YEARAHEAD-U.S. firms to make do with infotech on hand
By Peter Henderson
SAN FRANCISCO, Dec 27 (Reuters) - With corporate America's once-unassailable optimism about Net-driven productivity starting to fray, the information technology industry looks to be on the verge of its first sustained slowdown in a decade.
As companies draw up their budgets for 2001 amid concern about a broader slowdown, chief financial officers are rethinking the mantra that new information technology will always pay for itself -- even in bad times.
"In general, you can freeze (information technology) spending, and everything will roll along just fine," Martin Reynolds, an analyst at technology research firm Gartner Dataquest, said of the new thinking.
If that kind of thinking spreads and deepens, it poses a risk for the tech heavyweights such as Sun Microsystems Inc. <SUNW.O>, Oracle Corp. <ORCL.O>, Hewlett-Packard Co. <HWP.N> and others who have based next year's forecasts in part on the view that investment will prove durable even in a downturn.
But some argue that cutting back might be a good thing for their corporate customers, who would be forced to think hard about how to make better use of gear they already have.
"Nothing focuses the attention of an organization like recession or slowdown," added Hal Varian, Dean of the School of Information Management at the University of California, Berkeley.
"Firms have invested very, very heavily in information technology, and the attractive investment now is really integrating it," he said. That requires analyzing how technology is used, and maybe cutting back in some ways.
Should employees really be spending an hour to an hour and a half every day on e-mail, for instance? "I think people are going to try to squeeze value out of their acquisitions," Varian said.
THE BIG CHILL
Chief information officers, the architects of corporate technology spending, are already battening down the hatches, according to two recent polls by investment banks.
Corporate technology budgets will climb 8 percent in 2001, a Morgan Stanley Dean Witter study said. That seems hefty, except in comparison to the 12 percent growth in 2000.
In another sign of caution, companies also plan to defer more investment next year, in contrast to 2000, when a lot of buying immediately followed the crucial millennium turnover.
A recent Merill Lynch survey said that in just a month the share of corporate respondents planning to increase investment dropped to 56 percent of from 78 percent.
"Some of the spending viewed as 'non-discretionary' may actually be more discretionary than commonly perceived," analyst Thomas Kraemer concluded.
The failure of Internet start-ups has been widely telegraphed, but an overlooked impact of the dot-com shakeout is that it could ease pressure on larger companies to re-tool.
"Brick-and-mortar companies, once hurried to build out infrastructure to meet "new economy" threats, may be taking a more measured, slower approach to IT spending and researching more deeply to see what business models would boost their competitiveness," he said.
WHAT TO CUT?
The slowdown could stop companies from undertaking new projects, at least for a while, said Vernon Turner, an analyst at computer research firm International Data Corp.
"If you haven't started it now, it isn't going to happen in the early part of 2001," he said.
Analysts said the data suggest companies will try to squeeze more life out of already purchased personal computers and powerful network computers.
Gartner Dataquest's Reynolds said PC spending would drop as the economy slowed, since many new computers -- as much as 5 percent of the total sold in recent years -- had been for fitting out new employees.
But Merrill said business would still be brisk for companies that supply the infrastructure of networks, like Sun, Brocade Communications Systems Inc. <BRCD.O> and other storage makers, such as EMC Corp. <EMC.N>, and stand-alone storage product maker Network Appliance Corp. <NTAP.O>.
Reynolds said companies also would have to integrate what they had, and could look to new software, for electronic commerce and other needs -- the same argument Oracle makes.
"Software is where you can get the most leverage if your hardware is reasonably up to date," he said.
"The place where you want to be investing in IT is where you can reduce costs or make your system more efficient such that you can gain more business. That would mostly be integrating existing applications," he said.
The Morgan Stanley survey ranked database software, marketplace software and e-commerce software the top three spending categories.
Overall corporate investment is still projected to grow in 2001, but more slowly than the double-digit gains of the past four years. The Anderson School of business at the University of California, Los Angeles, for example, forecasts capital spending to grow by 4.6 percent over the next two years, down from the 9.3 percent average that has held since the U.S. economy began expanding in 1991.
"There is almost certainly some slack," Reynolds said. "If you are an IT manager, one of the most frequent visitors to your office next year is going to be the CFO. He is going to be looking for money." |
