The New York Times-20080126-Belt-Tightening- but No Collapse- Is Forecast in Technology Spending

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Belt-Tightening, but No Collapse, Is Forecast in Technology Spending

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In the consumer economy, the Main Street shopper leads the way. In the corporate economy, big technology buyers like Monte Ford will determine the arc of business spending in the coming months.

The decisions of Mr. Ford, the chief information officer of American Airlines, and his peers across corporate America matter a lot, because information technology looms so large in the modern economy. Today, purchases of computer hardware and software account for half of all capital spending by businesses.

Will falling corporate investment be the next shoe to drop on the way to a recession, or will it hold up enough to help steady the economy?

The outlook is encouraging, according to corporate technology buyers and industry analysts. There will surely be belt-tightening, and cuts may be sharp in some industries, especially the financial sector. Overall growth in technology spending may fall from 7 percent last year to 4 percent or less this year, according to estimates by IDC, a research firm.

That would be in sharp contrast to the experience of the 2001 recession, when technology spending fell 11 percent over two years in the aftermath of the dot-com collapse. During the boom years, the mentality was to spend on technology and hope for a payoff. But in recent years, corporate technology managers have been far more disciplined spenders, measuring results to prove that investments in technology really can cut costs, increase productivity and lift sales.

So the cutbacks in this downturn, analysts say, should be modest -- reassuring news for the economy. This is a reason for optimism that if there is a recession, it will be a mild one, said Mark Zandi, chief economist at Moody'sEconomy.com.

At American Airlines, a unit of AMR, Mr. Ford doubts that the current downturn could be worse for the airlines than the falloff after the 9/11 terrorist attacks -- a gigantic economic crack for our industry, he said. The company decided then that despite cutbacks elsewhere, it would not sharply pare its technology budget. This year, he plans to spend modestly more -- a few percent -- than last year.

To explain, Mr. Ford points to three major costs for an airline: people, planes and fuel. Technology remains the best lever for getting more value from all those, making your employees more productive, making better use of your fleet and increasing your fuel efficiency, he said.

That view, Mr. Ford said, is supported by results. A fuel efficiency drive begun in 2005, including software to tailor routes, flight paths, even baggage loading, has reduced fuel consumption by an estimated 96 million gallons a year.

At Pitney Bowes, a maker of mail handling equipment and marketing services, Gregory E. Buoncontri, the chief information officer, expects his budget this year to be roughly $180 million, about the same as last year. Despite the economic slowdown, Pitney Bowes will make some targeted new investments that the senior management team has agreed are priorities to help the company become more competitive. The priority projects, Mr. Buoncontri said, include analytics programs that sort through customer data to predict promising sales opportunities and to improve customer service.

You only want to start projects you are dead-serious about, he said. A downturn really heightens that discipline.

To make room for spending on new things, managers must make cuts in the spending for basic operations. The preferred way to do that is to trim the budget for routine things like replacing personal computers, issuing employees mobile devices like BlackBerrys and putting off upgrades to new desktop software like Microsoft's Windows Vista operating system or Office 2007 programs.

You adopt the mentality of a small-business owner for those kinds of things -- you just want to avoid writing a check, said Jack Santos, an analyst at the Burton Group, a technology research firm.

In a survey of 300 chief information officers last month, IDC found that personal computers and mobile devices were the hardware products that would face spending cuts first, said Stephen Minton, an IDC analyst. The software products at the top of the budget-cutting list were office programs and desktop operating systems.

Microsoft this week reported strong quarterly results, led by its big desktop software businesses. But the C.I.O. survey suggests a slowdown in sales, especially in the United States, if the economy falters.

Technology spending, if managed prudently, can also deliver new abilities and productivity without more dollars, executives say. With processing speeds and storage capacity doubling every 18 months or so, each generation of technology is faster, cheaper and smaller than its predecessor.

So, according to Frank Modruson, chief information officer for Accenture, a real danger during an economic downturn is adopting a rigid austerity that saddles a company with technology that is behind the curve. Steady investment, he said, can save money fairly quickly because of the rapid pace of improvement in computing technology.

Accenture, a technology services company, spends less on technology today than it did in 2001, even though its payroll has more than doubled to 175,000 employees worldwide. The reason we could do that is that we invested during the last downturn, Mr. Modruson said.

Companies are likely to find that it is smart to make new investments as long as their overall technology spending is under control. In a recent survey of large companies, Gartner found that technology budgets have increased an average of 2.8 percent annually in the last three years. By contrast, spending at those companies in the three years leading up to the 2001 recession had grown 12.9 percent a year.

Information technology spending, said Mark McDonald, an analyst at Gartner, is not the rich target for cuts that it was in 2001.

[Illustration]PHOTO: Monte Ford, the chief information officer at American Airlines, plans a modest increase in technology spending this year. (PHOTOGRAPH BY AMERICAN AIRLINES)(pg. C8)