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War With Iraq May Alter Budgets

By Larry Dignan  |  Posted 2003-04-07 Print this article Print

The prospect of war and its repercussions has technology executives ready to be prepared to prune already lean budgets again.

Brian Garavuso, chief technology officer for Interstate Hotels and Resorts, is mulling his own war plans.

The Sept. 11 terrorist attacks and a weak economy have hurt the travel industry. Now the Iraqi conflict could put clamps on his already-taut technology budget.

Garavuso's solution: Be prepared.

Upgrades of hardware and software would be the first projects to be jettisoned followed by an extension of a current hiring freeze. "We don't have a file with a contingency budget ready to go but we definitely have one in our head if something goes bad," he says. "You can't operate in this environment without thinking about the what-ifs."

As the largest independent hotel-management company in the U.S., Interstate could see its business slowdown even more. Indeed, the Iraq war wasn't a week old before Starwood Hotels and Resorts Worldwide withdrew its outlook on earnings because it couldn't gauge future demand amid geo-political turmoil.

"I could see it getting worse in the midst of a domestic terror attack," says Garavuso.

The prospect of war and its repercussions has technology executives ready to be prepared to prune already lean budgets again. According to analysts, technology executives should have three budgets: one for treading water; one for a worst-case scenario; and one for an optimistic outcome, just in case there's a quick war and the economy rebounds dramatically.

In a survey conducted the week the Iraqi war began, 67% of chief financial officers of U.S. corporations say they are spending cautiously or holding off all capital investment.

The survey, conducted by Financial Executives International (FEI) and Duke University's Fuqua School of Business, found that CFOs predict an 8% revenue gain, if the war ends swiftly, or a similarly sized drop this year if the war drags on or terrorist attacks result.

"There are very few CIOs that haven't had their CEO or CFO have a nice talk with them about worst-case scenarios," says Pat Cicala, principal of Hoboken-based Cicala & Associates.

According to Steven Norman, Merrill Lynch's first vice president and chief technology officer, the investment firm "is preparing for an ice age, not just a winter."

The company has pushed down its overall spending on technology and communications from more than $3 billion in 2001, to $2.2 billion this year.

The cutbacks come even as the demands on his systems are greater. Legislation such as the USA PATRIOT (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) Act and the Sarbanes-Oxley bill require better disclosure about customers and financial data, respectively. The company also has been under pressure from state and federal investigators into its investment research recommendations and practices.

"Times have been difficult," Norman says.

As a result, projects with high revenue and profit potential—such as a program to integrate wealth management services on desktop screens for 25,000 Merrill Lynch financial advisers—survive, as do those fundamental applications and services that are required to maintain its investment-banking, securities-trading and financial-advice services. That project, due to roll out in midyear, is being backed by "hundreds of millions" of dollars in spending, Norman said. And it includes such rollout partners as Siebel Systems and Thomson Financial Services.

"The projects in the middle are being squeezed out," he says. These include such potential projects as a $2 million expenditure on consolidating its disparate, existing debt-settlement systems.

Norman's focus on projects that make sound business sense is a common refrain among technology executives. Simply put, if a project doesn't dramatically boost revenue, cut costs or make the business more efficient, it's not being approved.

"The business is driving the technology initiatives," says Michele Morgan, chief information officer for Teekay Shipping, an oil shipping company operating out of Vancouver. "There may be an technology component to a business initiative, but we don't chase technology for technology's sake."

Morgan says Teekay will pursue a customer-relationship-management software overhaul with Pivotal while consolidating proprietary systems with help from Danaos, a Greek systems-integration company focused on the maritime industry, no matter how the war turns out. Those projects will save the company money by simplifying its infrastructure while helping it track its 102-vessel fleet.

"We're committed to that project because it makes business sense," says Morgan, who helps keep technology spending to 0.64% of revenue, according to Alinean. "We can check the total cost of ownership and see how our spending affects the business."

French Caldwell, an analyst at Gartner, says technology executives have to target projects that boost efficiency across business departments.

"It's very tough since there are things like customer call centers that don't fall within I.T. management," says Caldwell. "Don't be hesitant to reach out to the CFO to help prioritize projects and analyze risk."

Although cost cutting is the rage, some analysts say technology executives need to prepare for a business upturn. These analysts argue that a short war could "unfreeze" technology budgets, leading to larger technology projects such as supply chain and ERP overhauls. "What if a short war boosts demand?" says Douglas Tuttle, a director at Deloitte Consulting. "There is a contrarian argument that shouldn't be ignored."

But Tuttle and other optimists will remain contrarian. Technology executives, armed with a bevy of bleak economic indicators, are taking a believe-it-when-they-see it approach.

"I don't see any immediate turnaround," says Garavuso, who anticipates a flat-at-best-budget for the immediate future. "It'll take a while—at the very least six months—to get consumer confidence back."

Garavuso isn't alone. A Merrill Lynch survey of 100 U.S. and European chief information officers reveals 90% wouldn't increase spending if the Iraqi war was resolved quickly.

The biggest problem for technology budgets is the broader economy, which is struggling and unpredictable. Even the Federal Reserve says it is at a loss to forecast the course of the economy, citing "unusually large uncertainties clouding the geopolitical situation in the short run and their apparent effects on economic decision-making."

According to Forrester Research, it takes 4.5% of growth in the gross domestic product to boost technology spending. Fourth quarter GDP was 1.4%, according to the Department of Commerce.

Meanwhile, Caldwell notes that technology budgets traditionally lag actual business conditions. Given that most companies can't string together three good quarters of earnings and revenue growth, improved technology budgets could be at least a year away.

"Whenever there's a slowdown or uncertainty, it affects I.T. decision-making," said Oracle CFO Jeff Henley on the company's third-quarter earnings conference call.

Bottom line: While a quick resolution to the Iraqi war may give technology executives a few minutes of relief, budgets are going to remain tight due to economic worries.

"One lesson I've taught myself is, cheer up. In a way, this is a good time to be taking action," says Norman.

But, he adds, "the end of the war would be good."

Tom Steinert-Threlkeld contributed to this report.

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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