Slowdown! Or Not?
by Eva Marer
As the United States adjusts to a new administration in the wake of an economic downturn, an intense debate is raging about the future of productivity. Economists generally agree that technology has been responsible for the tremendous growth in productivity, or worker output per hour, over the past five years. The question now is whether those gains will endure amid signs of a rapid economic slowdown.
According to a recent ABC News poll, 55% of Americans now believe that a recession is imminent. Consumer confidence, an important indicator in predicting recession, is at it lowest ebb since 1991. Yet the Clinton White House, in its last formal economic report, says that there have been substantial productivity spillovers outside the technology sector, and that these will likely continue, even in the face of Nasdaq's 39.3% plunge last year.
A majority of CIN members interviewed for this report say that capital spending on technology has increased, or at least remained the same, especially in productivity-enhancing areas such as customer relationship management (CRM) and supply chain management. Even as they gird for a possible recession, CIN members are optimistic about the future; they believe that the investments they're making now will significantly lower costs and enhance productivity in the years to come.
One reason that CIN members are optimistic about the future is that many have already shored up back-end processes and infrastructure in previous years and are now looking to reap the benefits.
"We're not trying to tackle the same infrastructure issues we faced in 2000," says Christopher Cunningham, CIO of RedEnvelope, a multichannel upscale gift retailer based in San Francisco. "In 2000, we made significant investments that contributed to scalability for our online channel. In 2001, our investments will be targeted towards incremental improvement of the customer-facing feature set for the online store and deeper integration between our online business and our catalog business." Cunningham says that his budget has remained the same and that his company is in a strong financial position and does not require additional capital to reach profitability.
"We've seen IT expenditures increase in the areas of access and wireless delivery," says Tony Praza, CIO and vice president of technology at AVT Corp., in Kirkland, Wa. His company provides information exchange solutions to help companies manage their communications. He mentioned a Frost & Sullivan report on unified messaging (UM). "U.S. UM enterprise software market projection is from $219 million in 2000 to $534.6 million in 2004," which is just one indication that companies are continuing to invest in IT where there is a good ROI.
In 1999 and 2000, Praza says, corporations spent a lot of money on Y2K and corporate infrastructure, and although it may be true that spending for those one-time improvements has fallen off, the slack has been more than picked up by investments in long-term deployments such as B2B integration, Internet, wireless integration, and CRM applications.
Indeed, in a paper presented at the annual meeting of the American Economic Association, Robert Litan of the Brookings Institution and Alice Rivlin, a former Federal Reserve vice chairman, concludes that Internet-related savings could bring companies in various industries savings ranging from $100 billion to $230 billion during the next five years.
Not all CIOs are equally optimistic, of course. "Our budget has decreased significantly," says Tom Halwachs, a retired naval officer who is now CIO of the Naval Postgraduate School in Monterey, Calif. Even more than most government entities, the Department of Defense has seen its budget drop dramatically, and that means stretching life-cycle upgrades, consolidating servers, and making do with fewer staff. Located some 70 miles from Silicon Valley, the school is also constantly seeing talented folk jump ship. "We have constant, unplanned reduction in force," Halwachs says wryly.
Yet somehow the school must continue to support some 400 faculty, 900 staff, and 1,400 students from all the uniformed services, as well as about 50 foreign countries. In addition to making sure the school's technology labs align with the Navy's future technology directions, Halwachs is in charge of the school's telephone infrastructure and cable TV franchise for residence quarters. His major budget initiative this year will be to upgrade the telephone system. "Quite simply, we're expected to do more with less," he says.
Even in the event of a major slowdown, most public companies would not have to tighten their belts to the extent the Navy has. Yet analysts say CIOs should prepare for slower growth.
"Our research indicates that IT budgets will continue to grow, just not as fast," says Peter Burris, co-research director and CEO and president of the Dot-Com Division of META Group, in Stamford, Conn. Burris believes that budgets will continue to grow at about twice the rate of the Consumer Price Index. In the event of a slowdown, that could mean IT budgets, currently growing at about 8% to 10% annually, might slip to 5%. "Even in the case of a harder landing, two times real growth is not out of the question," he says. Yet Burris is adamant that, no matter what the economic circumstances, CIOs should focus on a few things immediately.
