

[From iSource Business, January 2002] Climate control systems from Carrier Corp. keep the heat at bay in locations as diverse as the Sistine Chapel and the Rock and Roll Hall of Fame. So it's no surprise that when an uncertain economy turns up the heat on information systems' budgets, Carrier's CIO, Jagdish Dalal, has kept his cool.

In fact, Farmington, Conn.-based Carrier was set to spend more in 2001 on information systems than it did in 2000. "Not as much as I had planned for," admits Jagdish Dalal, who is the company's chief information officer and vice president for e-business. But overall, his 2001 budget was a single digit ahead of the previous year's spend. And while Dalal's prognosis for 2002 - not unexpectedly - is less rosy, he is adjusting to the new realities of the post-September 11 world by, perforce, incorporating more flexibility into his plans for the future.

Carrier's CIO is not alone. Flexibility seems to be the watchword for corporate information technology (IT) and information systems (IS) departments as CIOs attempt to chart a course through choppy economic waters heading into the New Year. As Dalal says, "One of the biggest challenges on my plate right now is being able to do planning in an unplannable horizon."

Before...

Just scant months ago, corporations were anticipating a fast recovery from a brief economic downturn, and CIOs were planning their IT spending accordingly. Technology research firm Gartner reported in July, for example, that 56 percent of respondents in a survey of 589 large organizations still planned to increase IT spending in 2001. CIOs in the survey predicted on average a 10 percent increase in their budgets for 2001 against 2000 levels. Similarly, in Morgan Stanley Dean Witter's CIO survey released August 15, 52 percent of 225 CIOs questioned said their organizations had not changed their IT spending plans as a result of the sluggish economy, and 34 percent of respondents said they planned to spend more on IT in the second half of the year than in the first half.

At the time, companies may have been looking to cut spending for certain new projects, but competitive pressure kept many IT projects on the front burner for enterprises expecting a fast turnaround. Barbara Gomolski, research director for Gartner, says that back in August, many of her clients were concerned about getting behind in case the economy turned around quickly; they didn't want to be caught in the position of not being able to ramp up quickly enough, therefore losing competitive advantage. Some companies were thinking about investing more in IT in the belief that most of their competitors were not spending on technology.

...and After

Fast forward to the last quarter of 2001. By the time Morgan Stanley released version 2.8 of its CIO survey, on October 2, just 24 percent of respondents said they would spend more on IT in the second half of the year than in the first half, down from 34 percent in July (but up from 17 percent in September). Also in the October survey, 70 percent predicted a drop in spending for the second half (up from 54 percent in August). But perhaps the most significant finding from the survey was that 24 percent of respondents were still uncertain how the events of September 11 would affect IT spending and strategy (down from 33 percent in the previous month's survey).

The sense of uncertainty hanging over the IT industry in the wake of the terrorist attacks has been widespread, Gomolski says. "In my mind, there has never been a period of greater uncertainty in the last couple of decades in terms of information technology," she says. Carrier's Dalal agrees. "I've been in business for 35 years, and I've been managing at a senior level for the last 20," he says, "and I've never been in as uncertain, as unpredictable a time as we are in right now."

Yet the Morgan Stanley survey showed just a slight increase in the percentage of CIOs reporting that they were concluding smaller deals, slowing or cutting spending or getting requests from senior management for cuts: 52 percent in October versus 48 percent in September versus (and 47 percent in the pre-attack days of August). Why, given the unclear economic outlook, haven't companies rushed to cut their IT budgets?

Part of the reason, of course, is that funds for the remainder of 2001 were most likely already committed prior to September. "We could not really stop the expenditure for [2001]," Dalal says, "because we had lots of projects in process." For example, Carrier was well into an effort to take its warranty program online using Web-enabling software from a company called Entigo, with the project kicking off on October 22. Carrier has also been pursuing an aggressive program to use the Internet to do business with an increasing percentage of its supply base and planned to bring several hundred of its suppliers online in 2001. With these and other projects underway, Carrier's IT spend for 2001 was on target to finish the year just slightly under levels projected prior to September, but still ahead of 2000.

