Place Your BETS - CEOs increase information technology spending

Chief Executive, The, August, 2001 by Adam Feuerstein

CEOs play an increased role in technology decisions; they're tightening the strings, but not yet abandoning investments.

If you want a glimpse into the way companies are changing priorities for information technology spending these days, H.J. Heinz Co. is a good place to start.

Just over a year ago, the $9 billion maker of Heinz ketchup, Ore-Ida French fries, and 9-Lives cat food was one of those Old Economy companies taking the plunge into the New Economy waters. In short order, the company set about to put the dot-com in its business operations. E-business software was purchased and installed in its far-flung global offices, the company began buying products and services, such as broadcast time for its ketchup commercials, over the Internet. Heinz was also one of dozens of consumer packaged-goods companies to place big bets on a B2B online marketplace that promised to do no less than revolutionize the industry. The marketplace's name: Transora. It doesn't get much more New Economy than that.

But today, if you ask Gail Witenski, Heinz's general manager of IT, what gets her excited, she won't talk about e-anything. Instead, she's concentrating on making sure that all 60 affiliates and subsidiary companies in the Heinz family are reading from the same IT play-book. That involves less sexy tech talk like IT integration, implementation of enterprise resource planning software, and standardization, or the process of tying together disparate computer systems so they can communicate with each other.

The plan, she says, is to allow Heinz executives in Pittsburgh to have timely, accurate, and consistent information about the business, whether that's in the United States, England, Japan, or Australia. And the goal is to have that information not in weeks or months, but in days, maybe hours or minutes. "Five years ago, we were a very decentralized company. Today, we're trying to take a more centralized approach," she says.

And what about e-commerce? Turning Heinz into Heinz.com? Those projects are still important, says Witenski, but many of them are on the back burner. "Every IT project we take on must have its own return on investment," she says. "We have limited resources, so our core focus right now is on building a global data warehouse and completing the standardization across our [computer] systems.

"There was a lot of hype about Transora," she adds. "We're trying to figure out what we're getting for the money we invested, so right now we're limiting our participation. In the beginning, there was a lot of euphoria that this marketplace would be the end-all, be-all, but that's clearly not happening."

If Heinz was seduced by the New Economy siren, it certainly wasn't alone. Scores of companies did the same over the past few years, and CEOs everywhere, fearful of being left in the dust behind bolder, more "visionary" competitors, eagerly signed off on investments in new, unproven technologies. With the market moving far too fast for lengthy investigations, companies ramped up IT spending overall without fully understanding what they were getting into. And who could blame them? The stock market was enthusiastically rewarding fledgling dot-coms with multibillion dollar valuations -- never mind that dot-com spending was not generally followed by sales, profits, or shareholder value.

Of course, the party has since been declared officially over. With hundreds of Little Companies That Couldn't gone to the dot-corn graveyard, the old rules of business -- where cost-benefit analyses are more than lust a suggestion--are back. CEOs today want a guarantee of improved productivity, reduced costs, or enhanced efficiency before investing millions in a new IT system.

"Over the past several years, corporate boards had been pressuring CEOs to move quickly into an e-business strategy without really worrying about the details," says Jon Ekoniak, a technology analyst with investment bank U.S. Bancorp Piper Jaffray. "But that spending really didn't get them anywhere. So today, the sentiment has changed," he adds. "The Internet is still important and it's something that companies are crafting strategies around, but the panic is gone. Companies are still spending money on IT, but they're being smarter about it because they don't have to make rash decisions in a very pressured environment."

This new prudent approach to IT spending is reflected in numerous surveys conducted in recent months. In May, investment bank Morgan Stanley Dean Witter polled 225 CIOs about their IT spending. The results were not surprising. Fifty percent of companies had cut or slowed IT spending, compared with 40 percent in April and just 33 percent in March. The reason? Across the board, CIOs said news about the slowing economy, combined with a stock market decline, caused them to reevaluate IT budgets and spending.

An economic recovery should get IT spending moving again, but the sentiment on when that recovery occurs has also shifted. In March, 63 percent of companies polled believed the economy would improve sometime in 2001, according to Morgan Stanley. In May, that number dropped to 43 percent. Fifty-six percent of companies believed the economy would not improve until next year. A pessimistic 1 percent said the downturn wouldn't dissipate until 2003.