Corporate Internet Projects Still On The Rise

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January 22, 2001 (8:38 AM EST)

Corporate Internet Projects Still On The Rise

Companies are plowing ahead with Internet technology investments despite the economic slowdown, citing cost and competitive pressures as well as longer-term strategic positioning. At the same time, IT executives are under closer scrutiny to prioritize Internet projects based on their expected returns.

Seventy-seven percent of 250 IT and e-business executives surveyed by InternetWeek this month said their companies' Internet spending will increase in 2001. The average hike: a healthy 40 percent. Only 4 percent of execs surveyed expect their companies' Internet spending to decrease in 2001; 19 percent said it will stay the same as last year's.

The numbers are comparable to those for last year, when 77 percent increased Internet spending, 1 percent decreased spending, and 22 percent kept it the same. About eight of 10 managers said concerns about the slowing economy aren't causing their companies to consider scaling back spending on Internet efforts.

"When something is vital to the strategic mission of the business and you can pinpoint its value, funding will continue on a consistent basis," said Jack Cooper, vice president and chief information officer at Bristol-Myers Squibb Co. (stock: BMY). "Companies want to improve responsiveness to customers, reduce inventory costs, and reduce materials costs, and the Internet provides a marvelous collaborative tool to accomplish that."

Among the pharmaceutical company's Internet priorities: developing its global supply chain with key partners, using Web tools to support research and development on drugs and other products, and improving front-end Web tools that give customers access to the latest Bristol-Myers product information.

Undaunted by the soft economy, The MONY Group Inc. (stock: MNY) will double its spending on Internet and e-business technology this year. The insurance and financial services company will build a Web-based CRM system, add Web-to-legacy middleware, and introduce more self-service features to its websites -- all with the aim of increasing market share.

"The goal is to attract new customers," said E.P. Rogers, MONY vice president and CIO. "I read a report that 3.1 million people have switched insurance providers because of something they saw online. That tells me we've got to be there."

Most execs see little point in pulling back this year after painstaking efforts to build a presence -- and an industry leadership position -- on the Web.

"We're not going to decrease our investment now and lose that edge," said David Westmoreland, CIO of Arrow Electronics Inc. (stock: ARW), a $9.3 billion electronics distributor that generates much of its sales online.

Arrow will boost IT spending by 37 percent this year, even though the company expects revenue growth to slow, Westmoreland said.

The threat of recession has had "zero effect" on e-business spending at Continental Airlines Inc. (stock: CAL), CIO Janet Wejman said.

"Our CFO has reviewed and approved IT and e-business projects based on our projected return on investment," Wejman said. "So if we can show profitable returns on something, the company will go ahead with it regardless of the economy."

Continental will stick to a five-year technology investment plan that runs through 2005, Wejman said.

"That plan is focused on how we can use technology for business retention, operating the airline better, and giving customers what they want," she said. "Those types of things won't change."

For example, the airline this year will provide new Web services, such as one that lets customers access updated frequent-flier totals. It will also expand the number of Web-connected kiosks in airports and in other locations that let travelers check bags, change seat reservations, and get boarding passes. Continental is looking into providing wireless services from its airport President's Clubs to any services now offered on its site.

Also upbeat about 2001 is Office Depot Inc. (stock: ODP), which despite store closures and other cost-cutting moves in recent months expects to increase its e-business spending this year on the way to generating $1.5 billion in sales over the Web. The retailer's major projects include developing three or four additional websites for customers in other countries, expanding Internet links to its major suppliers, and providing in-store workers with access to more inventory and customer purchase data.

"Whenever we think about any new projects today, we think about Internet technology," said Bill Seltzer, executive vice president and CIO. "If the economy really goes in the tank and sales go south, we'd probably make adjustments in IT to recognize that. But the things we're doing on the Internet we need to do whether the economy is good or bad."

But although optimism prevails, gone are the days when companies could throw money at any number of e-business projects.

"You need to show ROI [return on investment]," Bristol-Myers' Cooper said. "The investment has to be tied to strong value, and there's more pressure to show that value rapidly. Without that, you don't have a shield. You'll be treated like those in the company who have budget cuts coming."

Senior managers at MONY "take a hard look at ROI on all big expenditures, and as the economy slows they'll take an even harder look at it," Rogers said.

Still, for many projects, such as providing information to customers on the Web, it's difficult or even unnecessary to do ROI analyses, he added.

"Some of this stuff you need to do just to be in the game," Rogers said.

Whirlpool Corp. (stock: WHR), which will spend the same on e-business this year as it did in 2000, began shifting its Internet priorities last July when it sensed a slowing economy. The appliance maker will now focus on projects -- such as its supply-chain network -- that will cut costs and improve relationships with key suppliers and retail customers, said Reuben Slone, vice president of global e-business. Whirlpool's B-to-C marketing programs on the Web will get less attention, Slone said.