IT departments are further hampered in reducing their spending by the relatively low percentage of their budgets that is discretionary. Gomolski says that, on average, about 75 percent of an IT budget typically goes to support what a company already has in place, such as its enterprise resource planning (ERP) system, or to make payments on major hardware and software investments that are being amortized over several years. "They can't turn on a dime and say they're going to cut their budget in half," says Gomolski. "Not unless they literally go around unplugging things."

Outlook for 2002

Given these constraints, what will 2002 hold for IT budgets? Boston-based technology consultancy Aberdeen Group, in a report issued two weeks after the September 11 attack, laid out three possible scenarios for IT spending in the year ahead. The scenario Aberdeen viewed as most likely called for a 6 to 12 percent drop in spending for the fourth quarter of 2001, followed by a rebound in 2002 as spending increased by 5 to 7 percent. The best case called for IT spending growth of 8 to 9 percent, and the worst case, a 2.5 to 5 percent rise in IT budgets.

Gartner's researchers offer a less sanguine outlook. Under the scenario they view as less likely, IT spending would rise by 5 percent in 2002, with higher spending on security, disaster-recovery and knowledge-management solutions offsetting financial difficulties in the airline, travel and insurance industries. Under their "more-likely" scenario, continued economic uncertainty would produce a 1 to 3 percent drop in IT spending across all industries in 2002, with the hardest-hit sectors seeing declines of 10 percent or more. In this scenario, companies essentially would halt all discretionary spending through the middle of 2002. Regardless of which scenario comes to pass, all companies likely will consider investing greater resources in security and disaster-recovery in response to the September 11 events. "Business continuance is everything now," says Gomolski. "It's all about can we keep the operation up and running if our infrastructure is hurt."

For example, at San Francisco-based financial services company Charles Schwab, which has had an emergency contingency planning (ECP) strategy in place, the possibility that terrorists might further target the U.S. financial system has prompted the firm to pay more attention to the types of service outages that could be driven  as a company representative says  "by malicious intent," according to Bill Wells, senior vice president for Schwab Technology Finance and Planning. In order to avoid falling prey to such attacks, the firm was considering investing to expand its ECP strategy, but those plans had not been finalized as of late October. Overall, Schwab says the September attacks did not change the company's technology spending plans for 2002.

Of course, it remains to be seen whether companies will actually wind up spending more for security and disaster recovery, and much will depend on how geopolitical events unfold. Many firms have been talking about "just-in-case" scenarios and dusting off recovery plans, Gomolski says. "But are they going to put their money where their mouth is? Are they really going to invest in those things, or are they just paying lip service to them? I don't think that's clear yet."

For his part, Dalal says Carrier will end up curtailing its discretionary project spend in 2002, but he emphasizes that the company will continue to invest in new systems that can replace less-efficient legacy systems or systems that are duplicated across business units. "We are going to be smarter in how we invest," Dalal says. As an example, he cites the case of two different application systems running at two separate Carrier subsidiaries in the Australia-Pacific Region. Previously the company might have upgraded both systems, but now Carrier will replace the two with a single new system, a consolidating move that will cut IT operational costs by more than half while increasing functionality.

Ultimately, however, with the economic outlook for 2002 still unclear, Dalal says he has had to incorporate a good deal of flexibility into his plans for the coming year. "We are building uncertainty into our plans by focusing on the costs that are fixed, that we have to support," he says, "and then building strategy around discretionary spend in such a way that we can change something."

Gomolski notes that the current uncertainty places a premium on the ability to be agile. Betting on a particular outcome to political and economic events through the middle of 2002 would be a risky wager indeed, since, the analyst warns, "The chances of getting that right are pretty slim."