Have IT Cost Cuts Gone Too Far?

According to recent reports, there are signs that many industries have cut IT spending as much as they can without cutting into the bones of their business. Analysts noted that a long tide of cost cuts is slowly reversing, although IT spending will not roar back to life with a big bang as 2002 draws to a close. Instead, the turnaround is occurring extremely slowly and only in selected sectors.

Aberdeen Group, for example, has projected that IT spending will register a 3.1 percent increase globally in the second half of 2002, with an increase of 4.3 percent expected in the United States.

Slow Climb Up

Aberdeen senior vice president Hugh Bishop told the E-Commerce Times that the research firm’s forecast heralds a very slow turn upward in the fortunes of those who sell IT products and services.

“It’s not a lot right now, but it’s a much better picture than what we were seeing a year ago,” Bishop said. He noted that a recent Aberdeen survey of 150 corporate IT decision-makers found that they plan to increase IT spending by an average of 3.7 percent in the second half of 2002 — a significant rise from a year ago, when IT managers projected an average 1.4 percent decrease in spending.

This shift has already been reflected on the balance sheets of some IT providers. According to an Aberdeen analysis, second-quarter financial results for the top 20 IT companies marked the fifth sequential quarter of declining year-over-year revenue, but the decline for the benchmark group was just 3.5 percent, the smallest drop since the beginning of 2001.

Selective Rebound

However, experts emphasized, any IT spending increase will not be an across-the-board phenomenon. For the most part, spending will rise only for functions deemed mission-critical.

For example, Bishop said, manufacturing firms are expected to lead the way in boosting IT purchases during the next six to 12 months. Such companies are seeking to streamline the way their products are made and delivered to market, and they know that failing to update technology could cause them to lose ground to competitors.

“When it gets to where IT cost-cutting prevents you from carrying out the kinds of programs you need to be competitive, that’s when it stops being productive,” Bishop said.

In contrast, spending on technology that is deemed auxiliary to companies’ core functions — such as security and communications — is not likely to enjoy the same boost in the short term, he added.

Pay as You Go

According to Gartner research director Barbara Gomolski, some of the pickup in IT spending — which she said is unlikely to occur until early 2003 — will be attributable to companies seeking to catch up with needed infrastructure improvements that were put off for longer than originally intended.

IT purchases delayed for too long can cause problems of their own, especially if they affect the basic internal functioning of a company, Gomolski said. In general, she noted, companies should spend about 75 percent of their IT budget on maintaining existing infrastructure, with about 25 percent invested in new infrastructure.

If new infrastructure purchases fall much below 25 percent, companies sometimes can find themselves making large purchases to solve problems that arise, costing them more than if they had made changes on an ongoing basis.

“It’s sort of like the strategy behind personal saving and investing,” Gomolski told the E-Commerce Times. “If you don’t invest a certain amount of money as you go along, it’s much harder to play catch-up later.”

Diverse Priorities

IT investment plans also vary widely by industry. According to a Forrester Research survey taken in mid-2002, consumer services firms reported that if everything goes as planned, their IT spending in 2002 will be 8.1 percent higher than in 2001. In contrast, high-tech firms said they expect to spend 8 percent less on IT this year than they did in 2001.

In an August 2002 report, Forrester senior analyst Tom Pohlmann projected that IT spending will finish 2002 at a level 2.3 percent higher than in 2001, with most growth concentrated in consumer-facing industries like retail, healthcare and leisure.

“Insurers and transportation firms will continue their trajectory of high IT spending growth, while utilities and high-tech continue their spending slide,” Pohlmann said.

Not Big Spenders

Apparently, company size is also a big factor in spending plans. According to Forrester, firms with between $1 billion and $10 billion in revenue will average a 0.8 percent spending increase during 2002, but all other surveyed companies will spend an average of 5 percent more than in 2001.

When Forrester surveyed 1,001 company execs, about 37 percent of those planning to raise their IT budgets in the second half of 2002 said they would do so by more than 10 percent, while about one-third of budget-cutters planned to slash outlays by more than 10 percent.

Overall, 19 percent of respondents forecast their IT budgets would increase during the second half of 2002, 12 percent predicted a decrease, and 63 percent stated they would keep spending flat.

Pohlmann said CIOs will continue deferring enterprise applications and big consulting projects. While demand for IT services was up in mid-2002 compared with the beginning of the year, 39 percent of firms said they plan to shift dollars away from consultants and contractors, a move that will put even more pressure on services pricing.

Some Must-Haves

According to Pohlmann, although some industries know they need to beef up IT spending in certain areas, that realization is not being followed up with major funding.

“There’s light at the end of the tunnel, as executive sentiments toward their use of IT and their belief in IT as a business enabler are approaching or surpassing early 2001 levels,” Pohlmann said. “But the run-and-gun days of high spending are over.”

He added that most firms will continue adding to infrastructure essentials — server, network and storage hardware — despite a presumed market glut. Demand for enterprise applications will remain low for the rest of this year, but software dealing with data dissemination and analysis is a relatively high priority and might see an increase.

Forrester found that 23 percent of firms surveyed said they plan to make purchases related to enterprise portals and business intelligence sometime before the end of 2002.