In-Depth
Will IT Spending Weather the Storm?
No matter how strange it sounds, many businesses could actually ramp up their IT spending during the current downturn
IT has been a surprisingly safe harbor in the midst of the current economic crisis, industry watchers say. In fact, IT-centric economic concerns have held steady, even if some bellwethers (such as networking giant Cisco Systems Inc.) have turned in less-than-stellar performances. Some tech firms are doing well. Hewlett-Packard Co. (HP) last month posted earning results that easily surpassed Wall Street's expectations, and issued encouraging guidance for the coming year.
Amid the economic turmoil, IT-related spending has continued to hold steady in spite of a protracted credit crunch drastically affecting consumer and business spending.
One reason, some argue, is that IT has already weathered its recession -- namely, the post-dot-com implosion during which the line-of-business reasserted its hegemony over IT and slashed IT-related spending and staffing levels. One upshot of the dot.com bust was that IT itself became leaner and meaner.
As a result, some experts say, there's room for growth: many businesses (outside of a few hard-hit sectors, such as financial services, heavy manufacturing, and airlines) are sitting on mounds of cash. Earlier this year, for example, the firms in Standard & Poor's industrial index had more than $600 billion in cash on hand. That's roughly equal to the sum favored by economist (and new Nobel Laureate) Paul Krugman for a second economic stimulus package.
It's also why some analysts believe that business spending -- and IT-related business spending in particular -- could continue to buck the cost-cutting trend.
It wasn't always so. "During the economic downturn of 2000-2003, IT was the favorite area of the business to slash. … IT was viewed, by the front office, as extraneous, not central, to the success of the business; the focus was on technology," writes Theresa Lanowitz, founder of industry analyst firm Voke, Inc., in a recent IT spending assessment, Fortune 500 Spending Required for IT Cost Savings. "Consequently, IT spending and innovation to support the business [were] drastically reduced or completely cut."
In some cases, cost cutting took the form of indiscriminate slashing. In many, if not most cases, a laser-like focus on cost cutting produced significant negative effects, maintains Lanowitz, who cites (among other problems) the reflexive -- and, in many cases, ill-advised -- embrace of outsourcing on the part of business decision makers; a lack of innovation, particularly among IT vendors; and a CFO-driven purchasing model in which organizations emphasized cost at the expense of features, functionality, complementary interoperability, and other factors in making purchasing decisions.
"The CFO emphasis on purchasing power elevated someone in the organization who had no technology awareness to the level of ultimate and final decision maker," she writes. "The impact from CFO led purchasing decisions was far reaching and long lasting."
An overly narrow focus on cutting costs had another important result, Lanowitz contends: quality cutting. Organizations that prioritize cost cutting tend to experience quality setbacks, particularly with respect to software development, project management, and similar domains in which quality assurance (QA) is of crucial concern. "Many IT managers and even consulting organizations viewed 'quality' as extraneous and something anyone could do," she claims.
The post-dot-com implosion fundamentally changed IT's decision-making paradigm, Lanowitz argues. At first, the consequences were mostly negative. Instead of focusing on getting it right -- or mostly right -- the first time out, for example, IT assumed a reactive posture: there simply isn't money enough or time enough to get it right, but there's ample time (and inevitable funding) for a do-over.
The good news, Lanowitz points out, is that both IT and its line-of-business masters have come to recognize that this position is untenable. "The result of these cost cutting measures put IT in the position of there is never enough time or money to do it right but always enough time and money to do it over. This conundrum resonated with both IT and the line of business and as the economy began to rebound, IT was tasked with reinventing its image," she says.
That’s why Lanowitz and voke believe that competitive Fortune 500 (and Global 2000) firms must actually ramp up their IT spending during the current downturn.
"The IT image makeover revolved around the business understanding the value and competitive advantage delivered by a nimble and strategic IT organization," she points out. "The IT organization revealed that it used technology to deliver a competitive business advantage and should rightly be viewed as a profit center instead of the historical perspective of a cost center."
IT has come a long way since 2001, Lanowitz says. For example, line-of-business stakeholders might once have bristled at the suggestion that IT -- or the software special sauce which IT deploys, supports, and manages -- runs the business, but many are now receptive (or more receptive, at any rate) to this idea. "The reality is, software does run the business and to keep the business running, competitive, and focused on the future, invest in IT, the technology required to support the business, and the proper processes," she writes.
In the years after the dot.com implosion, much was written about the importance of IT's developing a "business-centric" understanding of its role. In the post-housing-bubble milieu, she suggests, it might be time for the line-of-business to undergo a similar come-to-IT epiphany.
"It is essential for the line of business to understand the importance IT plays in the overall success or failure of any organization," Lanowitz concludes. "Modern enterprises invested in the establishment of software organizations to deliver on the demands of core business competencies. During challenging times, enterprises must remain focused on both their core business competencies and their core technology competencies."