Eastman Chemical Co. (stock: EMN) management has approved an IT budget increase of 10 percent for this year but is holding off on starting some projects until it gauges company performance through the first quarter, said Roger Mowen, CIO and vice president of Eastman's global customer services group.

"If things continue to be positive -- as we would hope they would be -- we will continue with our spend," Mowen said. "If in fact the economy deteriorates to the point that it's impacting the goals we have for 2001, then we would use our prioritization list to cut back spending."

At the top of that list is integrating the company's SAP R/3 platform with front-end applications.

Arrow Electronics will cut back this year on some internal IT projects, such as upgrading its human-resources software, that it considers "nice to have" but not crucial, Westmoreland says.

And not every company is boosting e-business spending.

Amtelco Inc., which makes call center systems for various industries, has cut its overall IT budget, including e-business, by 10 percent as it braces for slower growth. One project being scaled back is a voice-over-IP network, CIO John Poehling said.

Those companies surveyed by InternetWeek that are reducing their Internet spending said they're most likely to cut in the following product/technology areas: e-business application development (cited by 61 percent of surveyed execs); desktop hardware and software (55 percent); ISP, ASP, and other Internet-related outsourcing services (52 percent); online procurement software (52 percent); and mobile/wireless devices and services (50 percent).

While overall IT budgets will increase by an average of about 10 percent this year, that's down from 20 percent growth last year, according to a survey of 800 U.S. companies by Howard Rubin, a professor emeritus at Hunter College and a research fellow at the Meta Group.

As recently as June, companies were expecting IT spending increases of up to 30 percent as they built out their e-business infrastructures, Rubin said. By midsummer, the economics began changing. Rubin said he expects companies to keep a sharp watch on financial markets throughout the year and adjust their IT spending more quickly than ever.

"We're probably going into an era where the IT budget as we know it will change," he said. "Money will move in and out of IT frequently based on need, value, and economic times."

But e-business will constitute a growing portion of total IT budgets -- from 12.7 percent in 2000 to 15.5 percent this year and from 30 percent to 50 percent in 2005, according to a GartnerGroup study.

Warnings about an economic downturn have been hyped, said Gartner analyst Kurt Potter, who cautions IT managers not to panic, as many companies did during the Asia-Pacific financial crisis several years ago.

"My phone was ringing off the hook then, with people asking how they could cut their budgets and how bad it would get," Potter said. "We weathered that well, and I don't think this will be as bad."

If there is a recession, companies must resist the temptation to delay e-business projects and instead accelerate IT and e-business spending, he said.

"Some are going to take a more cautious approach and underfund initiatives," Potter said. "But companies should look at this as an opportunity to increase spending and leap ahead of their competitors. IT has changed from something used to cut costs to something that produces revenue, and very few companies will say, 'Let's forgo new revenue.'"

Some observers predict 2001 will be a year in which many large, established companies invest more aggressively in Net technology and e-business opportunities after watching dot-coms muscle in on the Web for several years.

"A lot of managers got scared by the dot-coms and realized their companies were vulnerable on fronts they didn't even realize existed," said Steve Schuckenbrock, former CIO of PepsiCo Inc. (stock: PEP) and managing partner of the Feld Group, an IT consulting firm. "Now all of a sudden, they're seeing a window of opportunity to make thoughtful, strategic investments. These companies are determined not to miss out on the Internet twice, even if it means investing in the Internet during tough economic times."

When asked in the InternetWeek survey to predict how dot-coms will fare this year after a disastrous 2000, IT and e-business leaders were divided. About one-third expected their businesses to improve, one third thought their businesses would get worse, and one third said their businesses would remain the same.

One sector in particular that's expected to consolidate in 2001 is B-to-B e-marketplaces. Several independent exchanges -- including Chemdex and ProMedix of Ventro Corp. (stock: VNTR) -- folded in late 2000, and analysts predict more exchange mergers and failures this year.

Still, the total number of dollars invested in exchange technology will skyrocket over the next several years, from about $2 billion in 2000 to as high as $80 billion by 2005, according to a report from Jupiter Research.

"Even in the face of a downturn, Net markets are on the short list for investment by major corporations," Jupiter research director Marc Harrison said. "The Net markets are a potential revenue source, so you can expect corporations to try and leverage them more, not less, in 2001."

Many companies plan to build private exchanges in 2001 to improve links with buyers and suppliers, Harrison said.

"There will be consolidation in this market, but most of it will happen among the independent public exchanges that are trying to run Net markets as a business," he said.

IT execs are optimistic about the health of e-business in general. Two thirds of survey respondents said they expect e-business conditions to improve, while only 12 percent say they will get worse.

Indeed, as an indicator of how much companies have come to rely on IT and e-business, some executives maintain that the economic slowdown could actually lead to higher tech spending.

"If you're not in a strategic part of the company, then you could be severely affected if budget cuts are made," Bristol-Myers's Cooper said. "But in those scenarios where there are business setbacks and reductions, IT is placed in even higher demand for more services. If you pull back on the technology budget, that means you lose productivity, not gain it."