The New Look of The Enterprise

That spending growth remains in the doldrums is old news to solution providers, systems integrators and outsourcing companies. But what they want to know is, when will spending pick up? Well, according to CIOs and customers interviewed by VARBusiness,not until the economy shows clear signs of a sustainable recovery. According to VARBusiness' 2003 State of Enterprise Spending survey, 70 percent say the economy is causing them to put at least some IT projects on hold, while 45 percent have actually canceled certain projects. Only 25 percent say IT spending will improve year over year.

And Forrester Research, which conducted its own CIO study, had similar findings, though slightly more optimistic. The Cambridge, Mass.-based researcher expects spending growth to total 1.9 percent this year.

With forecasts like those, some solution providers might assume it's time to fold up their tents and go home. But not so fast. While spending is down, it's certainly not out. Companies might be watching their IT spending, but they're not halting it. According to P&G's David, purely looking at the overall numbers doesn't paint a complete picture. "The internals of it are showing huge swings," he says. "It's doubling or tripling in some areas, and in some areas, scaling back."

Feeling the Squeeze
Solution providers ranging from large global integrators to network solution providers and boutique application developers are all feeling the prolonged downturn in IT spending, where large, multibillion-dollar transformation initiatives are being replaced by tactical projects that require quick payback. "We are seeing a focus and an emphasis on customers wanting to sweat their existing assets," says Alfred Mockett, chairman and CEO of AMS, a systems integrator based in Fairfax, Va., adding that cost savings, not revenue generation, are driving all businesses these days.

Chris Younger, president of Expanets, a network integrator based in Englewood, Colo., agrees. "We're just not seeing a catalyst that will free [customers] of that capital and open the flood gates," Younger says.

Still, solution providers note that money is being spent. For example, Expanets earlier this year was awarded a contract to roll out the DealerConnect network at all U.S. Chrysler dealers.

"It's still a half-trillion-dollar marketplace," says John McCain, global deputy COO of Cap Gemini Ernst & Young, adding that enterprise application integration (EAI), security and server consolidation "are still hot." Indeed, while tactical ROI-driven solutions are the primary focus of most spending, large companies are trying to reinvent themselves. Case in point: Auto giants DaimlerChrysler, Ford and GM are all in a tight race to build more cars in shorter periods of time, while improving relationships with their dealers and customers. As a result, they are involved in huge product life-cycle management (PLM) initiatives. They are also trying to gain improved efficiencies from their supply-chain networks and building portals to interact with consumers and dealers.

In the case of shipping giant FedEx, that means shifting the focus from its maturing air-freight business to its largely untapped, but potentially high-growth, ground-shipping and cargo businesses, says CIO Carter. That is no small task, considering those businesses were the result of several acquisitions during the past six years.

"We have some real challenges at FedEx," Carter says. "We've got all this disparate technology."

In addition, companies such as JPMorgan Chase and AXA Financial are moving to utility-based computing, while numerous others are seriously evaluating it, to gain better economies at the data center. The two financial services giants recently signed huge outsourcing deals with IBM Global Services to offer server capacity based on the company's On Demand strategy unveiled last fall.

"We were looking to move from a fixed to a more variable cost structure," says AXA's Billings, who sees the number of servers in his company's data center declining from 6,000 to 1,000.

At P&G, David is also looking for better utilization from existing server capacity, while going into maintenance mode after wrapping up a multiyear ERP implementation project. Yet P&G is increasing spending on consumer-facing Web applications, as well as on ongoing supply-chain transformation efforts.

Many of those new applications and infrastructure-utilization improvements will come through P&G's new outsourcing partner. P&G earlier this month awarded a 10-year, $3 billion outsourcing contract to Hewlett-Packard. The deal came after P&G failed to find a suitable business process outsourcing partner last fall. Rather than find a single partner, P&G earlier this year decided to find multiple partners.

"We were looking to outsource a much wider breadth of applications, modules or blocks than anyone else," David says. Those functions range from facilities management to employee services and IT, which covers application development, desktop support and data-center management. The goal with HP as its sole IT partner, says David, was not driven only by reducing costs, though that was a key component. "Clearly speed and scale is very much what we're after," he says.

Perfecting Processes
Despite economic uncertainties, which are affecting both consumer and corporate capital spending, CEOs of large enterprises like FedEx and P&G are unrelenting in their pursuit to continue transforming their business processes.

"How do I print money is what I'm after," David says. One way, he insists, is to continue full-steam ahead in RFID pilots with Gillette, Wal-Mart, Target and others with the help of solution providers including Accenture, IBM Business Consulting Services and Symbol Technologies. Using small chips that broadcast the whereabouts of items will have a major impact on the streamlining of inventories in the supply chain.

Despite weak sales in the highly competitive automotive industry, all the major car manufacturers are pushing ahead with IT initiatives to expedite the time it takes to design, build and deliver products. At GM, which has already cut the amount of time it takes to design a new car from four years to two years, one of the key initiatives now under way centers around building a common knowledge base that will track the life cycle of a car. Using data warehouses and EAI software from IBM (MQ Series) and SeeBeyond, GM is developing what it calls a product data manager, designed and maintained by its key outsourcing partner and former parent, EDS.

