Outlook 2004

In an old Hollywood movie, a wise nomad has some advice for the film's hero, who's traveling through the desert: "Trust Allah, but don't forget to tie up your camel."

Business leaders preparing for 2004 appear to be exercising the same blend of faith and caution when it comes to the economy, growth prospects, and budgets. Business-technology executives surveyed for InformationWeek's annual Outlook study expressed the highest level of optimism in three years about their companies' revenue prospects, but they're moving cautiously, with no plans to significantly increase IT purchasing levels or appreciably boost technology staffs.

The 400 companies surveyed plan to devote, on average, 8.3% of annual revenue to IT expenditures, down slightly from last year's 8.6%. That could still bring an increase in overall spending, since 82% expect their companies' sales to increase this year. Nearly half the respondents say they expect IT spending to exceed 2003 levels, a positive shift from a year ago, when 40% anticipated increased spending.

On average, survey participants say 30% of 2004 IT budgets will be dedicated to salaries and benefits, with 22% going to hardware and technology purchases, 20% to applications, and 11% to consulting services and outsourcing. Top-of-mind initiatives for the new year include optimizing business processes, improving customer service, and organizing or using customer data. Anticipated technology priorities include purchasing PCs, enhancing network security, and upgrading network-management software.

Money won't be easy to come by in the next 12 months. Tech projects underwent significant scrutiny during the last budget-analysis cycle, and short-term return on investment remains critical at many companies. Successful projects depend on workers understanding why they have an IT tool and being able to do their jobs better because of it, says Keith Morrow, VP of IS and CIO of convenience-store chain 7-Eleven Inc. "For us, it all boils down to, does it make our stores easier to run or does it add pain? That's the filter through which everything must pass."

Morrow has been known to fight against IT initiatives he doesn't think will provide adequate return on investment within a reasonable time frame, especially ones trying to patch-fix a broken process or get too far ahead of unproven technology. For instance, Morrow supports 7-Eleven's research and testing efforts in radio-frequency identification technology. But he's not ready to go beyond that. "I'm dead set against plunking down a significantly large investment on unproven and untested technology and perpetrating it on our stores," he says.

Morrow says 7-Eleven believes RFID--using tags that emit radio signals to track goods in the supply chain--will be an important technology, but as a retailer where inventory distribution to individual stores is generally completed on a single-item basis, costs associated with the technology are still too high for full-scale implementation. Instead, the retailer plans to continue budgeting for proof-of-concept initiatives around RFID, he says.

Overall, 7-Eleven's IT spending has remained fairly constant the past few years and will be flat again in 2004, Morrow says. The company has held the line by requiring managers to justify their projects and operations each year. "We build up the budget from a blank sheet of paper. Nothing in technology, in my view, should ever be static," he says.

Henkel Group, maker of Duck brand duct tape and other adhesives, has increased its IT budget slightly over the past few years, says VP of operations Gene Obrock. Henkel is trying to gain a competitive advantage by investing in technology rather than adding staff, which increases overhead expenses. "We'd rather invest in technology versus people," Obrock says.Henkel, which is among the top 100 suppliers to Wal-Mart Stores Inc., will make a significant IT investment this year to comply with the retailer's January 2005 deadline for pallet- and case-level shipments from its largest suppliers to be RFID-enabled. To that end, Henkel is implementing a warehouse-management system from Manhattan Associates Inc. to accelerate its wireless-tagging program. Although Henkel has been studying RFID for some time, it held back on full deployment until Wal-Mart issued more-specific directives to its suppliers in November.

Despite rising economic optimism, the view on IT budgets for this year hasn't changed much from the past two years, with 39% of survey respondents expressing a positive outlook on their companies' budgeting and spending plans, compared with 36% in 2003 and 34% in 2002.

At Sun Microsystems, optimism doesn't mean more dollars for IT. "The only budget increases we see now are for things that will save us money," says Bill Vass, Sun's VP of corporate software services. "It can appear that there's new spending internally, but it's more a matter of shifting the budget from one set of priorities to another--a zero-sum gain." Seventy-seven percent of executives surveyed cite reducing the cost of IT operations as a business priority for 2004.

