Is The Economy Leaving Your Tech Dept. Behind?

For Paul Zazzera, chief information officer at Time Inc., 2004’s technology budget is going to look a lot like 2003’s: Flat.

Zazzera’s budget, which serves the flagship magazine division at sprawling media giant Time Warner, will feature a few high-priority projects such as updating Time’s classified-advertising system. Whether he undertakes a lot of other projects depends on how the economy breaks.

“High-priority things will get funding no matter what, but things like updating our financial and human-resources systems, which will save money in the long run, are viewed as discretionary because they are an expense short-term,” says Zazzera.

So Zazzera isn’t counting his projects before the economy hatches. And he isn’t alone.

Like other colleagues gathered at the Society of Information Management’s SIMposium 2003 conference last month in New York, he expects business to pick up in 2004—but gradually. He is wary of data showing the U.S. economy recovering in any sort of speedy fashion.

After three years of budget cuts and adjusting to “business alignment” with their chief financial officers, technology executives aren’t about to become too optimistic.

According to a Merrill Lynch survey of 50 CIOs at Fortune 1000 companies and government agencies, technology budgets should end 2003 up 3% over 2002, with any material gains delayed until the second half of 2004, if not 2005. The survey, taken in late September, shows budgets barely outpacing inflation, which for the past year is a hair more than 2%.

Indeed, all 10 technology executives interviewed by Baseline for this story expect their technology budgets will grow less than 5% in 2004. Those compiling wish lists are buried under more-pressing needs such as cutting costs and integrating existing applications. Even so, it may pay to think ahead.

“It’s tough to do, but some projects need to get done no matter what the sales are,” says George Rimnac, vice president and chief technologist for Lake Forest, Ill.-based distributor W.W. Grainger, which is installing SAP customer-relationship software. “There’s an opportunity to make investments now so you’ll be ready to strike when the economy picks up.”

Georgia State University information systems management professor Ephraim McLean says executives are traditionally slow to believe a recession is really over. That reluctance may be due in part to economists who proclaimed this downturn was history in 2002, when the Gross Domestic Product rose 2.2% and 3.3% in the second and third quarters, respectively. Now, technology executives are likely to wait until they see a string of good quarters before taking on new spending.

The trick will be not waiting too long.

The Gross Domestic Product surged 7.2% to $9.8 trillion on a seasonally adjusted annualized basis in the third quarter of 2003, according to Commerce Department statistics released Thursday. That sum is the fastest growth since the first quarter of 1984 when GDP was 9%. Meanwhile, weekly jobless claims trended down last month albeit slowly and the University of Michigan’s consumer-sentiment index inched up to 89.4 in mid-October from 87.7 in mid-September.

“Growth should pick up in the economy over the next year-and-a-half or so, enough to spur companies to hire,” says Gus Faucher, senior economist at

One example: IBM, a beneficiary of renewed technology spending. The computer-services giant reported net income gained 90% to $4.87 billion on revenue of $63.2 billion for the nine months ended Sept. 30, compared to the same period a year ago. Now it hopes to add 10,000 jobs next year in services, middleware and Linux divisions. IBM ended 2002 with 315,000 employees.

Given the data, technology executives need to begin formulating plans for a better economic environment, experts such as McLean say. That means:

  • Prospecting for talent that may become more costly in an upturn;
  • Starting projects whose benefits you will need as business gains strength in 2004 and 2005;
  • Speeding up execution of current projects.

    If Charles G. McCaig, senior vice president, information technology at Chubb, gets some budget room, one of his first projects will involve moving his family of property- and casualty-insurance companies onto one unified set of hardware, software and data systems.

    Currently, Chubb’s global businesses have different databases, nomenclatures and systems to monitor various insurance products such as property, marine and casualty insurance. McCaig’s goal: create common definitions of information on insurance policies and unified-tracking systems so Chubb can determine profitability by customer, product, and the risks involved with each product.

    “There’s an opportunity to have transparent information across all products,” he says. “We have a global infrastructure, but don’t have a global information system. The more money we get, the more things we can do there.”

    For the last two years, projects have focused mainly on cutting costs and achieving returns in fewer than six months, but that could change to target implementations with a longer payoff. However, few see their higher-ups approving many projects with a return more than a year away, say executives.

    In better economic times, executives may consider being more aggressive, either about new projects or the timelines to complete existing installations. One way it may play out: Instead of a $10-million project being dragged out over five years it may be expedited to be done in three.

    McLean says executives should also focus on stockpiling talent, which will become more expensive as the economy improves.

    According to Mercer Human Resources Consultants, a senior project manager at a mid to large-size company averaged a median cash and bonus salary of $95,000 in 2003, up from $87,400 in 2001. If pay increases rebound from the average 3.3% today to the 4.2% rate in 2000, that project manager will cost $99,000 by the end of 2004.

    Among other items on the budget in an improving economy: All the technology maintenance—hardware replacement, database cleanup and unification, process documentation—that fell by the wayside while times were tight.

    In a recent survey sponsored by SIM, executives listed business intelligence as a top priority, which hints that technology managers may be a little more optimistic, says McLean: Those tools don’t have a clear return.

    The return on business-intelligence software varies by company, but one way to justify it would be as another step to make data-warehousing projects pay off. Many companies have vast data stores, but don’t effectively make decisions on the data.

    Ian Campbell, president and chief executive officer of Nucleus Research, says the return on business intelligence is largely intangible, but likely to become more popular as businesses see it as a way to make more-informed decisions. He recommends projecting a best-case scenario, say cutting expenses 1%, and a worst case such as saving just a tenth of 1%.

    June Drewry, chief information officer at AON Corp., says she expects collaboration technology to move higher on executive shopping lists if the economy shows steady improvement.

    “Margins are still tight, but these technologies—like WebEx, Microsoft’s NetMeeting and videoconferencing—bring together people and enhance productivity,” she says. “These projects will be done in a small way—they increase productivity, but it’s not as easy to show a return because people aren’t being cut.”

    For collaboration projects, the justification is lower travel expenditures, ideally a cut of 5% to 10%, says Campbell.

    What do such potential projects have in common? For starters, executives aren’t actively pushing to budget these projects for 2004. Instead, they are making a mental note in case the economy improves. In an upturn, items like business intelligence, e-learning and collaboration are viewed as important to the business even if they deliver “soft,” or murky returns, executives say.

    “I think CIOs have a lot of things in what I’d call their hope chest wish list,” says Bruce Carver, chief information officer at Pepsico’s Beverages and Foods unit. “Most of these projects will still have hard benefits, but projects with soft benefits that are near the customer could get done.”

    The big question for analysts and executives alike is what factors might prod companies to launch these “ideal-world” projects. The short answers are time and a clear case that the economy is out of its rut. The shorter answer: A close rival gets going first.

    “It will take a company in your industry using technology to gain a competitive advantage,” says Chubb’s McCaig. “Once that’s clear, other companies will move.”

    By then it might be too late.

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