For IT, a ”Triple Witching Hour”

A weak economy and doubts about E-business were bad enough. Then came September 11.
Scott LeibsNovember 1, 2001

In the wake of the terrorist attacks, the outlook for corporate IT departments has gone from bad to dismal. Already under the pall of economic uncertainty, firms must now reevaluate their contingency plans and computer security, and perhaps expand their use of a range of collaborative technologies, all at a time when IT budgets seem poised to shrink for the first time ever.

Figures compiled by Howard Rubin, executive vice president and research fellow at consulting firm Meta Group, in Stamford, Conn., suggest that 2002 will see the first outright decline in corporate dollars spent on IT since computers became a standard part of corporate infrastructure decades ago. Rubin points to his regular surveys of more than 200 companies, which found that the September attacks prompted a substantial reduction in planned IT spending. “Several days after the event,” he says, “only 13 percent of companies planned to cut IT spending, while 87 percent took a wait-and-see attitude.” But by September 26, more than half the 240 companies surveyed said they planned to cut spending; of those, 47 percent said they would pare spending by 5 to 10 percent, and 29 percent said they would make cuts in excess of 10 percent. Not a single respondent planned to increase spending in 2002 over 2001 levels.

In the past, weak economic conditions have occasionally slowed the growth rate of IT, but have never triggered an actual decline. “It’s a triple witching hour,” says Rubin. “We’ve got a weak economy worsened by the uncertainty that followed September 11, and doubts about the ultimate value of the E-business investments that have driven the sector for the past two years.”

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Hunkering down won’t be easy, not only because it runs counter to the aggressive implementation of IT that has shaped Corporate America for years but also because many companies want to improve contingency planning and computer security in order to prevent, to whatever extent they can, future business disruptions. And while many analysts agree that there is dissatisfaction with E-business investments, most chalk it up to growing pains–the “trough of disillusionment” said to plague every technological innovation– and believe that companies still see enormous potential for E-business and will want to spend accordingly.

Striking a balance between short-term cost pressures and long-term strategy is never easy, and that challenge is exacerbated by profound uncertainty as to what exactly constitutes “short term.” Michael Fleischer, CEO of consulting group Gartner, says that “after September 11, the common assertion that relief is just one quarter away disappeared. Now no one even tries to predict when things will improve.” And despite the fact that Gartner and other firms were deluged with calls from companies worried about the state of their disaster preparedness, Fleischer says that “putting a contingency plan in place is a long process, and it won’t drive a boom in technology spending.” In all likelihood, he says, any money that companies spend on such efforts will simply be taken from some other part of the budget.

Paul Sagan, president of Akamai Technologies, in Cambridge, Mass., agrees. His company suffered what he aptly terms a “tragic irony” on September 11, losing its co-founder and CTO, Daniel Lewin, in the very tragedy that proved the value of its technology.

Akamai provides Internet infrastructure and content management services to large companies, including media giants such as CNN and others that saw huge spikes in traffic that day. “It was a coming-of-age experience for the Internet and for us,” says Sagan. The sites that Akamai supports fared well under the pressure of astounding demand (Monty Mullig, senior vice president of Internet Technologies at CNN, says that in the hours following the attacks, saw more than three times the traffic it did in its previous busiest period, the day following the November 2000 elections), and underscored how critical Web operations have become, not only for news outlets but also for travel companies, government agencies, and many other entities.

Yet despite the increasing importance of a reliable Web site, Sagan says that in the current business climate, Akamai is winning far fewer “new” dollars than before. “Most of our business is now coming from ‘transitional’ dollars,” he says. “Companies are redirecting their expenditures, from private networks to IP-based services, from insourcing to outsourcing.” Sagan adds that while Akamai has always sold its service in part based on its value as a form of insurance against disastrous interruptions, the prime motivator for most clients remains ROI. “Companies are more serious than ever about E-business,” he maintains, “but they are approaching every investment very rationally, with a more protracted evaluation process than in the past.”

