Seven ways to prepare for the economic upturn

A brighter outlook offers a chance to set new priorities for IT

It has been a tough three and a half years. Since the Internet bubble burst in 2000, information technology budgets have been on a downward spiral — thousands of jobs have been cut, projects have been scuttled, and badly needed maintenance has been deferred. Now that the economy is off the respirator and back on its feet, the IT world is starting to revive. Aberdeen, Gartner, and IDC all predict U.S. technology budgets will grow between 4 percent and 8 percent in 2004, depending on how robust the recovery is.

But this time, rules about spending will be different. To find out how different, we talked to consultants, experts, and IT professionals around the country. We also polled chief technology officers at more than three dozen companies. More than half of them say their budgets will increase in 2004, and about a fifth expect a boost between 11 percent and 25 percent. But all say this recovery won’t resemble the heady go-go days of the late ’90s. Here’s their advice for managing technology in an up economy.

Throw out the old, bring in the new

Listen closely to enterprises in America and you’ll hear the thrashing of hard drives and the gnashing of teeth as frustrated users work on systems long overdue for an overhaul. Companies that put off infrastructure maintenance for the past three years will bite the bullet in 2004 and start replacing aging iron.

“This year, the bulk of our IT budget will go to upgrade systems and servers,” says Theo Nikolakis, IT director for the Greek Orthodox Archdiocese in New York. “Like a lot of other companies, we put off upgrades and tried to squeeze as much out of our existing hardware as we could. We’re looking at a Lotus Notes upgrade we’ve put off for four years. It’s going to be very painful,” he says.

In recent years many companies have put IT infrastructure on the back burner, says IDC analyst Kevin White. “Now that cash flows are starting to improve and profits are up, they’re starting to upgrade obsolete systems, especially the stuff they purchased in the late ’90s,” he says.

But companies should be careful to avoid upgrading just for the sake of upgrades, warns consultant Erik Keller, especially as they rely more on Web-based applications and less on desktop productivity tools.

“What business benefit do you get from having an up-to-date version of Office?” asks Keller, principal at Wapiti. “Those things represent monster budget buckets. People fell into the propaganda trap on how you need to continually upgrade. … Smart companies rethought the whole process and [figured out] how to take a PC and make it last five years or more.”

Tread carefully near the bleeding edge

When companies venture into new IT projects in 2004, they’re far less likely to take a flyer on untried technologies and will only pursue technologies with a direct impact on the bottom line.

“There’s so much good equipment out there at such a good price, we don’t need to be on the cutting edge for our needs,” notes Scott Testa, COO of Mindbridge Software, an intranet software vendor. During the past six months, Mindbridge has upgraded nearly all of its infrastructure, using low-cost commodity parts. The company purchased most of its PCs and networking equipment from companies that had gone belly up, and it even got some great deals on eBay.

Yet there’s one relatively new technology Mindbridge adopted without hesitation — voice over IP. “With VoIP we could see a return on investment in six months,” Testa says. “Our decision was driven by just plain cost-savings.”

Likewise, Nikolakis installed four VoIP lines last year, saving an estimated  $1,000 per month in overseas toll charges. In fact, when we asked our survey group what new technologies they planned to pursue, VoIP was named most often, followed closely by Linux migration, Wi-Fi networks, and early RFID (radio frequency identification) trials.

Some technologies, such as RFID, are being driven by supplier requirements. Wal-Mart, for example, requires radio tags for tracking inventory, and “almost everyone is a vendor to Wal-Mart,” notes Katherine Spencer Lee, executive director at Robert Half Technology. But most implementations, such as the move toward open source operating systems, are driven by a desire to cut costs.

“It’s always a boon when you can get stuff without having to pay the Microsoft Monster,” says Alex Breeding, information systems manager at Ben E. Keith Beers, an Anheuser-Busch distributor. Breeding adds that many companies have been burned in the past. “So many of my contemporaries tell me they invested all this money in stuff that just didn’t work,” he says.

Hang on to your best, lose the rest

In tough times, IT staffers cling to their jobs like barnacles to a reef. But as budgets relax and companies start hiring again, expect your best employees to test the waters. According to a recent Accenture survey, 48 percent of middle managers are looking for other jobs or plan to do so when the economy recovers.

“Retention is going to be a big issue for lot of organizations,” says Ed Jensen, a partner in Accenture’s human performance practice. “There’s a lot of pent-up demand from people who are ready to move on but have been waiting for the market to lighten up.”

Skill sets in demand are also changing. Today, 82 percent of companies are hiring Windows administrators and 56 percent seek those with SQL server skills, according to quarterly surveys by Robert Half Technology, which provides contract labor for IT shops. But increasingly companies are looking to hire techs well-versed in Linux, security apps, .Net, and business intelligence software, Lee says.

Just don’t wait too long to bring in new bodies, as the talent pool may begin to shrink, Lee advises. “We’re starting to see some positive things happening on the IT hiring front. It’s not a rocket ship to the moon yet, but the trend is certainly positive,” she says.

