CIO sentiment on slowdown: Why panic?

As we all worry about the slowing economy, the next big decision for many is to see how the current environment will affect technology spending. Unfortunately, there are as many answers as there are analysts.

Morgan Stanley conducts surveys of 150 to 200 chief information officers from senior major companies on a monthly basis. The word is that spending is slowing, but the data isn't yet catastrophic.

The dot-com spending spree and the post-Y2K bubble that helped to boost technology spending in 2000 were aberrations. We knew spending was likely to slow and our numbers backed that supposition up--from 12 percent to 8 percent growth in IT budgets for this year. But is the 8 percent number at risk also?

According to Morgan Stanley economists, the risk of a recession and further IT budget cuts is high and growing higher. As announcements of earnings shortfalls, slowing industrial production, rising unemployment, and continued energy problems flow in, buyers could get nervous. We've yet to see the big hammer drop from upper management with an edict for across-the-board budget cuts outside of a few areas in telecommunications and financial services. But of course, we're early in the year and those types of cuts are still possible.

Earnings from technology companies have been a mixed bag. Almost all hardware companies and network equipment companies have warned of slowing growth or already reported lower than expected numbers. The one lone exception in hardware is IBM, but that's mainly because of easy comparisons with last year and low expectations for growth.

However on the software side, the large companies such as Peoplesoft, SAP, i2 Technologies and Siebel Systems posted stronger than expected numbers in December. Although smaller software companies with high exposure to dot-com spending (Web site analytics, content management, and so on) saw a sharp fall off, the numbers outside of that segment looked pretty good.

Therein lies the dichotomy. Enterprise applications aren't bought for current quarter consumption given the long implementation times. Hardware is more tied to immediate usage. But even enterprise software infrastructure--databases, application servers, storage software--which is presumably more tied to hardware shipments, hasn't seen a material change in its growth rate.

It could be that hardware companies benefited more than software companies from the dot-com and Web site building boom. The software companies continue to paint an outlook for good growth, although its lower than last year's outlook--but still at levels that require a reasonably good buying environment. Of course growth would have slowed anyway because of the tough comparisons with last year and the large absolute numbers involved.

Chin up: Sunlight on the horizon
But all is not lost. Before we all get too negative, it's useful to remember that technology is a lot more ingrained in corporate strategy than it was doing the last recession. Jack Welch recently said he hopes his competitors cut IT spending because he plans to invest right through the slowdown given the strategic importance of technology.

I think it's safe to say that the high profile of e-business has caused most executives to think more strategically about technology. While they can cut some things, it may not make sense to cut to the bone when competitors are building for the next upturn. And retaining people now might be easier than it was six months ago, but highly talented technologists are still in short supply so companies will think twice before giving them up.

Moreover, CIOs have become more important to their organizations given the Y2K problem (or non-problem, as it turned out) and the subsequent focus on e-commerce. CIOs are meeting much more frequently with senior management and pitching their ideas to board members proactively.

So that leaves us with a plausible scenario where some non-strategic projects are cut since IT probably got a little fat along with everyone else during the boom times of the last five years. However, the major projects that can drive market share--revenue, increase productivity, or lower costs significantly and in a measurable way--continue to plow along. That argues for areas with a more proven or understood return on investment and fewer exploratory, skunkworks projects.

So the old boring stuff--enterprise resource management and supply chain--could hold up quite well. Customer relationship management (CRM) and procurement are a notch down but still have understandable returns on investment with success stories. More brick-and-mortar companies are being asked to document their e-business strategies for Wall Street so a massive cutback may be more visible to investors than it was in the past.

Things may not be as good as last year, but there's a case to be made that most companies hold out as long as possible before cutting the big projects. The next six months will start to separate companies who plan to bet big on technology and those that plan to play it more conservatively. The split between the two will determine the fortunes of technology stocks over the year.

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