Cost savings are often used to fund other, often mandatory, technology initiatives. A major investment that survey respondents anticipate this year is ensuring compliance with government regulations, with 41% expecting to spend more on those efforts this year than last and 78% indicating they plan to use IT in their compliance efforts. Among Sun's priorities for 2004 is compliance with the Sarbanes-Oxley Act (see story, "A Top Priority For 2004: Sarbanes-Oxley Compliance"). The company also plans to focus on cost cutting by continuing to replace PCs with thin-client systems, including home-workers' systems, consolidating server and software platforms, and improving security.

When looking at key business priorities for 2004, more than 90% of executives surveyed say they want to simplify or optimize businesses processes, and 83% want to gain a better return on their IT investments. Brian Bonner, CIO of semiconductor manufacturer Texas Instruments Inc., says that after seeing many projects fail to deliver on their promise in recent years, some companies will no longer engage in large projects that last multiple years, such as enterprise resource planning. "What we want today are very short projects with quick deliverables," Bonner says. "If there's a longer project, there need to be gates at which you can view a piece of it and ensure the project is headed in the right direction."But throughout the business world, companies will need to increase spending on items such as PCs because many of them have significantly delayed upgrading as part of their efforts to cope with the poor economic conditions of the past few years. Storage upgrades also will represent an area of significant investment. Eighty-eight percent of survey respondents say PCs are on their planned-project lists for 2004, 60% cite storage area networks, and 52% enterprise storage systems. "I don't see necessarily that people are waiting for times to get better and then they'll plop down a whole pile of money, although the IT industry would like to think differently," Bonner says. "A lot of companies, however, have delayed discretionary spending on technology and will eventually grow at a gradual rate."

One such example is Texas Instruments' use of internally developed customer-relationship-management software for mobile workers. Improvements in worker mobility will be an important area of investment this year, Bonner says. The goal is to increase the productivity of the company's mobile sales force without investing in a major software implementation, he says.

Productivity is important to almost all Outlook respondents; 90% say boosting worker productivity is a business priority in 2004. Existing productivity efforts seem to be paying off, with nearly three-quarters of respondents saying their companies were more productive in 2003 than in the previous year.

At automaker DaimlerChrysler AG, the IT budget has been flat for several years, but CIO Sue Unger says she thinks that's when tech departments do some of their best work. "IT shops are better off when times are a little tough because it forces them to look at how they can become more efficient internally," she says.

DaimlerChrysler's IT department worked with each company division to look at key projects scheduled for this year and then created a prioritized implementation plan. One of the biggest projects: upgrading to the latest version of Dassault Systemes SA's Catia product-design system. Catia lets engineers create digital versions of vehicle designs and the factory layouts needed to build them. The software will be a key part of DaimlerChrysler's digital-manufacturing platform, which lets engineers create a virtualized factory so they can offer instantaneous feedback on the manufacturing implications of new design considerations.Tony Scott, chief technology officer at General Motors Corp., says refreshing GM's IT infrastructure is high on the to-do list for 2004. The carmaker will upgrade its frame-relay network to multiprotocol label-switching technology, which is expected to provide a higher level of service control within its wide area network. The company also will continue consolidating the number of servers throughout its network, possibly making use of blade-server technology.

GM's efforts to digitize its vehicle-engineering processes are well known: The company already has reduced the amount of time it takes to bring a car from the drawing board to production from 40 months to 18 months or less, Scott says. In 2004, GM will focus on digitizing the drawing-board stage--the early design steps where car concepts are developed before being handed off to engineering. Some of the automaker's biggest increases in IT spending will be outside the United States, including in Latin America and Asia, particularly China, where GM expects much of its future growth. GM plans to roll out its multiprotocol label switching network in Europe and then other parts of the world before doing so in the United States.

GM also needs to make plans for 2006, when its outsourcing contract with EDS expires. GM outsources far more than most companies, since it does none of its own development. But outsourcing is top-of-mind for the majority of survey respondents, with 85% saying they plan to spend the same or more on outsourced services this year. Of the 172 respondents whose companies outsource offshore, 46% plan to spend more, and only 11% expect to spend less.

