2007 I.T. Budget Check

By Kim S. Nash  |  Posted 2007-02-07

No one really knows how much they're going to spend on technology this year. Not even you.

Key analysts disagree in their forecasts about information-technology spending in 2007. Goldman Sachs predicts technology budgets will jump 6% to 7% compared to 2006. International Data Corp. goes along with that. But Merrill Lynch puts the increase at 4.2%, based on a survey of 100 chief information officers in late 2006.

Most pessimistic is Gartner, which forecasts that overall technology spending will grow by 2.8%. Yet that figure may seem worse than it is, according to Jed Rubin, an analyst in Gartner's worldwide information benchmark service.

Many of the technology executives Gartner talked to said they have cut keep-the-lights-on infrastructure costs in the past year through efficiency plays, such as consolidating servers, which can save 5% to 10% on maintenance. So, while 2007 budgets may increase by just 2.8%, more of the budget will be freed up this year for new projects, Rubin says.

Some of the savings have to be recycled back into the corporate coffers, of course. Chief executives love to show Wall Street just how efficient they've made things. But some amount will remain in the information-technology budget, giving CIOs more room to maneuver.

Much more interesting than quibbling over percentage points, though, is what technology executives plan to do with their money. Several chief information officers told Baseline that security and streamlining infrastructure to cut technology operating costs are the two biggest priorities.

Keep It Tight

While the places where companies will spend their technology dollars—and the amounts they spend—are sure to vary from one corporation to the next, there does seem to be an overriding consensus that the tight budgets developed in the past several years are here to stay. And the only way CIOs will get to help guide business strategy—and the kind of high-profile projects that can change companies—is by finding money for such things within the funding they already have.

"We really need to, at a lower cost, deliver more I.T. capability to our business," says Kim VanGelder, chief information officer at $14.3 billion Eastman Kodak in Rochester, N.Y.

"You owe it to the shareholders to process I.T. the cheapest way possible and still maintain quality," adds Nick Ibrahim, chief technology officer at the $1.3 billion Ruby Tuesday restaurant chain.

But how?

One way, says Bruce Skaistis, founder of eGlobal CIO, a consulting firm in Tulsa, Okla., is to replace older hardware with new multiprocessor machines that cost less. Or swap home-built applications for Web-based systems or software delivered as a service. But Skaistis knows it can be hard to rouse enthusiasm for such projects, even if the tech staff is convinced of the long-term benefits.

"You say, 'I want to commit $50 million to completely redevelop this application we've had for 20 years that's working OK.' And the organization is like, 'You want to spend $50 million to basically replace something we already have.'"

To get approval, he advises, take the time to lay out the mathematics of how and when the savings will come: "It's a hard sell. But more and more companies are realizing they have to do it."

The average North American company spent 68% of its I.T. budget to support existing software and hardware last year, according to Gartner. About 19% went to adding capabilities to keep up with company growth, and just 13% went to technology to propel the company into new markets or sell products and services in new ways.

But this year, watch for the proportions to shift. By cutting—or having cut—5% of spending on upkeep for the hardware and applications already there, companies should be able to add that much to "transformational" technology projects, Rubin says. The fun stuff.

In the media industry, for example, newspapers are experimenting with providing news continuously through multimedia Webcasts. "The business is changing the way it's delivering its product … with I.T.," he says.

At the opposite extreme is Alhambra Resources, a gold mining company in Calgary, Canada. Alhambra is mining 2.7 million acres in Kazakhstan and expects to increase gold production 25% in 2007. Even so, the company continues to lose money-—about $1 million in 2005, the latest year for which full-year results are available. It has also sunk more than $15 million into exploration and development. Until its gold harvest starts to pay off, Alhambra has to operate as lean as it can, says CIO Ihor Wasylkiw.

A small mining company typically runs more bulldozers and pneumatic drills than PCs and servers anyway. But Alhambra didn't even want the few dozen pieces of computer hardware it does use on its books. The company outsources all information technology to Calgary-based Impulze Computer Systems, Wasylkiw says: "We have 200 employees, and 150 are miners who work in dump trucks. I.T. isn't a big issue."

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High-priority technologies

Among more mainstream companies, tech spending in four specific sectors —financial services, federal government, communications and manufacturing—reflects technology spending overall, according to Goldman Sachs.

