IT Budgets Remain Under Close Watch for 2006

By Kim S. Nash  |  Posted 2006-01-06 Print this article Print

Companies will be cautious with their technology budgets in 2006, and many will allocate dollars on a case-by-case basis.

We face another year of living moderately, at least with regard to technology spending.

A just-completed survey of 115 senior information technology executives in big companies by CIO Insight, a sister publication to Baseline, shows a 1.3 percent decline in technology spending this year among companies with more than $500 million in sales.

The publication's findings, however, indicated that companies with revenue under $500 million will spend 6 percent more this year than last, a slower rate of growth than in 2005.

Meanwhile, research firms Gartner Inc. and International Data Corp. predicted a rise of 5 percent in IT budgets compared to last year. The Goldman Sachs Group Inc., on the other hand, said technology spending will either stay flat or decline this year, but didn't reveal by how much.

Why such different findings? Part of the reason may be that the IT budget process has changed. Traditionally, the CIO pores over wish lists and historical spending figures collected from various corners of the company to arrive, on a wave of sweat and caffeine, at one big number to take upstairs for approval.

Today, technology spending is a lot less predictable. Companies are moving away from monolithic technology budgets laid out months before the ball drops on New Year's Eve.

Cathy Tompkins, CIO at Chesapeake Energy Corp., can't tell you exactly what her technology budget will be in 2006 because she's budgeting projects as the year unfolds. Tompkins proposes projects with her business-side counterparts, and each is evaluated in relation to other projects underway as well as to what else is happening in the energy industry.

"We really don't do budgets at the IT department level. It blew me away when I started here [in November 2004], to be honest," Tompkins said.

But the dollars that are being allocated, according to CIO Insight, are going mainly to projects in disaster recovery, business intelligence, Web services and IT's perennial bane, data integration. Here's how other technology spending plans shape up for the next 12 months:

COMPANY Arch Chemicals: a manufacturer of industrial chemicals, based in Norwalk, Conn., with $1.3 billion in sales for the last 12 months.
CIO: Al Schmidt
2006 TECH SPENDING: about $22 million, or 1.7 percent of revenue, as it was in 2005 (excludes capital spending, which Schmidt proposes by location and project on a rolling basis).

  • Roll out SAP AG enterprise planning software to European offices, following completion of an SAP upgrade in the United States last year.
  • Install Microsoft Corp.'s Microsoft Dynamics CRM (customer relationship management) software to better determine the profitability of customers, based on data fed to it from SAP supply chain and financial software.

    Arch Chemicals has spent the last 18 months refocusing its business—including selling off a microelectronics materials division that supplied chemicals to semiconductor makers. The company now specializes in treatment products, such as chemicals used to clean swimming pools, and performance products, such as additives for antifreeze.

    Because of the business changes, the company needs to understand more fully what those customers want and the best way to provide it, Schmidt said. The goal is to improve profit margins, which slipped from 34 percent in 2002 to 32 percent in 2004.

    Schmidt said he wants to arm the sales force with data not only about selling activity but also "selling results," such as whether or not the deal closed, how long it took and how lucrative each transaction was.

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    Schmidt on how to be lean:"When we're doing a project, [we] will bring in additional [contract] staff to ramp up and down and we may [outsource] selected infrastructure areas, but most of ongoing operations are done with internal people. [At 150 people, the tech staff] is deliberately lean. We're very good at IT operations, such as systems administration.

    "[For example,] Hewlett-Packard OpenView monitors all networks and major servers, and Microsoft SMS [System Management Server] distributes patches to all servers and PCs automatically. Where we can, we try to invest in a tool [to free up staff] to be proactive as opposed to reactive, and it makes a tremendous difference."

    COMPANY Chesapeake Energy: a $4 billion gas company in Oklahoma City.
    CIO: Cathy Tompkins
    2006 TECH SPENDING: to increase 30 percent to 40 percent over last year.

  • Build a data warehouse to consolidate information about the company's gas wells, from geological data to production output to ownership legalities and profitability.

    Right now, well data is spread across the company in departmental systems, such as Microsoft Excel spreadsheets for tracking mineral rights and a Microsoft Access database to monitor the activities of companies it could acquire. Having the different kinds of information in one place will improve data accuracy and help with business analysis, Tompkins said.

  • Install a PeopleSoft human resources and payroll system. Chesapeake head count has jumped from 866 at the end of 2002 to about 2,200 today, as the company has acquired hundreds of smaller natural gas providers, or certain of their assets.

    Chesapeake's revenues have tripled and then some since 2002, from $826 million to $3.9 billion. The tech department alone more than doubled in 2005, from about 55 people to 120, and will reach 140 to 150 by the end of this year, Tompkins said.

    Tompkins on budgets—or lack thereof: "We have [technology] budgets at the corporate level for SEC reporting, Sarbanes-Oxley compliance and so forth. But [for daily technology operations] it's more of a per-project basis. I don't have a fixed ceiling I'm managing to all year.

    "We propose projects. [I'm] working with counterparts and department heads [on] what we need to do as a company, with technology. Our industry is a pretty capital-intensive business. No matter what you spend on IT people or projects, it's still almost a rounding error to them."

    Having no formal budget, Tompkins added, "does a little reverse psychology on you. You don't have excuses, like 'I didn't have enough money to do this.'"

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Senior Writer
Kim has covered the business of technology for 14 years, doing investigative work and writing about legal issues in the industry, including Microsoft Corp.'s antitrust trial. She has won numerous awards and has a B.S. degree in journalism from Boston University.

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