The first is value management. "In the event of a slowdown, it's no longer viable to just cut the IT budget across the board," Burris says. Instead, he says, CIOs have an obligation to protect those areas where IT is an instrumental player in business innovation and/or revenue generation. "CIOs should be devoting a fair amount of time in the first quarter to laying down formal regimes that clearly articulate the relationship between IT and productivity," he says. Such regimes would formalize investment priorities and strategies, including pricing, service level, and risk. In particular, says Burris, CIOs should look closely at overall sourcing management, with an eye toward introducing best practices.
Ricardo Diaz-Rohr, CIO of Lufthansa Passenger Airlines, in Frankfurt, Germany, devotes a substantial portion of his time to value management. He ticks off the issues: "How do you create stability for selecting and working with partners? Which offer the correct infrastructure? Are they upgradable? What about security? How do you manage project risks? How do you ensure that what's promised is delivered, and how do you ultimately manage the outsourcer to get the performance you need?" With over 100 providers in Germany claiming to offer CRM alone, he says, devising a formal outsourcing strategy is a top priority to ensure stability. He notes that project management is a decisive skill that will become increasingly important as many companies turn to build-and-run IT solutions.
One silver lining in the event of a slowdown, Burris says, is that the huge pressure to deliver projects quickly would abate, leaving CIOs more time to think strategically. "By strengthening their strategic sourcing relationships and thinking in terms of long-term sourcing rather than short-term procurements, they will be ready to move strategically when the economy heats back up," he says.
Enhancing Productivity From Within
Even as they refine relationships with outsourcers, says Burris, CIOs must take this opportunity to improve productivity within their own IT organizations. "It's somewhat paradoxical, but during tough times, it might make sense for the cobbler to take care of his own kids," he says. In other words, in the event of a recession, IT departments may be expected to deliver projects at lower price points than those of outsiders. In order to do more with limited resources, CIOs would have to formalize best practices, as well as ensure operations excellence and adaptive infrastructure, says Burris.
One person who is meeting that challenge is Richard Mannix, manager of operations and technical support at Fuller Co., a global builder of cement-producing plants based in Bethlehem, Pa. Fuller's parent company, F.L. Smidth, had been outsourcing its IT operations, and in 1998, F.L. Smidth chartered a group to look at the technology Fuller had in place. F.L. Smidth decided to integrate some of Fuller's operations.
"We were doing some pretty interesting things in that we had reengineered away from 400 mainframe terminals to a client/server base," says Mannix. "Also, we run Oracle under Novell at the enterprise level, which most people in networking will tell you is not routine." Perhaps most important, however, Mannix's division routinely sized processing and disk capabilities to maintain 35% to 40% growth of information retained, and that was important to a global business set on expansion.
Although the decision represented a vote of confidence for Mannix, it also required a structural overhaul.
Now that his division has become the global data center, however, Mannix's budget priorities have also changed. His first goal is to expand the company's storage area network (SAN) technology. His division has already strengthened all of its backup procedures and gotten all tapes off-site, so that he feels confident about the disaster recovery side of the equation. Yet, he says, "we've become a truly global processing organization, and we cannot afford to be down for even three or four days." That means preparing for every eventuality, even "what happens if you suddenly find an airplane sticking out of your roof," says Mannix, whose company is located next to an airport. "You basically have to look at how elastic is your organization," he says, beyond the basics of fire, flood, and HVAC protection and alternative power.
Burris says, "2001 ought to be viewed as the year that the CIO really turns on IT productivity from within the business." Burris also notes that, like Halwachs, other CIOs may well be expected to do more with less.
In the White House study, new government data suggests that productivity growth is far higher in industries that are intense users of technology than those that aren't. Productivity gains will likely continue as long as companies continue to put technology to work and innovate.
"The appropriate approach to strategic planning is not to look just at the coming year, but how your industry will be impacted five years out," Praza says. For most CIOs at mainstream organizations, technology spending is part of a multiyear strategic plan, and most CIN members say they're right on track.
Eva Marer is a freelance business and technology journalist based in New York City.