Customers are back in charge

By Larry Dignan
Staff Writer, CNET News.com
February 11, 2003, 4:00 AM PT

While the economy has baffled industries and investors in the last few years, it has clarified some things for John Dean.

The chief information officer at furniture maker Steelcase says the high-tech slowdown has allowed him to evaluate what information technology he really needs--and what he does not.

"There's been a permanent attitude adjustment about what you need to spend," said Dean, whose company plans to keep IT expenditures flat for 2003. "I'm going to continue on the path of cutting dollars from the budget even when the economy recovers. I lived through it, and now know I can do it."

That epiphany could be a troubling omen for countless hardware and software manufacturers anticipating an automatic rebound in sales when the economy finally begins to turn around in earnest. Newly wiser chief technology and information officers, once persuaded to buy products simply to keep pace with the blinding pace of the industry, are rejecting axioms that have dictated spending decisions for years.

Widely accepted product life spans such as the three-year PC cycle are being challenged for the first time by cash-strapped companies that have become skeptical of the purchasing advice of manufacturers. Companies are increasingly questioning other long-held assumptions, including the need to buy the latest operating systems, and talk of the next "killer app" in sales pitches may well be subject to ridicule.

The new pragmatism has reversed the dynamics that have governed much of the technology business for years, making this a true buyer's market. "We make decisions based on features, not the need to continuously upgrade," said Chris McMahan, CIO of Wireless Retail. "We stay put until we need more functionality."

As longtime spending rules quickly become myths, meanwhile, the prospect for recovery in the technology industry is less clear than ever. Even with traditional benchmarks such as three-year hardware upgrades, predicting the industry's recovery has been a crapshoot at best.

In the face of this uncertainty, chief information officers across the board are being particularly frugal. This year, overall spending projections are expected to be flat or up just a bit, only a slight improvement over what researcher IDC called the "worst year in the history of the IT industry." The Gartner Group is projecting that IT spending will reach $2.1 trillion in 2003, up 4.9 percent from 2002, estimates in line with other research firms.

"I don't think we will ever go back to the 13 percent to 14 percent compound growth rate--ever," Merrill Lynch CTO John McKinley Jr. said. "We've learned some very painful lessons coming out of that 1997-2000 tech exuberance era."

One of the most important of those lessons, technology officers say, is not getting caught up in the kind of hype that defined the dot-com boom. Throughout the late 1990s, many corporations bought new, unproven products and even entire companies for fear of losing their competitive edge--resulting in an industrial arms race that left many stranded with expensive technologies and little to show for them.

The resulting backlash has revived an old business concept of previous generations that has been rarely spoken of in high-tech circles: If it ain't broke, don't fix it.

"We will probably stretch the rubber band thinner," General Motors CTO Tony Scott said.

The first place where he and others are saving money is the personal computer, flouting the long-held rule that PCs must be upgraded every three years. Computer makers banking on the usual three-year cycle got a rude awakening last year when they expected a surge in sales to replace PCs bought in 1999 to avoid the Year 2000 problem. That boost never occurred.

Under the three-year schedule, PCs had been replaced on a continual basis. Instead, companies are choosing to replace nearly 3 percent of the machines each month, according to industry estimates.

International advertising firm Ogilvy & Mather, for instance, is extending the life for 30 percent of its PCs to 4 years. Others are doing the same, finding that they simply don't need more computing power right now.

"Chips have outstripped the ability of software makers," said Jay Williams, CTO, The Concours Group. "PCs are out with gigahertz chips--you don't need that much for an office product. It's hard to justify a 2GHz laptop."

Steelcase is two years past the last three-year cycle and is trying to stretch the lifespan of its computers still further. "We were on pace to replace PCs every three years and notebooks every two, but we dramatically shut that down in the last two years," Steelcase's Dean said.

Like other CIOs, Dean is using software from Citrix Systems to make applications accessible from stripped-down PCs, extending their lifespan. "We're stretching farther than we should but are balancing that out with thin clients," he said. "We don't go in with the attitude that everyone needs a desktop."

Technology officers who have leasing programs have stuck with the three-year cycle under their agreements, but the longevity of a PC is getting longer. According to estimates by the Commerce Department's Bureau of Economic Analysis, the lifespan of a PC--defined as the length of time it will operate before breaking down--widened to 2.1 years in 2001, up from 1.9 years in 2000--and many believe it will get only longer.

"I think the average cycle will be 4 to 5 years and extend over time," Williams said. "These machines are going to live longer."

Of course, PCs will never achieve immortality. "I believe there will be almost a desperation to replace PCs and other basic infrastructure in 2004," Ogilvy CIO Atefeh Riazi said.

Even if that's true, however, companies will keep costs down by forgoing other technologies once thought necessary. As with PCs, for example, technology officers are balking at big software upgrades because they are not essential for their operations to keep running.

Case in point: CIOs are no longer automatically upgrading their Windows operating systems and other software when they replace PCs, a move that has led manufacturers to take some unpopular countermeasures in an effort to push sales of their products.

In one tactic aimed at prodding customers to make new purchases, software makers are ending maintenance and service on older releases while revamping licensing models. In particular, Microsoft's recent licensing change to get customers to follow more of a leasing model has drawn fire from technology officers.

"I will not be signing up for this licensing scheme where everybody signs up and it's like renting software," Merrill's McKinley said. "The economics are just atrocious for us. As much as we are a tech poster child for using their technology, we won't be a contractual poster child."

That attitude means 2003 may be the year of creative licensing. "Software vendors will have to be the most creative," said Pat Cicala, principal of Cicala & Associates. "The general 'this is the greatest thing in the world' pitch is not going to fly."

If true, that would represent a heretical blow to a staple of high-tech salesmanship: the "killer application"--the ultimate weapon, which can obliterate the competition. For something repeated so often, it's amazing how many nonbelievers there are. CIOs say they believe in the killer app as much as they believe in the tooth fairy.

"I don't think we need a killer app," Krispy Kreme CIO Frank Hood said. "A killer app is not a physical application per se, but a philosophy. As CIO, I need to focus on business processes and the business of making doughnuts, not adding megabytes. Our killer application is our doughnut."

Other CIOs hold out hope for the fabled killer app but note that victories are smaller these days. Is Extensible Markup Language a killer app? How about Web services? Application servers?

In the boom years of the late 1990s, many companies embarked on multimillion-dollar enterprise resource planning (ERP), customer relationship management (CRM), and sales force automation systems. Software makers and consultants claimed that such systems would streamline operations while boosting bottom lines.

While success stories exist, many companies don't believe that they have received adequate payback from their investments. Athletic-shoe maker Nike and Hershey Foods are case studies in ERP implementations gone bad.

"People are looking for the next big thing, but we need to utilize the killer apps we have," Riazi said.

The way GM's Scott sees it, the smaller advances today will set up a revolution tomorrow. One key step will be the combination of Web services with identity management, something that would deliver information anywhere in any format.

"People don't want to think about where they are and login commands to get information," Scott said. "The next killer app will be enabled by infrastructure being built today and will be something revolving around transparency, accepting information no matter where I am."