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Which Way to Turn?

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As the economy sputters, most companies seem ready to spend less on technology, but some may crank it up.

By Scott Leibs

Signs of an economic slowdown are prompting many companies to reevaluate IT budgets, but analysts caution that knee-jerk cost-cutting may be unwise. A December survey by Morgan Stanley Dean Witter & Co. found that IT budgets would increase by an average of 8.1 percent in 2001, compared with 12 percent last year. A survey released by Merrill Lynch in early January put the average increase at 5 percent, compared with 11 percent in 2000.

While a modest adjustment to rates of growth may not seem significant, a closer look at just where companies will and will not spend money indicates that 2001 may be a year in which decisions become more difficult than in years past. For example, despite the general mood of belt-tightening, a survey by AMR Research found that companies will continue to spend aggressively on E-business technologies. To fund those efforts, 29 percent plan to reduce their spending on forms of technology that don’t connect to customers or suppliers. Morgan Stanley found that spending on database, marketplace, and E-business software will grow faster than overall IT budgets, while desktop and mainframe hardware and software will see only nominal growth, and consulting services will see an outright reduction in spending.

With spending levels very much an issue, CFOs are likely to budget plenty of time for IT. “The last time most CIOs saw their CFOs was the 1990­91 recession,” quips Ken McGee, group vice president and research fellow at consulting firm Gartner Inc. “When times get tough, CFOs like to see big cuts in spending that show up fast on the income statement.”

But with the phrase “soft landing” filling the void left by “dot- com,” few, if any, companies are pushing for big cuts. And experts see more than one bright side to slower growth. Rob Austin, a professor at Harvard Business School and a fellow with the Cutter Technology Council, says that big companies in particular may find a silver lining. “Firms that responded to the rise of Internet start-ups with shock and dismay,” he says, “can now relax and figure out how to get it right. They don’t have to worry that their ROI horizons of two to five years put them at odds with the ‘fast and nimble’ dot-coms.”

Gartner’s McGee sees another advantage. “When the economy was booming, IT budgets increased so fast that most companies didn’t do a good job managing those assets, or even cataloging them. Now that they have to look closely, they can figure out just what they’ve got.”

What they haven’t got they may decide to rent rather than buy. Martin Reynolds, also with Gartner, believes that many companies will shift expenses from capital budgets to service contracts. “Outsourcing and ASPs look more interesting now,” he says. “Others may simply put off big projects until a later quarter.” Morgan Stanley analyst Charles Phillips says his survey indicates that IT spending will indeed be “back-end loaded,” with 14 percent saying they will spend cautiously in the first quarter, while another 12 percent scaled back their budgets even before the quarter began. Any improvement in the economy, he says, will prompt many firms to spend more heavily later in the year.


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