Time for the Tech Tide to Turn?


By Olga Kharif At $30 million, John Kenagy's information-technology budget at Oregon Health & Science University is no higher than last year. The economy in Oregon remains wobbly, and the state keeps threatening to slash its funding to the nationally recognized hospital and medical school by 40%. With inflation factored in, Kenagy's buying power is down about 4% vs. 2004, he figures.

Even so, Kenagy has a big software project lined up that could inflate his spending, although technically the money will come from his $30 million capital budget account. Designed to revamp OHSU's health records system, the three-year undertaking he's kicking off in 2005 is expected to cost $30 million this year alone. As a result, Kenagy's total spending is up 33% from 2004. How does he manage? "We're working leaner, but we're building the infrastructure for the future," Kenagy explains.

This project is just one indication that the supposed dreariness of the IT spending landscape in the U.S. might be overstated. Corporations are certainly still in a cautious mode, but they're finding ways to spend on major, strategic initiatives -- perhaps indicating that 2005 could be a turnaround year for long-suffering tech companies.

"BUYER'S MARKET." Already, in a monthly poll of 300 CIOs released by CIO Magazine on Jan. 3 respondents expressed optimism about their spending outlook. They expect IT budgets to grow 6.7% in the next 12 months -- less than November's 8.4% projected growth, but still the highest number for a December poll in four years. And typically by December, CIOs know what their budgets for the following year will be.

This rising demand is fueled by rock-bottom pricing, even though prices usually tend to move higher during an economic recovery. "Right now, it's a buyer's market. We can get very, very good prices," says Mort Rahimi, CIO of Northwestern University in Evanston, Ill. Rahimi is spearheading Northwestern's efforts to implement enterprise resource planning (ERP) software that can be used to manage everything from manufacturing to human resources. "I expect the technology economy is going to really take off, and later such prices will be harder to get."

ERP finally seems to be coming into its own, experts say. The systems cost 25% to 50% of what they did three years ago, estimates Albert Pang, an analyst with tech consultancy IDC in San Mateo, Calif. And most of the wrinkles (many will recall sky-high budget overruns and failed implementations) have been worked out.

PERSONAL TOUCH. "The software is easier to use and cheaper than ever," says Pang, who projects that the North American ERP market will grow 6.7%, from $13.3 billion in 2004 to $14.2 billion this year. Vendor SAP's (SAP) customer base increased by 5,000, or 20%, between January of 2003 and 2005, he estimates. "In 2000, we had a rush to ERP," says SAP Senior Vice-President Jim Snabe. "Now, it's a more considerate, strategic process. But the market is definitely increasing its focus on ERP."

Ditto for ERP-related additional hardware, such as servers. Many tech companies, starved in the downturn, are still willing to cut deep into their margins to make sales.

Kenagy found servers from Sun Microsystems (SUNW) were several thousand dollars cheaper than similar boxes from IBM (IBM) or Hewlett-Packard (HPQ), he says. Sun's management was also willing to set up a personal meeting with Kenagy, who already operates 180 Sun servers. Anything to help the company recover market share lost in the downturn. Such steep discounts probably won't last, so CIOs are grabbing them while they can.

WINNERS' CIRCLE. Labor costs might be going up in future months as well, making today the better time to implement labor-intensive projects. Already, the CIO Magazine poll showed that 13.6% of CIOs say qualified labor is hard to find, up from 5% in January of 2003. "As investment in software is showing some life, the question is whether they'll have the staff to implement it," says Gary Beach, group publisher at CXO Media, CIO Magazine's parent. "The IT labor pool is not as deep as once thought." And that could lead to salary increases as companies once again jockey for network administrators and programmers.

That increased spending will largely go to companies that specialize in certain areas. Life will be good for ERP vendors such as SAP and Oracle (ORCL). Other beneficiaries will be storage and server vendors such as Network Appliance (NTAP) and Dell (DELL). And with computer viruses becoming ever more virulent, IT dollars will continue to flow into security software. Worldwide spending on security software should increase 15.6%, from $9.6 billion in 2004 to $11.1 billion this year, according to IDC.

Meanwhile, other categories, such as PCs, could suffer, as large companies work to comply with new government regulations such as the Sarbanes-Oxley act, which mandates that companies ensure reliability of their financial reporting systems. Instead of bumping up their IT budgets for typical hardware purchases, companies with 5,000 or more employees may simply redirect more than 15% of their spending to compliance-related issues, according to CIO Magazine's poll.

LOOSENING SCREWS. Still, many customers are waiting for revenue growth to return before increasing their IT investments. Take Del Taco, a chain of 262 fast-food restaurants, whose IT budget is flat at $2.4 million. The company will eventually need to replace its hardware, some of which is so old it's no longer made. "But the good and the bad thing is, the systems are running at peak performance," says CIO Henry Volkman. And Del Taco's money handlers say if it ain't broke, don't fix it.

But a lot of companies have held off on some strategic investments for much too long already. "We've gotten operations as tight as it's going to get," says Volkman. So chances are, the tech industry will some loosening of the screws pretty soon - beginning with big projects like ERP. Kharif is a reporter for BusinessWeek Online in Portland, Ore.


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