Recession revisited: Will this time be different for IT?

As the US economy turns downward, CIOs are preparing in dramatically different ways than the last time

When CompuCredit began feeling the sting of the subprime mortgage mess and resulting credit crunch toward the end of last year, CIO Guido Sacchi's IT organization was forced to absorb a 20 per cent year-over-year hit to its annual IT budget.

But for Sacchi, that's where the similarities between handling the current economic slump and the one earlier this decade end.

Last time, IT budget-cutting was a one-time exercise. Now, Sacchi and his IT finance team are making weekly adjustments to the company's IT budget. They're using scenario planning to analyze changes in consumer spending and credit-market conditions, in order to roll with the business and fine-tune its IT spending plans on an ongoing basis.

"I think today as CIOs, we have more tools to respond to those [financial] challenges," he says.

The situation at CompuCredit illustrates that the current economic deceleration is different for IT than the recession that followed the dot-com bust.

For starters, many IT organizations have risen to the status of business partners, and IT's visible contributions to corporate revenue growth and efficiency gains have made senior management more selective about cutting IT investments. Indeed, unlike the previous economic downturn, where across-the-board IT cost-cutting was de rigueur, investments in certain technologies such as virtualization should continue to rise, thanks to the efficiency gains they generate.

Moreover, the shift to the use of IT contractors, from India to Singapore, has enabled IT leaders to scale back their contract labor without resorting to layoffs.

And finally, any slowdown in IT spending caused by a slumping US economy may be offset, in part, by strong international growth among many multinationals.

To be sure, the industries most directly and adversely affected by the housing bust and subprime mortgage madness have tightened their 2008 IT spending plans. In mid-February, Forrester Research lowered its predictions for US IT spending for the second time in two months, from a 4.6 per cent growth estimate it issued in December to 2.8 per cent.

But even within those businesses, "it's almost impossible to generalize IT spending changes by sector," says Howard Rubin, professor emeritus of computer science at Hunter College. There are "microclimates" of economic impact and corresponding IT budget reactions that are occurring on a company-by-company basis, he explains.


There are stark differences in spending priorities now compared with the period following the dot-com bust.

In the late 1990s, companies of all stripes invested heavily in new systems during their Y2k preparations. At the same, many businesses were making "speculative investments" to determine which Internet models might work for their organizations, notes Mark Settle, former CIO at Corporate Express and Arrow Electronics who is currently between positions.

Once the economy began to soften in mid-2000, many CIOs were ordered to cut back on new application development and stretch other systems investments. And many couldn't push back effectively because they had lost credibility among executives who perceived that the Y2K threat had been oversold.

In the current downturn, which many economists expect to extend through 2009, different circumstances and philosophies are affecting IT investment decisions.

CEOs and other executives have become much more cognizant of the business value that IT investments can deliver, even during a period of economic retrenchment. So they're generally more reluctant to cut back on strategic projects aimed at increasing revenues or improving operational efficiency, says Hunter Muller, president and CEO of HMG Strategy, a CIO consulting and advisory firm.

That's particularly evident within companies where CIOs have delivered solid results, have achieved a level of trust with senior management and are continuing to execute on three-to-eight-year IT-business strategies, he adds.

A case in point is FirstHealth of the Carolinas, an integrated health-care network.

Even if the economy worsens, "there's very little I could stop doing" from a project execution standpoint, says CIO David Dillehunt. That's because the company's clinical systems investments are aimed at "getting patients out the door faster" and reducing operating costs, he says.

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A tendency to plan for the long term is playing out even in hard-hit industries.

For instance, although Lowe's 2008 IT budget will take a hit compared with last year, the home improvement chain is continuing to expand its PeopleSoft ERP platform and customer-facing systems, says CIO Steve Stone. Lowe's has added human resources and finance modules to its PeopleSoft suite since 1999 and is adding at least four spend management software units as well, says Stone.