Steve McDowell, CIO of Holiday Retirement Corp., which manages more than 260 independent-living retirement facilities in the United States, Canada, and Europe, says the company hasn't faced the kind of slump that retailers and manufacturers did during the downturn. Instead, its tech group's challenge has been keeping up with the steady addition of 12 to 15 facilities per year without much increase in its IT budget. In the late '90s, driven in part by Y2K issues, the company overhauled its IT infrastructure, which at the time was based on outdated technology, and upgraded to new servers, J.D. Edwards ERP applications, and Microsoft Exchange.

In 2004, the priority is implementing applications that leverage that infrastructure and make the company's business processes more efficient. "I now want to focus on things that will give us a big bang," McDowell says.Among those initiatives are applications for managing the process of moving residents into and out of the Holiday Retirement facilities and managing maintenance work orders. One project this year will be the implementation of an electronic time-clock system for the company's 9,000 employees, a system that's expected to reduce payroll paperwork and associated costs. In addition, McDowell plans to install eTrust IT security software from Computer Associates to help manage system access for employees--a problem in an industry with a high rate of employee turnover--and for intrusion detection. Help-desk applications from CA also are on the planned-projects list.

Holiday Retirement also is considering several business-intelligence projects to extract data from the company's ERP systems and provide it to executives through a portal, McDowell says. Altogether, McDowell says his to-do list contains about 70 IT projects, and he expects to make significant progress on about 25 of them this year.

At Harrah's Entertainment Inc., the goal for 2004 is to use technology to improve the time-honored casino tradition of giving perks to good customers. That will require turning the massive data warehouse used to collect and analyze guest information derived from Harrah's Total Rewards customer-loyalty program into a source of real-time information. The goal: to track the activities and spending habits of its top 100,000 VIP customers and reward them in real time. Harrah's has plenty of company--three-quarters of survey respondents say they'll establish processes that support real-time information this year, and 61% say data-warehouse technology is a priority. The Total Rewards system is powered by warehouse technology from NCR Corp.'s Teradata division. Harrah's plans to adapt that system with Teradata's active data-warehousing technology to perform customer-data analysis in real time, rather than after a guest has left a casino. Using messaging middleware from Tibco Software Inc., the data warehouse will be tied into recently installed customer-contact applications from Blue Martini Software Inc.

Harrah's, which operates 26 casinos, is expecting solid sales growth this year, but tax increases recently enacted in Illinois, New Jersey, and other states likely will take a bite out of profits. CIO Tim Stanley has his own bottom line: Harrah's measures IT spending as an operating profit or loss, and Stanley expects 6% operating-profit growth on the IT budget this year and 7% profit growth on IT capital spending.

Office-supply company Office Depot Inc. has several major IT initiatives planned for the year involving supply-chain management, merchandise planning, and warehouse operations. The company has multiple sales channels, including direct delivery to companies, Office Depot aisles within grocery stores, and online sales; only 46% of its sales come from its retail stores. Business technology and processes for managing and restocking those multiple channels must be flexible and efficient, CIO Patty Morrison says.This year, Office Depot plans to install supply-chain-management and merchandise-planning applications from Retek Inc. The software will help the company work with its suppliers to complete product-assortment-planning, sales-forecasting, and price-optimization tasks, Morrison says. The retailer also will use software from Manhattan Associates to improve the efficiency of its warehouse operations, especially in Europe, where it's integrating operations with those of office-product supplier Guilbert SA, which Office Depot acquired in 2003.

Morrison's IT budget has remained relatively flat, not including major initiatives such as the supply-chain and merchandise-planning projects. The company is considering shrinking the number of IT vendors it works with, particularly companies that provide contract employees. But cost cutting, per se, isn't the goal. "The priority is to find efficiencies so we can reinvest those dollars in growth initiatives," Morrison says.

It's an increasingly common strategy to ask business-technology groups to cut costs to fund new initiatives. With 54% of executives in our Outlook study expecting total IT spending to be less than or only equal to 2003, this will be a year of both squeezing budgets and adding projects. And while hopes are high for steady improvement in the economy and a more prosperous year ahead, business-technology professionals must accept that IT investment will likely lag, rather than lead, any recovery.

-- with Rick Whiting