And in those areas, the concept of using software as a service-—where end-user departments access central applications and servers when they need to, rather than setting up their own systems locally—appeals to CIOs looking for ways to save money and gain control of applications. Thirty-six of the 100 technology executives Goldman surveyed in October 2006 said they already run at least some software on a service basis. Another 16 will deploy the technology this year, with an additional 20 saying they will follow by the end of 2008.

Washington Mutual has experimented with the technology, according to Debora Horvath, CIO of the $22 billion Seattle bank. This year, Horvath plans to expand the project because she likes the simplified application maintenance; there are fewer versions of each piece of software in use.

On the other hand, there's Fluor Corp. The $13 billion industrial construction firm is entering the fifth year of a five-year streamlining plan. Server consolidations, increased outsourcing and collapsing the number of technology vendors it uses from dozens to five are key moves that have helped Fluor hack $80 million from its tech budget since 2002, says Ray Barnard, CIO at the Irving, Texas-based company.

Barnard declines to say what his overall budget was or is, but says that this year, he's spending on several projects. They include upgrading SAP financial, human-resources and sales applications from version 4.5 to version ECC 6.0. Fluor is also buying blade servers—thin computers that slide into racks—from Dell and IBM to replace traditional blocky hardware the size of bookshelves.

Security is one of Fluor's top priorities, Barnard says. He's upgrading or enhancing firewalls, identity authentication software, encryption tools for laptops and physical security devices such as cameras. Security amounts to 8% of Fluor's overall technology budget. It's a hefty portion and it has to be, he says.

Fluor, which builds sensitive structures such as power plants, bridges and chemical factories, is among the largest employers in Third World countries, according to Barnard. "Some of our biggest activities are in China, Russia, Saudi Arabia and Africa—places where you need big-time security wrapped around I.T," he says. "We're constantly under attack because people think we have blueprints for everything."

As for hiring staff, technology executives who said they plan to add people in the coming year warned it would be within strict boundaries.

American States Water will spend some of the 4% increase to its tech budget this year to pay the salary of the one and only one person the utility plans to hire in 2007: a second-in-command for head of technology David Hefler. "The board of directors felt there should be one for continuity," Hefler explains, should he leave the $236 million Southern California water company. He'll be looking for someone with experience in regulatory compliance and security. The emphasis would be on knowing how to protect data from internal and external malicious activity, and making sure security procedures are carried out, Hefler says.

Ruby Tuesday, which plans to increase its 130-member tech staff by 10%, wants several project managers. They will, for example, help plan and roll out wireless networks at the 950 restaurants in the chain.

Kodak will be looking for people who know SAP modules such as Business Warehouse. "Hiring is limited and specific, and that's been the case for the past several years," Kodak CIO VanGelder says.

Right Approach to Budgeting

Aside from freeing up money in the existing information-technology budget, there's another way to make sure your favorite projects get funded: ask the right way.

Show how whatever it is you have in mind does something concrete to improve the company, either by making it more competitive, improving the internal flow of information or bolstering product quality, says Skaistis, the eGlobal CIO consultant.

"It's incumbent on the CIO to be the leader, as opposed to being reactionary and waiting for business to say, 'We want one of those,'" he points out.

How a technology executive presents ideas can determine whether budget requests get approved or denied, adds Scott Holland, who leads the information-technology practice at The Hackett Group, a consulting firm in Atlanta.

Rate all technology proposals by the degree to which they address core infrastructure maintenance, help the company keep up with growth or transform a major process, Holland suggests. Even more effective, he says, is tailoring your proposal to one of the chief executive's critical interests. "Tell him how you can invest in I.T. to lower sales, general and administrative costs," he says.

More specifically, find technological ways to cut costs in finance, human resources and procurement, which are among the biggest drivers of sales, general and administrative expenses. Companies classified as "world class" by The Hackett Group, meaning they rank in the top quartile in hundreds of efficiency and effectiveness metrics, spend 7% more on technology than their peers. But their financial processing costs, for example, are 45% lower, according to studies by Hackett.

"Organizations close the books faster with I.T., not with more people," Holland explains. CIOs make a grave mistake when they position their department in isolation, as a line item in the overall corporate budget, he says: "Put those systems in place to automate, simplify, integrate. But show how technology makes business visions real."

Fluor CIO Barnard agrees. When asked how he was able to cut technology spending while supporting a company that's in the process of doubling its revenue in four years, Barnard says, "What, besides knowing what we're doing?"

Mel Duvall contributed to this article.