Sept. 11: Tech Sector Copes With Cloudy Business Outlook

To survive and prosper under the challenging business conditions, many solution providers have gone back to basics. "We have kept our focus from day one, which is getting solutions from Point A to Point B on time, the way the customer wants it and within budget," said Jeffrey Burgess, CEO of Burgess Computer Decisions.

The Northbrook, Ill.-based solution provider realized 40 percent revenue growth in 2001, Burgess said. "We get involved early, manage the process from beginning to end and follow up with the customer after the sale," he added.

Networking solution provider Netarx stresses return on investment to its clients, a strategy that has helped the Bingham Farms, Mich.-based firm more than double its revenue in the past two years, said Dwayne Kersey, co-founder and president. "We understand the businesses our customers are in and identify the technologies that will enhance these businesses," Kersey said. "Helping our customers own the solution and realize the return on investment after the solution is implemented is how we differentiate ourselves from our competitors."

In many cases, high-tech companies have had little choice but to return to fundamentals. Although the U.S. economy has shown remarkable resilience in the year since the attacks, new questions are arising about the degree of economic recovery,even as business technology spending appears poised to pull out of its lengthy malaise. That has some industry executives and economists re-examining the economy's ups and downs over the past year.

About six weeks after the attacks, the national economy,already in a mild recession,was virtually frozen. "Business basically came to a halt in October. There was not a lot of proposal generation," said Pete Busam, COO of Decisive Business Systems, a solution provider in Pennsauken, N.J. "And when you're not generating proposals, it can translate into a three-month business slide."

Sharp increases in government spending and steadfast growth in consumer purchases, however, helped lift the economy back into the plus column going into the fourth quarter. Overall government spending ballooned in inflation-adjusted terms at a 10.5 percent annual rate from October to December 2001, buoyed by higher defense spending and a series of emergency response packages. That rate was the highest quarterly figure in more than 20 years.

Meanwhile, attractive financing and short-term interest rate cuts helped bolster consumer spending, which jumped by a 6 percent annual rate (adjusted for inflation) in the fourth quarter, the fastest growth rate since early 1998. As a result, U.S. real gross domestic product (adjusted for inflation) grew at an annual rate of 2.7 percent in the fourth quarter of 2001. Gains in the housing market accelerated the recovery in the first quarter of 2002, with real gross domestic product rising at a 5 percent annual rate. Yet businesses remained cautious in their spending. Corporate IT investment declined every quarter last year after peaking in the fourth quarter of 2000, according to federal statistics.

But some light appeared at the end of the tunnel in early 2002, as technology equipment and software investment climbed in the first quarter and continued to rise in the second quarter. "The first quarter had its good weeks and bad weeks, but the second quarter was very strong," Busam said. "One big factor was all of the questions surrounding Microsoft's subscription-based licensing model, which gave us the opportunity to get back in front of our customers and demonstrate the value of upgrading their system software."

The revival proved to be short-lived, though, and the high-tech sector still hasn't received a sustained economic boost. Sequential gross domestic product growth tapered off in the second of quarter 2002, and more recent economic data indicates that the pace of expansion is slowing in the manufacturing and services sectors. What's more, unemployment remains stubbornly high, the stock market continues to be volatile and consumer spending is starting to slow. Consumer confidence in future job and financial prospects also has slipped, and the housing market is showing signs of peaking.

Recent economic and political trends have left policy-makers with a weak set of tools for rejuvenating economic growth, if their use becomes necessary. With interest rates at 40-year lows, the Federal Reserve has little room for additional, meaningful rate cuts. And with the federal budget deficit approaching $200 billion, more tax cuts or government spending aren't likely.