Ray Seabrook, CFO at Ball Corp., says his company will continue on its existing E-business course, which he describes as “slow and cautious. In fact, we think there is a lot more we can do with our intranet before we devote more resources to the Internet.”

Certain technologies have enjoyed an immediate spike in sales. The cell phone achieved nearly heroic status in the wake of September 11, and sales are booming. Cellular carriers that only weeks before had been lobbying the Federal Communications Commission for more time to implement E911 location-identification requirements suddenly announced that they would meet the October 1 deadline after all, making the devices even more useful in emergencies (although the capabilities of the handsets represent just one facet of the necessary infrastructure). Pagers, wireless PDAs, and Blackberry E-mail devices have been selling well, both to corporations and to consumers, and the outlook for video- and teleconferencing has also improved.

Newer collaborative technologies may also enjoy a boost. Intralinks, for example, offers Web-based “workspaces” in which financial institutions can collaborate on loan syndications and other complex transactions. Tom Stein, managing director of the loan syndication group at First Union Securities Inc. in Charlotte, N.C., says his firm was able to continue working on two deals with Goldman Sachs despite the latter being severely affected by the events of September 11. “As long as employees had Web access,” says Stein, “they could log on from home or a hotel and see the documents, make changes, post their thoughts, and so on.”

While companies had no choice but to accommodate themselves to virtual collaboration at that point, what will happen once confidence is restored in the nation’s travel system? Michael Schrage, co-director of the E-Markets Initiative at the Massachusetts Institute of Technology Media Lab and author of Serious Play: How the World’s Best Companies Simulate to Innovate (Harvard Business School Press, 1999), believes that making greater use of such technologies is one way to adjust to the new economic reality. “Faced with declining margins and slow- or no-growth markets,” he says, “companies are looking for new business models. Business travel isn’t going away, but we will see a profound moving of the needle in favor of using technology to complement face-to-face meetings.”

Using the technologies effectively, however, requires some effort. Schrage says that people often become frustrated with collaborative technologies too quickly, because they don’t appreciate the inevitable learning curve. “It’s like the early days of E-mail,” he says, “where your message was often perceived as too curt or more critical than you intended, because you hadn’t yet learned how to express yourself in the new medium.” He says the combination of cost and safety will prompt more people to investigate collaborative technologies, but only those firms that appreciate the cultural, managerial, and educational issues will be able to make the most of them.

One managerial issue likely to get more attention is computer security. Warnings of cyberterrorism abounded through September, and while there is no shortage of technology that can be brought to bear, Gartner security expert William Malik says that companies should first appoint a chief information security officer, or CISO. “No technology can overcome a lack of leadership,” he says. While calls for every manner of “chief X officer” have been emanating from consultancies at an unprecedented pace, Malik says about 10 percent of his firm’s clients, and nearly half of the country’s largest corporations, actually have a CISO.

As squeezed as IT budgets may be, most analysts do expect to see more money spent on computer security. “But it won’t be enough,” says Morgan Stanley Dean Witter technology analyst Charles Phillips, “to affect the market to any meaningful degree.” For now, in fact, Phillips is among those who see rocky times ahead. “I’ve been following the industry for 15 years,” he says, “and this is as bad as I’ve seen it.”

There is some good news. Gartner’s Fleischer believes companies will emerge from this period much more savvy about their use of technology. As an example, he points to companies’ efforts to, as he puts it, “squeeze every last penny out of the supply chain,” often at the considerable expense of leaving no room to flex when events take a dire turn. Tom Davenport, executive director and partner at the Accenture Institute for Strategic Change, suggests that companies may have overinvested in IT infrastructure, but “that’s not necessarily bad, if they can take the time to assess what they’ve got and how to put it to best use.” He adds that companies have not been much interested in that kind of ex post facto analysis, preferring instead to rush to what’s new. But no one seems to be rushing anywhere these days, and a little contemplation may be as good for the bottom line as it is for the soul.