I recently went for a walk with a friend who is a highly respected European financial sector leader. I talked about the challenges we experienced in managing through the economic slowdown that started in 2001, and asked for his thoughts on the current situation. “This is very different,” he said. “In 2001, it was Main Street that took the hit. This time it’s Wall Street.” In other words, the last time around it was core manufacturing industries that suffered, but this time it’s the big financial institutions. Since that discussion, I’ve given this a lot of thought, trying to understand what it will mean this time around. No doubt, the data is contradictory and difficult to cleanly analyze. Good times, bad times? On the this-can’t-be-good side of things, credit remains tight, and the housing market continues to slump. Oil prices remain over $100 a barrel, and food prices are up. Retailers are reporting the worst January in four decades, and unemployment rates have edged up to a three-year high, reflecting declines in construction and manufacturing. However, amid these negative performance indicators, capital expenditures seem to be holding up. Since technology spending represents such a large percentage of capital spending, let’s use the technology sector as a bellwether for determining the potential impact of this downturn on corporate spending. For starters, IBM has forecasted 2008 earnings well ahead of Wall Street expectations, as strong growth abroad makes up for weaker results in the United States. Microsoft met expectations for its March quarter and upped its outlook for fiscal 2008. SAP said it had robust sales of software licenses (the best in four years) and raised its guidance for the rest of the year. McAfee also posted a better-than-expected fourth-quarter profit. Despite the strong results, though, technology stocks have taken some hits. It’s almost as if we have to start believing our businesses are worse than they look to us, simply because the underlying news tells us it is so. It’s a sentiment echoed by fellow CEOs across the industry. As John Chambers, CEO of Cisco, said recently in an interview in the Financial Times: “When I talk to many CEOs, most of them would say, ‘I feel pretty good about my business, but I don’t like what I’m hearing and seeing.’” So what does all this mean? This is not 2001 When the dot-com bubble burst, most companies suddenly realized they had been on a rather irrational spending binge when it came to technology. For more than six years, companies spent more on technology than ever before, driven by two fears: - Y2K—All systems had to be replaced for fear they would be operationally dysfunctional and shut down operations at the stroke of midnight, January 1, 2000. Companies rushed to invest in client-server systems and software that proved unwarranted.
- The Internet boom—Most companies overspent on technology, fearing some nimble e-upstart would beat them out of their markets. This led large companies to make ridiculous investments in the creation of trading exchanges, like Transora in the consumer goods industry and Covisint in automotive, and too many e-initiatives that proved a waste of money.
When it all came crashing down, business executives realized that billions had been spent on technology with little to show for it. Industry went from buying technology out of pure fear (or a desire to keep up with everyone else) to draconian cuts in spending in order to rationalize years of unjustified spending, which resulted in a virtual shutdown of technology spending. In fact, 2001 was the first time in the history of the technology industry that spending actually shrunk from the prior year. Until then, tech spending had grown while GDP shrunk during recessions. Between 2001 and 2004, companies turned their attention to implementing what they had already purchased, getting rid of shelfware they had no use for, writing off investments that shouldn’t have been made, outsourcing nonstrategic components of IT infrastructure, and redefining the entire IT governance process in the context of business goals. Recovering from the very bad dot-com/Y2K hangover changed how companies approached IT spending and management. The biggest result has been that IT is now a core part of the business strategies of the best-run companies, which means technology spending won’t be hit nearly as hard as it was in 2001. What to expect Of course companies will trim budgets in a downturn. They will slow hiring plans, perhaps extend the use of aging desktops and laptops by a year, and maybe put off upgrades until it passes. However, our research clearly shows that companies will not postpone investments that are vital to strategic business initiatives. Expect the following to unfold: - Continued investments in business intelligence and performance management software to support business decision making
- Product innovation and development in high-tech and other industries that compete with short product lifecycles
- Product authentication, track and trace, and similar technology in life sciences
- Demand intelligence and management in any consumer industry
Even in retail, which is in the eye of the storm this time around, we expect continued strong investment in several strategic areas: - Advanced point of sale—To revamp aging in-store software and hardware for more efficient transactions and to get closer to the customer
- E-commerce technology—As a platform for cross-channel interactions to ensure a consistent face at each point of customer contact
- Merchandising—Specifically assortment planning, inventory management, and lifecycle pricing to move toward localized products and pricing strategies
AMR Research completed its annual IT budget survey of spending plans across sectors in October (see Figure 1). The survey of IT and business leaders shows most industries are growing their IT budgets for 2008, even financial services, which was one of the top spending sectors in the study. At the time, we projected 8% spending growth in IT in 2008. 
While those numbers are likely to readjust downward (particularly financial services), don’t expect a dramatic shift in spending. Budgets will be trimmed, but we estimate growth coming down to perhaps 6% from our conversations with companies about their plans. In the final analysis, the answer is yes—a struggling economy will affect capital spending, but the impact on Main Street will be minimal. Companies have taken great steps since 2001 to improve governance and maximize profit, and this will bolster spending. This is not 2001 all over again. I look forward to hearing your comments and thoughts at tfriscia@amrresearch.com.
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