The retailer is also continuing a five-year effort to implement systems to help customers order specialty items that are out of stock at a particular store. Even in a down market, "you don't take those types of things off the table," says Stone.

It's not just the economy, stupid

Although research firms such as Forrester and Gartner have toned down their US IT spending estimates for this year, not all of the pullback is the result of a faltering economy.

For instance, IT spending in the North American retail industry is expected to rise just 4.3 per cent this year, compared with 6 per cent in 2007, but the reduction is more directly connected to the normal replacement cycle of in-store systems than with the current economic climate, says Greg Buzek, president of IHL Group, a retail and technology research firm. His findings are drawn from a recently published retail and technology spending study involving 124 merchants that IHL Group conducted with RIS News , an industry trade publication.

If anything, "retailers are more likely to cut back on peripheral projects" in the face of lower consumer spending while retaining the types of ERP and customer-facing initiatives that are core to their business strategies, according to Cathy Hotka & Associates, a retail IT marketing firm.

That's true at Lowe's, where the company is retaining its "big ROI projects" and is instead postponing "deferrable" efforts, such as refreshing some of the desktop Linux devices at stores where their life cycles can be extended, says Stone.

There are parallels in the investment banking community, which has gotten whiplashed from its mortgage-related investments.

For example, financial pressures in the sector have led Tabb Group to lower its estimates of IT spending increases for brokerages into "the low single digits," says Robert Iati, an analyst at the financial markets research advisory firm.

But the economic impact among financial services players will depend on their level of exposure to shaky mortgage investments, Iati says. And even affected financial services companies are not cutting IT spending across the board as they might have in the previous downturn.

In fact, the multibillion-dollar mortgage-related losses that big investment banks have racked up have spurred a 10 per cent to 15 per cent increase in risk-management-related IT spending, compared with the same period last year, says Iati. That's not surprising, as these companies attempt to better manage their investments and expenses.

Iati doesn't see much of a parallel between IT strategies among Wall Street firms during the post-dot-com recession and now.

"Back then, a lot of the focus was around initiatives such as straight-through processing and sending application maintenance work to India," says Iati. Nowadays, trading has become so globalized that many big banks will continue to invest heavily in new systems to gain competitive advantage, including building out new IT infrastructures in emerging markets such as China, he says.

"It's a time like I've never seen before," says Chris Barber, senior vice president and CIO at federal credit union WesCorp who served as CIO at GlobeNet Stock Exchange from 1999 to 2003.

Despite economic pressures, financial companies are reluctant to postpone investments for new trading systems, for fear of being left in the dust by their competitors, he says. "The trading industry is moving so fast that if a competitor gets even one leg up, they're going to surpass you," Barber explains.

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Leveraging resources

Another significant difference between the current economic environment and the last downturn is that it's not just CIOs like Sacchi who have better tools to work with.

CEOs, CFOs and other business executives are all making much more extensive use of business intelligence systems and dashboards to track key performance indicators such as sales and inventory turns. As a result, business and IT organizations are reacting much faster to even subtle changes in business conditions.

"We tune very quickly now" to changing market conditions, says Chris Eberly, head of enterprise information management at ING Group, a global financial services company.

Because ING's wealth management business in the US has not yet been affected by the sputtering economy, its IT spending plans have also remained unchanged, says Eberly. But if ING's business does get squeezed down the road, its IT organization can react more quickly now than in previous economic cycles because of its increased reliance on domestic and offshore contract labor.

In the early part of the decade, ING's IT organization was predominantly made up of full-time employees, says Eberly. But over the past five to eight years, ING has increased its reliance on contractors, allowing it to scale its IT labor pool up and down based on project demands and changes in business conditions, he says.

While US IT executives in general are certainly leveraging global sourcing models more intensively than they had in prior economic slumps, they're also not pulling back the reins on domestic hiring. At least not yet.

