Y2K, E-Commerce Compete for Expanding IT Budget Pie

Y2K Spending Among the Fortune 1,000:
  • High10.8 percent
  • Average26.5 percent
  • Below Average21.2 percent
  • Low 4.9 percent
  • Insufficient Data*36.6 percent
Due to inadequate disclosure, late filing or data collection problems. Source: Weiss Ratings evaluation of 10K and 10Q filings with the SEC.

Year 2000 budgets at many large nonfinancial corporations jumped as much as five-fold in the first quarter of this year, indicating that management may have greatly underestimated the scope of their Year 2000 computer problems. However, it's likely that e-commerce projects will soon overtake Y2K spending as millennium projects finally begin to wind down.

Thirty-seven percent of the largest public corporations report significant increases in Y2K remediation spending over last year, according to evaluations of SEC filings by Weiss Ratings Inc. (Palm Beach Gardens, Fla.). Topping the list of spending spikes is OGE Energy Corp. (reporting a 483 percent increase to $35 million in its Y2K budget over last year), Fluor Corp. (267 percent increase to $55 million), Kroger Company (158 percent increase to $80 million), and USX-U.S. Steel Group (100 percent increase to $71 million).

"Estimating Y2K fix-it costs has been touch-and-go for many companies," says Martin Weiss, chairman of Weiss Ratings. "Often, the more bugs they fix, the more they find. The net result is that some of these companies are falling even further behind in their Y2K remediation schedules."

Even technologically advanced companies have had difficulty gauging the costs of their future Y2K fixes, Weiss finds. For example, America Online Inc. (Vienna, Va.), boosted its Y2K budget to $20 million as of March 31, 1999, more than double the $8 million estimate of three months earlier and four times larger than the estimate of six months earlier. Nearly two-thirds of AOL's Y2K budget was still unspent at the end of the first quarter, according to the company's disclosures to the SEC.

IBM has so far failed to formally reveal the amount it has spent in Y2K remediation efforts in any SEC filings, making it difficult for outside analysts to evaluate the company's Y2K progress, Weiss reports. In its most recent annual report, however, IBM disclosed that it is spending up to $575 million to bring its own systems into Year 2000 compliance, but did not break out how or where that money is being spent. Other major companies, including Boeing Company and Merck & Company, have failed to disclose either their Y2K budgets, their expenditures or both, as requested by the SEC.

"Investors can usually absorb just about any bad news on Y2K, provided it's reported promptly and in small doses," Weiss comments. "It's the sudden surprises, typically the result of inadequate or late disclosure, that have the potential to cause the most damage to investor sentiment."

A lot of money is being poured into Y2K at this time, but other projects are also chomping at corporate resources. Gartner Group Inc. (Stamford, Conn.) projects, however, that e-business will soon eclipse Y2K as the main focus for IT spending. IT spending worldwide will be $2.2 trillion in 1999, with up to 40 percent of that amount devoted to Y2K spending, according to Lou Marcoccio, research director for Gartner Group. By 2002, worldwide IT spending will climb by 50 percent, to $3.3 trillion, with half going to e-business spending.

To stay competitive, companies need to ratchet up their e-business initiatives as soon as possible, says Marcoccio. "Enterprises must properly integrate e-business and IT planning into the core business planning this year, or they may have to make that IT expenditure again next year."

Gartner confirms that IT spending increased dramatically recently due to Y2K remediation, and will again accelerate in 12 months, fueled mainly by e-business initiatives. Typically, this spending is shifting toward business lines and away from IS functions, with about 60 percent of IT spending projected to occur in the business lines by 2003. By this time, many companies will be stringing together their many "skunk works" e-business projects into a comprehensive e-business strategy.