Silicon Valley and the rest of the technology industry is dreaming about a swing of the pendulum back in their favor. Wishful thinking or waste of time? Experts at Wharton weigh in.
The auto-making titan continues to invest about 3 percent of its purchasing budget on various computer technology initiatives. That?s no small change: Ford?s global purchasing budget is more than $90 billion annually. Company spokesman Paul Wood says Ford realizes the value of information technology for a range of operations, including manufacturing and procurement.
"Ford?s IT spending has held consistent over the past couple of years," Wood says. "It?s a strategic advantage."
Silicon Valley and the rest of the technology industry can only dream of more clients as steady as Ford. Corporate information technology spending overall is stagnant with a grim outlook for the rest of this year, if not beyond. The sluggish IT situation flies in the face of earlier optimism for a recovery this year, and comes on top of a major spending slowdown in 2001. Reasons for the bleak outlook include a surplus of software and hardware from past purchases, disappointment with earlier-generation IT systems, and uncertainty in the form of muted economic growth, terrorism fears and the bearish stock market.
|Corporate information technology spending overall is stagnant with a grim outlook for the rest of this year, if not beyond.|
Meanwhile, by refusing to step on the IT gas, companies may only be hurting themselves and also missing out on an opportunity to help jumpstart the economy, according to management professor Raffi Amit, director of Wharton?s Electronic Business Initiative (WeBI). Firms that delay profit-boosting technologies such as new electronic procurement and customer relationship management systems are threatening their future, Amit suggests, adding that such companies "will fall behind competitively."
To most IT firms, 2002 has been a disappointment. Late last year, some analysts projected technology spending could rebound in 2002, a rebound that many firms desperately need. After all, 2001 had been a bust with the dot-com implosion and a sputtering economy pushed into deeper trouble by the terrorist attacks of Sept. 11. Spending on information and communications technology in the United States grew at less than one percent to $812.6 billion in 2001, according to a study by the World Information Technology and Services Alliance (WITSA), a consortium of IT trade groups. Tech consulting firm Giga Information Group, meanwhile, estimated late last year that 2001 IT spending would drop by as much as 5 percent from 2000 levels.
Whatever the precise change in IT spending, it?s clear some tech firms took huge hits. Computer chip giant Intel, for example, saw its revenues in 2001 fall to $26.5 billion from $33.7 billion in 2000. Computer server maker Sun Microsystems posted third-quarter 2001 sales of $2.9 billion, down from $5.0 billion in the same period the prior year.
But the long-awaited upturn hasn?t materialized. And the latest data are gloomy. A July IT spending survey released by brokerage Goldman Sachs concludes that "although we continue to anticipate some level of seasonal improvement at year-end, overall spending remains under significant pressure." A majority of IT managers polled said they expect to "underspend" their budget during the remainder of the year. And 38 percent of IT managers said they expect their IT spending to be down for the full year, versus about 30 percent in previous Goldman Sachs surveys. Technology companies, in turn, are cutting back on their tech investments. A Merrill Lynch survey on semiconductor industry capital spending, for example, indicated a 20 percent decline for 2002.
It?s important to remember that spending levels during 2000 were particularly high, says Bob Austrian, Banc of America Securities application software analyst. Nonetheless, Austrian sees a troubled climate for business software vendors.
"IT spending is under the tightest grip it has seen in ages," he says. "It is likely to remain a tight-fisted environment at least through the end of the year."
Glut of IT products
The IT doldrums have paralleled a slowdown in the economic recovery that began late last year. But other factors seem to be at work in convincing companies to limit purchases on new computer hardware, software systems and technology services. For one thing, firms have a glut of IT products they bought in the past but haven?t fully utilized, Amit says, adding that another factor is "disappointment with the fruits of the first-generation investments in...Internet technology." In other words, companies found heavily hyped products such as new "e-marketplaces" did not live up to their billing. And researchers have argued that more than half of CRM (customer resource management) initiatives fail to deliver anticipated results.
|In other words, companies found heavily hyped products such as new "e-marketplaces" did not live up to their billing.|
"Volatility breeds caution," Austrian says. "Nowhere is that more true than application software, which over the short-term is discretionary."
Application software refers to programs used by companies to handle business tasks such as financial planning, human resources management, supply-chain management and customer relationship management. As Austrian notes, application software firms are suffering. Database giant Oracle, for example, saw its revenues for the second quarter fall 15.7 percent year-over-year to $2.77 billion. The $2.77 billion represented a 17.8 percent drop from second-quarter 2000 sales. Commerce One, which allows firms to conduct purchasing over the Internet, said second-quarter revenues fell to $27.8 million compared with $101.3 million for the corresponding quarter in 2001--a whopping 72.6 percent decline.