"Everything you want to know about that car is in the repository," McNicholls says. In addition to a planned CRM rollout, GM is looking to tie its OnStar system to an application that will know when a part of the car is underperforming and have that data transmitted to the system.

But like many CIOs, perhaps the biggest IT issue on McNicholl's radar screen is the ability to recover from any interruption.

"Disaster recovery is becoming very essential," he says. "There are two things the CIO at General Motors does not want to do: No. 1 is stop the factory. No. 2 is stop the engineering center. Those are career-threatening [events]."

Indeed, McNicholl's remarks, made at a conference held by InformationWeek, a sister publication of VARBusiness, are a common thread among those CIOs and operations managers interviewed in recent months. Customers want to have 99-plus percent availability in a redundant architecture. In some cases, particularly in the banking and securities industries, that means building fully mirrored and redundant data centers that are more than just a few miles apart.

The Depository Trust & Clearing Corp. (DTCC), for example, one of the world's largest clearing and settlement corporations, decided after the Sept. 11 attacks that it would be better served by having a backup data center away from Manhattan. Chairman and CEO Jill Considine formed a contingency-planning task force, with representation from HR, corporate services and, of course, IT. A new facility will be built in another region, according to George Perrietti, vice president of information technology, speaking at the recent American Bankers Association Operations Conference in Tampa, Fla.

"A regional disaster can take out both of our data centers, and we don't want to be put in that position," Perrietti says. The facility is working with Securities Industry Automation Corp. (SIAC) to have the facility up and running this summer. SIAC is the systems-integration subsidiary of the American and New York Stock exchanges.

Improved Operations
While data recovery in a disaster is most important to 37 percent of those respondents when it comes to determining spending on software, a significant majority say reducing operational costs and improving customer services are key business priorities (68 percent and 60 percent, respectively).

For instance, Delphi, the auto-parts distributor that was spun off from GM in 1999, is trying to consolidate its ERP systems from multiple platforms to just one or two instances of SAP R3 so employees can have access to aggregated information in near-real-time. To operate that infrastructure, Delphi recently disclosed plans to have HP host its mission-critical systems. Although HP was already hosting its systems, as more divisions came online, Delphi upped the performance requirements in the new hosting contract.

"We raised the bar on them," says John Reaves, Delphi's executive director of global enterprise applications.

Many CIOs are looking to centralize their operations in order to reduce operational costs and provide an infrastructure that is suited to improving customer service. For Ace Hardware, which supports 5,100 stores, 75 percent of which are independently owned and operated, the key challenge this year will be to provide a centralized inventory-management system.

Like AXA and Delphi, Ace is leaning toward a hosted application-service provider model, according to CIO Mike Altendorf. Because Ace can't mandate use, Altendorf says usage-based pricing makes more economic sense.

"To build it up-front would be a huge risk," he says. Among those providers he's considering are AT&T, EDS and HP. But that will likely happen later, rather than sooner, in the year.

In fact, 62 percent of this year's IT spending is slated for the second half of the year, according to those surveyed by VARBusiness. Hugh McIntyre, IT director at oil-drilling giant Halliburton, says that's certainly the case at his company.

"We're trying to drive down the cost of transactional activity and redirect our spending toward the administrative focus, which is information delivery and integration, and real-time delivery of information from our ERP system," McIntyre says.

Now that Halliburton has completed the implementation of SAP, with help from Accenture and BearingPoint, the company is looking to bring much of the maintenance of its ERP system in-house. But McIntyre says plans in the second half call for a massive server-consolidation effort. The ERP system is already being hosted by HP, and plans call to outsource other server functions in the second half. McIntyre says the company is still considering various options, including HP as well as IBM Global Services.

Decisions such as whether to migrate to the Windows 2003 Server or run applications on Linux are still being evaluated, McIntyre says. In terms of enterprise software, Halliburton has no plans to add new back-office applications.

"That's the focus,making the most of what we've got," he says. Indeed, only one-third of respondents to VARBusiness' survey say spending on software is a priority, down from 41 percent, showing the sharpest decline in focus year-over-year.

Staggered Approach
PC refreshes are also on the decline; 27 percent now say upgrading their PCs is a priority, down from 34 percent last year. Halliburton, which buys direct from HP-Compaq and recently completed an enterprise refresh, is moving toward a phased upgrade program, updating one-third of the company's desktops each year rather than replacing everyone's systems at once.

At Covenant Health, a network of hospitals based in the South, PC and server refreshes are being fleshed out from three years to five years, says Frank Clark, senior vice president and CIO.

"Our strategy moving forward is to use them as long as they're capable of performing," Clark says. That's not to say Covenant is adverse to IT investments. In fact, Covenant last year rolled out a physician portal and is in the process of testing tablet PCs in hopes of getting physicians to enter more data digitally.

While most spending is flat, there are some enterprises that are actually increasing spending. Burlington Coat Factory is looking to increase its IT spending by 15 percent this year, says CIO Michael Prince. Much of that spending is going toward building a backup data center and rolling out a new point-of-sale network to its stores. Burlington Coat Factory is among the 25 percent of those surveyed that intends to use the economic downturn to its advantage this year.

"It's a buyer's market," Prince says. "I can't say the bad economy is good for us, but there is a silver lining on some of these clouds."