IT Spending Key to Competitive Gains During Recession

November 9, 2009 Alex Woodie

While it is true that companies have sharply curtailed spending on IT during the recession, top financial executives still view IT as a strategic investment for obtaining a competitive advantage, according to a study of CFOs commissioned by Micro Focus. The study, released last week, found the recession has focused companies’ efforts more on improving existing systems than implementing new ones, and has brought the side benefit of boosting collaboration between management and the IT department.

There is no sugar-coating the huge impact that the recession has had on overall IT spending. The server business–the most visible part of the IT ecosystem–recently stomached the worst quarter in history during the April-through-June period, with a 30 percent decline in revenue, but it’s not the only IT segment to take a hit.

As previously reported in The Four Hundred, Gartner last month predicted that IT spending for 2009 will be about $3.2 trillion, or 5.2 percent lower than 2008 levels. Overall, spending on hardware will decline by 16.5 percent to $317 billion, telecom by 4 percent to $1.9 trillion, personnel by 3.5 percent $781 billion, and software by 2.1 percent to $197 billion, according to Gartner.

With $200 billion less floating around in the IT ecosystem this year compared to 2008, companies have had no choice but to lay off employees, delay hardware upgrades, cancel projects, and embark upon other forms of belt-tightening. It’s no wonder Gartner declared 2009 “the worst year ever” for IT spending. And while an economic recovery is reportedly underway, 2010 will likely be a just a tad less devastating. IT spending isn’t expected to return to 2008 levels until the far-off year of 2012.

But not all companies in all industries will suffer equally during the recession. Take the automobile industry, for example. While the big automakers suffer historical losses and bankruptcies, used car prices have held steady, and auto repair shops are reporting higher sales. There is a similar phenomenon at work in the IT business, and companies like Micro Focus–which sells a lot of application modernization software and solutions that allow companies to keep applications functioning and relevant despite their age–stand to do well.

This August, Micro Focus worked with CFO Research Services to put actual numbers to the idea that shifting priorities do not spell an end to IT investments, and that, executed correctly, IT projects can be key differentiators and help a company prosper competitively during a recession.

Micro Focus and CFO Research Services based the report on the responses of 198 senior finance executives at primarily medium-size companies and interviews with executives of six large companies. It was recently released with the title Road to Recovery: Finance’s views on IT investments for efficiency and competitive advantage.

The report presented some interesting–if not earth-shattering–findings. For example, a full 58 percent said their company remains committed to IT projects set on track before the economic downturn. Only 2 percent said they were stopping most IT projects without any intention of starting them again, according to the report.

One of the executives interviewed for the report, Ippocratis Vrohidis, the director of finance for the industrial and transportation division of 3M, says projects that were strategic before the downturn mostly remain strategic today. “We do not want to start and stop IT projects haphazardly because of the downturn,” he says.

As for future IT investments, the study suggests that companies are most likely to choose IT investments that are tailored to “generate efficiencies and boost productivity,” the report says. That means companies are choosing to modify existing systems representing big investments as opposed to starting new projects. More than 70 percent of executives say they are modifying existing ERP applications and data centers, as opposed to installing new ERP programs or building new data centers.

However, companies are more apt to make bigger bets on less complex and costly systems. When it comes to CRM systems, only 54 percent of executives say they would rather modify than start from scratch, while 52 percent say they are modifying existing Web and e-commerce sites instead of building new ones.

Overall, with its capability to drive new top-line growth as well as boost the bottom-line profit, IT remains front and center in the minds’ of finance executives as a way to navigate their companies out of the recession, according to the study. Twenty-two percent of respondents said IT will be a “very important” factor in their company’s competitive position after the downturn, while 49 percent said it will be “somewhat important.” The remaining 29 percent said IT was “somewhat unimportant” or “very unimportant.”

The report suggests that the tough times are forcing some companies to collaborate more effectively across their management, finance, and IT divisions. While the majority of respondents to Micro Focus’ survey say this relationship has not changed during the recession, more than one-third of them say it has improved.

Nick Bray, CFO of Micro Focus, suggests that smart companies will use the global economic disaster to improve their IT systems and gain a competitive edge. “Now that companies have trimmed more of the fat across their organizations,” he says, “investment in existing IT systems stands out as a cost effective means to achieve competitive advantage.”

Modernization of mainframe applications is a big source of revenue for Micro Focus, which is the biggest provider of COBOL tools outside of IBM. The company also has a large stake in the System i modernization market with its acquisition of NetManage and its RUMBA customer base. The report can be downloaded from Micro Focus’ Web site at www.microfocus.com.

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