Guarded optimism - Management - executive survey on economic, business outlook

Chief Executive, The, Jan-Feb, 2003 by Paul Rogers, Victoria Griffith

Still chastened by a slow economy, CEOs offer a mixed outlook for 2003. They're loathe to spend lavishly, but corporate purse strings aren't completely tied.

As chief executive of Staples, Ron Sargent knows all to well the lengths some division heads will go to plead their case for a larger budget. So he's come up with a plan: To every budget meeting he attends, Sarg~ent brings along a golden, Oscar-like statue he calls "Johnny."

"When people start to get a little dramatic in describing why they need more [spending], I push Johnny toward them," Sargent explains. "It's a humorous way to remind people that we're just trying to run a business here and it's in all our interests to keep spending under control."

Sargent may be sliding Johnny across the table quite a bit this year. Like many U.S. companies, Staples, the No. 2 office supply retailer in the country, is pinning its hopes for profits on curtailed spending. With some exceptions, most CEOs remain only guardedly optimistic in their outlook for 2003. Despite historically low short-term interest rates and the prospect of an economic stimulus package from Washington, many remain loathe to increase their capital investments.

"All the CEOs I talk to--and I talk to a lot of them--are looking to add to their bottom line by watching costs," relates Joe Tucci, chief executive of EMC, a high-end data storage provider in Hopkington, Mass. The $7 billion company has seen demand for its products fall and competition rise in the sluggish economy. For the first nine months of 2002, EMC's revenues fell by 29 percent. The company cut its capital spending in half last year. "We don't expect to cut that further," says Tucci, "but we won't be increasing it either."

Such anecdotes are borne out by national surveys. A poll taken by The Business Roundtable of 150 CEOs of leading corporations finds that 57 percent of them expect their companies' U.S. capital expenditures this year to be the same as in 2002; nearly a quarter anticipate spending less (see charts below). In a separate survey by PricewaterhouseCoopers, 35 percent of senior executives say their firms are planning major new capital investments this year. That's down slightly from even a year ago, when the events of September 11 were still fresh in mind.

Corporate spending has been slow to recover from lavish investments in information technology during the Internet boom. Companies find they no longer have--or in a weak economy can certainly do without -- such big-ticket needs. At Staples, for example -which experienced growth of 0.7 percent on $10.7 billion in sales in 2002--the massive IT expenditures that went into building the company's dot-corn business won't be repeated anytime soon, says Sargent.

TracFone Wireless, the largest nationwide provider of prepaid wireless phone service, is in a similar position. The private, Miami-based company invested millions several years ago in the infrastructure underpinning its virtual wireless network, sewn together from the smaller networks of 40 different carriers across the country. Last year, TracFone, known for selling phones that show how many minutes subscribers have left on their plans, spent $5 million on capital investments, or just over 1 percent of revenues, says CEO F.J. Pollak. He predicts roughly the same level of spending this year, mainly to compile a database of intelligence about its 1.8 million customers.

Beefed up marketing

Companies that do make IT investments this year will most likely be after efficiency, not infrastructure. "We will spend on things that make people more productive, including software to streamline inventory and the supply chain, and warehouse automation," notes Sargent.

Picking up on this trend, IBM CEO Sam Palmisano announced last fall that the company--which burnished its name on hardware breakthroughs -- will invest $10 billion to enable its clients to buy computing services "on demand." As part of this push, IBM has bolstered the ranks of its service consultants, now 180,000 strong, compared with 65,000 at Hewlett-Packard and 13,000 at Sun Microsystems.

Marketing expenditures may also pick up as companies work harder to boost sales. In consumer products, Gillette, Procter & Gamble and Clorox are all redeploying savings from plant closings and job cuts into vigorous advertising campaigns. Millennium Pharmaceuticals is building up its sales and marketing staff to sell its promising new cancer drug, Velcade, expected to be approved this year. Staples, too, is concentrating on direct marketing to lure customers into its stores. "One of the worst things you can do in a recession is lower your spending on marketing," asserts Sargent. "We won't make that mistake."

But over all, even sectors known for aggressive spending are showing at least some signs of restraint. On one hand, cash-rich Millennium, in Cambridge, Mass., has set aside a hefty $500 million for research and development this year. "We'll continue to invest in people and IT hardware and software to increase productivity," CEO Mark Levin, whose company had 34 percent growth in the first three quarters of 2002 on revenues of $256 million, said in early December. But on the other hand, Millennium announced two weeks later that it planned to layoff 103 employees, or almost 5 percent of its work force, as part of a shift from research to product development.