Although both big companies and small are weathering blows, Austrian suggests the smaller ones are in greater peril. "This is an environment of near-death experience for many smaller software companies," he says. Already, the stock market seems to be predicting the death of companies such as Commerce One, which launched near the beginning of the Internet age in 1997. Since soaring above $135 in 2000, the stock has plunged to less than a dollar. Commerce One is in the process of seeking approval for a 1-for-10 reverse stock split.
In effect, the uncertain business climate is likely to reinforce the reigning software firms, Austrian argues. One reason is smaller firms may not have the resources to outlast the downturn. Another has to do with the trend toward IT "integration," Austrian suggests. Integration means linking together a company?s disparate computer systems, such as business planning programs and Web portals. Smaller players such as WebMethods and SeeBeyond Technology provide this service. But Austrian bets corporate clients will choose a comprehensive suite of software from bigger players like Oracle. "The fragmented little companies suffer and the larger companies absorb their share," he says.
To him, the past several years in the software world can be seen as a kind of repeat of the 1960s free-love experiment. There was a "dating frenzy" during the Internet boom when firms hooked up with a range of IT providers, Austrian says. But the experimentation has proven unsatisfying, he suggests, and corporate America is returning to long-term software partners. Austrian?s point seems confirmed in part by the latest Goldman Sachs IT spending survey. Market share gainers in software included industry giants Oracle and PeopleSoft. In the hardware and security categories, big names such as Dell, Compaq, IBM and Cisco gained ground.
|A recent report...argues the information security market will not see substantial signs of a rebound until 2004.|
One smaller player also made the list in security--Internet Security Systems, which provides protection from online attacks. Information security ranked as the top IT spending priority in the Goldman Sachs survey. Even so, cybersecurity is not yet a goldmine for IT firms. At a June conference on government spending organized by investment bank Thomas Weisel Partners, "all parties present agreed that spending on homeland security initiatives has taken longer to materialize than initially expected," according to Thomas Weisel analyst David Grossman. What?s more, a recent report from financial research firm Vista Research argues the information security market will not see substantial signs of a rebound until 2004. Vista expects the security sector to grow 3 percent this year, 11 percent next year, and 18 percent in 2004. Total spending in the sector is expected to climb from about $5.9 billion in 2002 to $11.7 billion in 2007, according to Vista.
When it comes to "pent-up" IT demand, survey respondents ranked security software as first, followed by CRM software, storage software, security hardware and storage networking switches.
Despite their reasons for holding back, Amit says corporations would be wise to loosen the purse strings and make those IT purchases. "The pendulum has swung too far. We have come from one extreme to the other extreme," he said. Technology is now available to improve companies? bottom lines. An online sales presence can boost revenues, he argues. And when it comes to cutting costs, he points to an online training system at Cisco and a digital design system shared by various divisions of Volkswagen.
Amit cautions, though, that technology alone isn?t a silver bullet. For real benefits, companies must be willing to transform the way they do business on a fundamental level. "When you invest in digital technology, you have to modify your business processes and organizational structure. The three go hand-in-hand."
Amit has studied companies engaged in digital transformation for the past year. He believes greater investment in technology by corporations not only would prepare them individually for the future, but would provide a lift to the overall economy. Even so, he is pessimistic about corporate leaders heeding his advice. IT spending isn?t likely to enjoy an upturn for another 18 to 24 months, he believes: "We would be lucky if it happened at the end of 2003."
Temporary staffing firm Adecco North America, for one, expects to boost its IT budget next year. On the other hand, Adecco has slashed IT spending some 20 to 22 percent this year on top of additional budget cutting last year. Arnie Rind, chief information officer for Adecco, says he agrees with Amit that companies must preserve their technological edge. But Rind claims to have done so even while shaving costs. Adecco has trimmed its spending on expensive consultants and renegotiated contracts with vendors. At the same time, Rind has taken steps such as investing in virtual private network technology and upgrading to the latest versions of Oracle and PeopleSoft software. These advances come on top of a major software upgrade completed by early 2001 that gave Adecco employees database, Internet and intranet access.
Although Rind has been tight-fisted in the past year, he expects to increase IT spending in 2003 thanks to the company?s growth. Adecco, which already has 1,500 offices, plans to open another 200 by the end of this year and branch into new categories of temporary help, such as airport and hospitality workers. The proper technology to be able to bill for those workers and pay them is critical, Rind argues.
His words must sound like music to the IT industry?s ears.
"The IT department is the engine," Rind says. "If you want to get more horsepower into that engine, you?ve got to invest money in it."
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