"I'm not hearing the term 'hiring freeze' too much yet, but it's in the wind," says John Bemis, a partner at recruiting firm Benchmark IT. Most of the company's financial services, pharmaceutical, retail, hospitality and manufacturing customers are moving forward with their IT hiring plans, says Bemis. But the mood among his CIO clients is considerably more cautious than it was in 2007, he adds.

The IT labor market is noticeably different than it was after the stock market tanked in mid-2000, says David Foote, chief research officer at Foote Partners, an IT skills research company.

Back then, "you had this bloat of Y2k workers, and 10 per cent to 15 per cent of the IT workers just left the IT field altogether after that," he says.

But since then, an increasing percentage of discretionary IT spending has been directed toward new application development as opposed to IT infrastructure and operational types of investments, "and I don't see [employers] reducing that hiring," says Foote.

That's certainly the case at Wells Real Estate Funds. The national real estate investment firm has a 37-person IT staff with four positions open. Oracle, document management and help desk skills are among those it's seeking, says Barry Cohen, the company's vice president of applications management.

The company has not been adversely affected by weaknesses in other portions of the real estate industry and has increased its IT budget by 5 per cent to 10 per cent this year, says Cohen.

IT hiring has also continued apace at some companies that have tightened their IT budgets in other areas. For instance, even though CompuCredit has cut its 2008 IT budget by 20 per cent compared with 2007, Sacchi says he recently hired two virtualization specialists and an outsourcing relationship manager.

In the event of an extended recession, the fate of many IT groups will depend on their reputations, says WesCorp's Barber. CIOs whose IT organizations have been able to deliver on meeting business requirements and who have forged strong relationships with their business counterparts should be able to convince senior management that a stable IT organization is in the best interests of the company, he says.

"Our relationship with the business units is what gives us that credibility," says Barber, who is currently trying to fill eight open positions for people with .Net, Java and IT security skills.

And people aren't the only resource being leveraged like never before. The consistent budget pressures that IT executives faced during the earlier part of the decade have taught them how to better stretch their other resources as well.

For instance, companies are now much more likely to reuse software components for projects in other departments or across continents. For its part, ING took a reference architecture (a set of IT architecture best practices) that was developed in the US and began extending it to Asia, Europe and parts of South America in 2003, says Eberly.

"One of the things we look at is how we can leverage work that's already been done," he says.

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The virtualization push

Server, storage and even desktop virtualization opportunities are also driving many companies to up their investments in these areas in order to optimize their operations and drive down their costs. The threat of a recession only supports these priorities.

Prior to the launch of its server virtualization efforts three years ago, the utilization rates of Lowe's clustered Intel servers were in the "abysmally low" 10 per cent to 15 per cent range, says Stone. Since the company's virtualization efforts kicked in, server utilization rates have soared into the 85 per cent to 90 per cent range, and the retailer plans to continue those programs through 2008, he adds.

Over the same period of time, CompuCredit has consolidated 50 per cent of its server base while saving a few million dollars by sidestepping server purchases and related hardware and software licensing costs to support the company's prior business growth, says Sacchi.


Meanwhile, IT executives in many other industries are anxiously waiting to see what effect the economic slump will have on their businesses and IT spending plans.

"At this juncture, it's a yellow-light phase," says Jerry Luftman, associate dean and distinguished professor at the Stevens Institute of Technology. "Many CIOs aren't being aggressive with their IT spending but they're not cutting back yet," he adds.

"We're waiting here with baited breath," says Michael Israel, senior vice president of information services at Six Flags, a theme park company whose venues begin opening this week.

Although the company has cut its IT budget for systems at its parks by 50 per cent compared with last year's, it has increased its back-office spending plans by the same proportion, to cover planned upgrades to its Great Plains accounting system, and food and retail inventory systems, Israel says.

For now, Six Flags' IT spending plans remain "pretty good for this year," he says. "But as the season rolls out, we'll see" how the economy affects IT spending, he adds.

So buckle up. The roller coaster ride has just begun.