That means you may need to look at your pay structure. “As firms strive to attract and retain top talent in a growing economy, salary levels should rise accordingly,” Lee says.

Larger companies face a particularly tricky balancing act; they must seek out knowledge workers with new skills while maintaining legacy apps with an aging workforce. “One problem many mainframe shops face is the growing number of retirements of old Cobol programmers,” says Peter Kastner, executive vice president of research at Aberdeen Group. The solution, says Kastner: Pay them more to stay on, hire them back as consultants, or go the outsourcing route.

Outsource? Sure — but pick your spots

In boom times as well as bust, companies will continue to outsource generic or legacy IT functions so they can focus on what they do best. More than 80 percent of companies in our survey group outsource some IT work, and all plan to maintain or increase outsourcing in 2004.

“For me, all my QA and installer work or about 30 percent of my IT budget is outsourced offshore,” says Charles W. Stevenson, executive vice president at Gupta Technologies, a relational database company. “This frees my engineers up to do the real work that needs to be done this year, including a very large initiative to get to Linux by the end of the year.”

Outsourcing is the most efficient way to ramp up when times are good and throttle down expenses when the crunch comes, says George Bailey, an electronics consultant at IBM Business Consulting Services. But companies need to carefully decide which functions to send outside, as well as where to send them.

“[Outsourcing] doesn’t necessarily mean you put everything in India and China, it means finding the right location for the skills, cost, and quality of what you need to have done,” Bailey says.

The cost savings are compelling, but offshoring can have disadvantages, as Dell discovered when it had to move support call centers for its enterprise PCs from India back to the United States last year, due to customer complaints. With offshoring expected to hit $46 billion by 2007, according to IDC, there may be an economic backlash as well, something to consider if you’re contemplating a long-term relationship with an outsourcer.

“Two or three years down the road, rapid wage inflation in India is likely to erode the economic benefits that are so enticing today,” Kastner says.

Business value concerns aren’t going to go away

More than ever, “business value” is the mantra that drives IT spending. If your pet project doesn’t increase revenue or cut costs, it probably won’t happen. This is one holdover from the recession that’s not going away.

Smart business executives will take a portfolio approach to technology, says Mark Lutchen, lead partner at PricewaterhouseCooper’s IT business risk management practice. “Companies that have more IT-related projects than they’re able to support will go through them all and ruthlessly prioritize what will and won’t get done.”

IBM’s Bailey adds that such calculations must be rooted in verifiable, real-world numbers. “One time, I was consulting for a company and I went over all the supposed savings each IT project was going to provide,” he says. “When I added them up, they exceeded the total operating budget of the company. Those days are gone.”

Polish your powers of persuasion

From Y2K safeguards to Web infrastructure, companies poured billions into IT investments with little or no payback. Now C-level executives are casting an especially skeptical eye toward all technology projects, warns IBM’s Bailey. The winners will be those that will help boost their P&L numbers.

“It’s no longer enough for an IT guy to say this CRM system will be turned on by May 1,” Bailey adds. “Top execs want to know when they’re going to see cost reductions and sales increases.”

IT managers who want to get their projects approved will need to take a more active role in their companies’ overall decision making, both to better understand how to fit technology to business needs and to help execs understand the implications of IT on the company’s success.

“You can’t wait for the business side to throw a project over the fence and ask IT to execute it,” says PwC’s Lutchen. “You have to be far more aggressive and communicative in helping the business side understand what benefits IT can bring.”

RHT’s Lee agrees: “You’ve got to become part of the business decisions made in your organization. You don’t want to be the last one to find out about a key strategic initiative.”

Make a federal case out of security issues

In 2003, corporate America learned that even the smallest worm can topple the mightiest firms. Virtually overnight, security issues moved from the network administrator’s to-do list to the CEOs desk.

“The No. 1 concern we hear about is security,” says Gartner analyst Martin Reynolds. “People want to stop the business disruptions they’ve had from all the worms and other problems.”

Worse, a company’s reputation could be tarnished irrevocably if its security is breached, notes Douglas Dormer, president of Black Dragon Software, a maker of products that assess corporate security risks. 

“Eventually I think we’ll see an Enron-type of event with IT security, when it will shift from a technology problem to a branding problem,” Dormer says. So if, for example,

a major bank had its security compromised and that became public knowledge, a rival bank could capitalize on the failure.

Other big drivers of security concerns are federal and state legislation, such as Sarbanes-Oxley, the Gramm-Leach-Bliley Act, HIPAA (Health Insurance Portability and Accountability Act of 1996), and California’s SB1386, all of which deal in part with ensuring the security of corporate and personal information.

Where companies might have been reluctant to spend limited budgets on making their networks more secure, IT managers can use such federal regulations to spur necessary improvements, says Steve Orrin, CTO of Sanctum, a maker of security software.

“Mapping technology to the pain points that CEOs and COOs can understand really helps,” Orrin says. “That’s especially true in security. Instead of saying, ‘We need $1 million to fix these audit tools,’ you can point to regulatory compliance and use those drivers to help justify your budget.”

Copyright © 2004 IDG Communications, Inc.