IT spending is coming back: It won't be a boom this time, but it can't be ignored - Distribution - Industry Overview

Electronic News, Feb 25, 2002 by Rob Spiegel

Is information technology spending moving toward a heady return? Capital spending typically kicks in once the Fed eases on interest-rate cuts and money is relatively cheap. The Fed has clearly ended its cutting binge, which would suggest a return to IT investments as well as other pent-up capital needs. But most industry executives don't expect any increase in spending to lead to an IT boom, even if information innovations are likely to come back into fashion.

IT spending during the dot-com craze reached dizzying heights. When the bubble burst and the dot-coms died off, traditional companies sighed in relief and cut their IT budgets. In the meantime, IT spending in ERP and Internet-based systems continued to deliver the promised productivity gains. This was unprecedented during a recession. Hmm, said the enterprise customers. Maybe we should continue investing in IT. The clincher came with the mammoth billion-dollar write-downs of excess inventory. With the supply chain growing more complex by the day, companies realize they can't ignore their investments in improving their IT systems.

"With IT, you can't really stand still. The only way to save is to keep spending," said Andy Bryant, president of Avnet Electronics Marketing, a business unit of Phoenix-based Avnet Inc. Prior to taking the reins of the electronics division last month, Bryant ran Avnet's computer business. "I think IT spending is going to come back. It's obviously not going to come back to the pace we were enjoying during the Internet boom, but it will come back." Bryant noted that during the boom years, IT spending was "euphoric in nature and defensive." He said he expects the new growth to be "offensive in nature and tied to ROI [return on investment]."

Most companies cut their IT budgets significantly last year. "We saw softness last January and February," Bryant said. "Through the summer and fall, everyone was cautious. Sept. 11 didn't help. A lot of projects were put on hold, so there's pent-up demand." Bryant noted that even the companies that clamped down on their projects do intend to move forward on IT improvements as soon as they can increase their budgets. "A lot of tasks are still being down in an inefficient process and IT can help in lowering costs. Companies are really drilling down on productivity."

During the past year as companies struggled to produce earnings while experiencing gut-wrenching revenue drops, companies tended to shed their vendors while continuing to work on their IT systems internally. According to Forrester Research in Cambridge, Mass., most large companies either kept their e-business headcount or increased it. Salaries also increased or stayed the same for e-business personnel.

Some industry observers don't expect this budget clamp-down to end quickly. "I don't think there's a coming boom in IT spending. Absolutely not," said Vinay Asgekar, principal analyst covering the high tech industry for AMR Research in Boston. "I don't see IT budgets increasing significantly. Companies are starting only mission-critical initiatives. They're looking for small investments."

Many IT vendors have tailored their offerings to a new low budget, high ROI tools. "Companies have tightened up," said Michael Topolovac, co-founder and CEO at Bom.com in Mountain View, Calif. "They used to have $200,000 budgets, and now they have a $30,000 budget. ROI has always been important, but now that importance is greater. Companies are talking more about proving an ROI before they can allocate."

Though it's clear that IT spending will pick up, many of the researchers following e-business don't expect any significant increase until late 2002. Yet some vendors have seen evidence of increased interest in IT recently. "They are spending again, but now they're looking for high return," said Chris Smith, executive VP for RiverOne, a supply chain company in Westlake Village, Calif. "We're at the end of a bleeding cycle. People have to stop the bleeding; then they can start spending again." Smith also noted a greater demand for ROI in IT initiatives. "Now they only want to do the projects that are easy to do and can bring a high ROI."

Rob Rodin, CEO of eConnections in Pasadena, Calif., pointed to an increased awareness of the need to improve the supply chain. "The slowdown has affected all initiatives, and after Sept. 11, people got very careful about planning for the future, but the one thing that hasn't changed is the need for supply-chain management," Rodin said. "You have [the complexity of] outsourcing and terrible forecasts and that hasn't changed. You've got to have intelligence to manage the extended supply chain. The good news is you can outsource around the globe. The bad news is that you can't do it without collaboration." Rodin said this would continue to drive IT investment.

Even if the investment is inevitable, some companies are holding off at long as they can while they get their balance sheets in order. "I think IT spending will pick up," said Dan Hawtof, director of business development at iSuppli in El Segundo, Calif. "New projects are being considered, especially in supply-chain management, but they are not getting the green light now." But, he noted the days of the multiyear ERP projects are over. "They're looking for less expensive quick hits," Hawtof said.