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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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FEBRUARY 4, 2004
Less Bounce in This Tech Rebound While corporations are buying again, their spending strategies are Spartan, and no innovative tide is likely to sweep in and overcome that conservatism For Bill Zadrozny, 2004 looks like a pretty good year for tech spending. He heads the U.S. arm of Siemens Financial Services, part of the German tech and industrial-equipment conglomerate. Zadrozny counts among his 2,600 customers many of the largest corporations in the world. His outfit finances roughly a billion dollars worth of their tech purchases from chipmaking-equipment producers, phone companies, and PC makers, among others. Those buys include not only Siemens' (SI ) gear but purchases from many other tech concerns as well. Based on demand for that money, Zadrozny says, he has seen "more interest in tech the past four months than in the past few years." The two categories of equipment he sees moving the fastest are advanced voice-and-data telecommunications systems and plain-vanilla PCs. Businesses use the former to integrate their voice and data networks and bypass phone companies. As for PCs, Corporate America's are simply wearing out. MODEST INCREASES. That observation is telling. Yes, a tech recovery is occuring, and the corner office has finally decided that it's time to buy. But this rebound is looking very different from the tech booms of decades past. For one, consumers have led this recovery, with corporate buyers coming to the table only recently. At the same time, no massive technology shift is driving the upswing. So while chief information officers have finally loosened their purse strings, they remain wary of big outlays, preferring instead modest spending increases to achieve specific goals. That's a recipe for a tech recovery that could prove to be less robust and shorter-lived than the rebounds of years past that moved the entire economy. This implies tech industry revenue gains in the mid-to-high single digits, a far cry from the explosions following the arrival of the minicomputer, the desktop PC, and the Internet. "We could have a very short-term return to previous growth if the economy really booms," says Steven Minton, director of the worldwide IT market research group at tech tracker IDC in Framingham, Mass. "But after that, we think that IT spending will settle around the 7% to 8% growth range." NEW DISCIPLINE. He adds: "What would change that would be a new and compelling technology. But we don't see anything like that on the horizon right now." Minton's group predicts that global business IT spending, including services, hardware, and software, will grow 5% in 2004, from $874 billion to $915 billion. Unlike in past tech binges, that rate of increase would correspond more or less with U.S. and global economic growth. And it would pale next to 2003 revenue gains in the mid-double digits enjoyed by makers of such hot consumer fare as digital cameras, consumer laptops, and digital TVs. With no new killer tech looming that would induce big spending, the Spartan ethos honed during the past few years of economic stagnation remains tech buyers' standard operating procedure. "In the late 1990s there was a lot of spending that was technology for technology's sake," says David Edelstein, CIO of Dade Behring Holdings (DADE ), a Deerfield (Ill.) medical-diagnostics concern with 2002 annual sales of $1.3 billion. "It was somewhat disconnected from what the business really wanted. The bust drove a different kind of discipline into IT spending." DRIVING HARD BARGAINS. That discipline means this recovery isn't likely to be as wide-ranging as in the past. For instance, Siemens' Zadrozny sees enterprise software -- which organizes all the information within a company -- as a soft spot, a view confirmed by CIOs who are driving hard bargains. Across the spectrum, tech outfits still have little bargaining power. "We were very aggressive with [our hardware and software suppliers] on their pricing, and they were willing to deal," says Edelstein. "A couple of years ago, they would not have done that. Even though things are starting to turn around, there are a lot of hungry vendors out there -- even the big guys." Witness the $30 million deal signed this past December by the U.S. Treasury Dept. for portal software (used to make disparate applications and information accessible through a simple browser) from Vignette (VIGN ). The deal consolidated maintenance fees and other expenses -- essentially delivering a price cut on a per-user basis. According to Drew Ladner, Treasury's CIO, it saves the department millions of dollars. "We reduced the maintenance stream significantly and reallocated those savings to more efficient uses," says Ladner, who presides over a $2.6 billion tech budget and 8,000 employees across Treasury's many bureaus. READY TO PERCOLATE? Still hard to predict are the winners and losers of this IT recovery. The early laggards appeared to be software outfits, as hardware vendors of servers and PCs reported strong quarters over the past three months, led by stalwart Dell (DELL ). IDC's Minton, however, believes the PC sector has benefited from a big replacement cycle that could peter out toward the end of 2004. A January Goldman Sachs survey, which quizzed 100 top chief information officers as to their spending plans, found a similar sentiment. While enterprise software looked like an also-ran, the Goldman Survey found that the field should start percolating soon, with particular interest in database, CRM (customer-relationship management), and Internet-related software. That uptick may not show in earnings of big software shops such as Oracle (ORCL ) and Siebel Systems (SEBL ) for at least a quarter, though. "I feel that customer-service applications, including CRM, will become increasingly important," says Ajit Patel, CIO of 550-store clothing retailer Chico's FAS (CHS ). While demand for computer services -- a mainstay at IBM (IBM ) -- looks strong on the surface, Minton believes it will see the slowest growth in 2004 among the three main tech components he measures -- 4.6% for services, vs. 5.2% for hardware sales and 5.6% for software. That reflects the continued reluctance of CIOs to undertake big-ticket projects. THE SIGN TO WATCH. Such reluctance is only one of a handful of potential deadweights that could inhibit the recovery. For instance, consumers have continued to spend heavily on technology, but more and more economists are wondering if the persistent lack of job growth could snap their wallets shut this year. Moreover, government spending on security and other big IT projects helped keep tech businesses afloat over the past two years. But with record budget deficits, federal IT spending could start to slow considerably. "I'm not quite sure whether it can last," says Peter Cohan, a management consultant and tech-sector expert. The telltale quarter, Zadrozny predicts, will be 2004's first. It's traditionally a weak period for tech spending, and Zadrozny believes that if corporations continue to buy, it'll be a strong signal of at least a steady tech revival. The U.S. economy's recent cooling to a more sustainable annual growth rate of 4% also implies that tech, which has powered past economic upturns disproportionately, is playing a restrained role for now. So the layoffs have stopped, and tech profits finally are rising. But tempered expectations and a sober buying mentality will continue to color the tech horizon for the foreseeable future.  By Alex Salkever, Technology Editor for BusinessWeek Online
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