Carpe Diem: Take Advantage of Technology, Now

The latest macroeconomic numbers and AMR Research’s most recent IT spending surveys suggest that we’re finally entering a sustained, albeit modest, recovery in the technology economy.

Encouragement came first from the latest U.S. Commerce Department numbers:

After falling sharply in the second half of last year, quarterly growth rates of private fixed investments in IT-related capital expenses, including software, spiked up impressively in the first quarter of this year.

The corporate profit picture, which rose throughout last year, continues to improve. This is a critical metric with regard to projected capital expenditure growth. AMR Research’s spending surveys are in line with the macro trends. We have surveyed decision-makers each quarter since the first quarter of 2001. The latest survey (see Figure 1) shows a sharp improvement in confidence from the second half of last year. The percentage of companies that plans to increase spending has jumped considerably, and the percentage that plans to decrease spending has dropped for the first time in three quarters.

The survey also shows that the planned spending is balanced across a number of areas (see Figure 2):

• Applications (particularly supply chain management and enterprise performance management)-30 percent
• Infrastructure (desktop/laptop and operating system upgrades)-19 percent
• Network and wireless infrastructure-18 percent
• Integration tools and outside services-27 percent

Optimism breeds momentum

These numbers are significant for one very important reason: This is the first year in the last three when the confidence level of IT decision-makers has been stronger in the middle of the year than it was at the year’s beginning. In 2001 and 2002, decision-makers came into the year with cautious optimism, only to have their budgets slashed further by mid-year because of a worsening economy. Interestingly, these users came into 2003 rather pessimistic (Figure 1 shows our projection coming into the year of no spending growth). However, because of an improving economic picture, they now believe that they will spend more than they planned. (The mid-year projection is for 2 percent growth.)

This growing optimism is important because it means that we will come into the next budget cycle with positive momentum, something we’ve lacked since 2000. This should drive spendingneeded spending has been put off for two years, resulting in aging infrastructure that has to be replacedand should allow for a sustained recovery through 2004.

If I’m right, where can we expect spending to be in the coming year beyond infrastructure replacement and upgrades? As I’ve said all along, the best companies have not stood still through this downturn. They are using this respite to improve their ability to perform. The activity of these leaders will lead the spending habits of the restcompetitive fear being the motivator. So the best gauge of where we can expect spending increases is to look at current success stories. Following the money should tell us where we can expect higher concentrations of investment.

Where is the current spending activity?

Compliance is a large and growing reason for spending. Consider these examples:

Sarbanes-Oxley ActThe Federal Government is requiring companies to comply with the requirements of this act by June 15, 2004, by which time we estimate global companies will spend upwards of $2.5B to meet these requirements. In a recent AMR Research survey, 85 percent of decision-makers said that they will have to invest in changes in IT infrastructure in this process. In fact, 77 percent of companies report that they will spend more on IT, business process change, corporate governance, consulting, or all of the above this year as a direct result of Sarbanes-Oxley compliance. This is also expediting efforts like application rationalization and ERP instance consolidation.

Industry-Specific Regulatory IssuesSimilar to the impact of ongoing FDA regulations in the Food and Pharmaceutical industries, a growing number of government regulations are spurring new IT spending. For example, The Transportation Recall Enhancement, Accountability, and Documentation (TREAD) Act was passed to force automotive companies to better tie field reports to manufacturing of vehicles and components. Half of the investment for TREAD Act compliance is going to be in IT systems and staff. Investments in collaborative warranty systems, unstructured data analytic systems, global ERP, global PLM, and unified dealer systems will yield dividends in taking companies beyond minimal compliance to TREAD.

Even as the economy improves, cost containment will remain a powerful force. This is also leading to application rationalization and consolidation efforts, as noted above.

The impact on spending is far-reaching:

OutsourcingThe number of companies that outsource offshore will grow by 50 percent this year. Ultimately, 35 percent of companies will use offshore services.

Supply Management/E-SourcingOur Benchmark Analytix research finds that a 25 percent COGS is achievable through these initiatives, and a growing number of examples exist of companies realizing these benefits. This is why the 17 percent of companies that don.t have e-sourcing or procurement applications plan to implement them in the next 12 months.

On-Demand/Utility ComputingThe days of companies buying a huge number of licenses upfront is over. Companies want to pay by the drink, and we will see increasing activity in this direction, especially in the small to midsize business market.

Another area to find spending increases is in the extended supply chain. The fact remains that after all the activity, more than $400 billion of waste still exists in North American supply chains. Now these chains are becoming more global and more multicompany, exacerbating the problem.

Look for increased investment in a number of areas to address the issue, including the following:

Radio Frequency Identification (RFID)These tags are going to revolutionize how supply chains are managed. They offer the promise of 24/7 views of material availability, the ability to better share real-time information with trading partners on demand, the elimination of loss and shrink of valuable components, and a host of other benefits. In next few years, we will see the implementation of thousands of readers and potentially billions of tags. This will also fuel upgrade to existing supply chain and enterprise applications and boost investment in data warehousing and analytics technologies.

Product/Service Innovation70 percent of product cost is locked in at the design phase, and direct material spend represents, in many industries, 60 percent to 75 percent of total procurement costs. Attacking this is why PLM is a booming area of investment. There is significant competitive pressure here that will drive spending. In one instance, GM has documented $1 billion in IT savings through its PLM initiative and has reduced new vehicle time to market from 48 months to 18 months. Likewise, John Deere has reduced time to market by 50 percent and is realizing lower warranty allowances and lower material costs.

Conclusions

We have entered a new era in the IT industry. Don’t forget that amid this severe downturn, radical changes have been happening. These will continue, starting to accelerate as the economy improves. To support you in these efforts, AMR Research has an initiative underway, what we call Research Continuums, to provide ongoing analysis of the opportunities outlined above.

My message is clear: you can’t play “sit and wait” foreverthe risks are too great. An opportunity exists to target your investments to gain real competitive advantage. If you don’t realize it, someone else will.

A recent article in The Economist, “Rising Above the Sludge” (April 5, 2003), reports on strategies companies used to thrive in tough economic times in Japan and Germany during the last decade. One conclusion caught my attention: Nissan, Japan’s third big car company, was late going global. When Charles Ghosn moved in to rescue it after Renault had bought a stake in 1999, he was struck by the way that Nissan managers were full of excuses for the company’s poor performance. They each blamed one another and they all blamed the collapse of growth in the Japanese economy throughout the 1990s. But that was hogwash. The article concluded that, based on their detailed examples, a feeble economy is now a feeble excuse. You have an opportunity to lead. The technology is available like never before. Carpe diem!