Slim budgets test users' creativity

Part One: Network industry rearranged
Part Three: Net innovation gets squeezed

With the economy continuing to flag, many network executives are under the gun to stay within IT budgets that are either shrinking or growing more slowly than in past years.

They're responding by looking for bargains, lengthening buying cycles, automating network management, off-loading noncore projects to outsourcers and delaying noncritical undertakings.

Shifted priorities

"Our buying habits have changed since the beginning of the year. That's when we really started changing our focus, tightening down the budget and being more efficient with how we spent our money," says Gene Rekos, CTO at Teen.com. "We analyze things a little bit more in detail, and we take a little bit more time to make a final decision."

In this second part of a three-part series about the struggling economy's effect on the network industry, we find network executives embarking on new strategies, striving to meet the business guidelines some are facing for the first time.

"In the past they could get away with saying, 'This isn't about saving money; it's about avoiding costs or it's about improving our position in the market,'" says Barbara Gomolski, a research director at Gartner. "They have the same amount of budget, but they don't seem to have the level of discretion in terms of what they do with it."

But those budgets may be shrinking. Last month's terrorist attacks have prompted research firms to cut their estimates of IT spending even further. A Gartner study released in July found that more than half of the companies surveyed plan to increase IT spending an average of 10% this year. In the wake of the attacks, Gomolski suspects that growth may drop to around 5%.

But the biggest effects will be seen in 2002, when Gartner predicts a 5% IT spending increase as a best-case scenario and a 3% drop as a worst case. Companies in the hardest-hit sectors, such as the travel and insurance industries, could cut IT spending by 10% or more, Gomolski says.

Other research firms paint an equally dim picture. Merrill Lynch predicts that IT spending will grow only 5% in the U.S. this year, below the 9% growth it initially forecast in January. A Merrill Lynch note issued Sept. 19 said it was too soon to gauge CIO reaction to the terrorist attacks.

"Certainly, the [terrorist attacks] have halted a number of noncritical projects," says Jeff Wenger, CTO at Tax Technologies, a tax software firm in Haworth, N.J. "However, we remain optimistic that this will be a short-term impact and anticipate minimal impact on our long-term strategy for growth."

At Teen.com, Rekos has already done more with less, after layoffs in January and June that closed two business units, cut 200 employees and trimmed his IT staff.

And Mark Hoffman, application systems architect at Tufts Health Plan, says he is managing his firm's transition into e-business "with a flat or reduced budget."

Even where network budgets haven't been affected, spending habits are changing. Staples, for instance, is looking for better deals. "We are doing better in various deals with our vendors or partners than we would have anticipated," says Max Ward, Staples' vice president of technology. "Technology vendors feeling the squeeze of the economy and the squeeze from the competition has definitely benefited us."

Tax Technologies, which buys most of its hardware from Dell, has saved about 15% on servers and equipment, and the company takes its time to get the best price, Wenger says.

"We tend to hold out for a deal a little bit more now than we may have in the past," he says. "It may take four to six weeks to pull the trigger on a sale if it's a noncritical piece of equipment, just so we can get the best deal." Previously, the company would have placed orders almost immediately after identifying a need.

Because of recent budget constraints brought on by both the economy and changes in federal Medicaid funding, Jim Olson, CIO of Waterbury Hospital in Connecticut, is holding off on some projects.

Olson won't be upgrading his Cisco switches from Layer 2 to Layer 3 this year, saying the financial return on such an upgrade would not be felt for a few years. "We might have done that in the past, given the money we usually had, just to make sure our infrastructure is staying a little bit ahead of demand."

Instead, Olson says he is looking into a computerized, document management system. The return on the project will be more immediate, he says, because the system would save the hospital "a few hundred thousand dollars a year" on its medical forms budget, which runs around $1 million annually.

Doing more with less

Other firms are looking for innovative ways to get a bigger bang for their network bucks. At Teen.com, Rekos is using existing hardware in new ways and buying from vendors that sell used and remanufactured equipment.

Rekos uses a load-balancing switch among a cluster of older servers to get the performance he needs. "We can get the same kind of horsepower that we would with a new server," he says.

David Rich, global managing partner at Accenture, says network executives can also look at automated management software to do more with current network staff and infrastructure.

Some companies have made staff cuts, "but now it's time to re-engineer the work out of the business," Rich says. "That means getting more done with fewer people, and that usually means having to do process automation."

Paul Edmunds, senior network analyst with Duke Energy in North Carolina, says network management tools are invaluable, especially in tough economic times. Duke Energy has used Hewlett-Packard's OpenView network management software since the early 1990s, and cost savings were a big reason for installing it, he says.

"We can do a lot of remote troubleshooting and remote problem-solving without having to dispatch a technician. That's a pretty big savings," he says. Edmunds wouldn't estimate cost savings, but says he would "absolutely" install network management software now, if it weren't already in place, to help his network run better in today's economy.

Outsourcing

Another way network executives are looking to trim costs is through outsourcing. Hoffman is in the process of determining what to outsource. He has outsourced the Tufts Health Plan home page since the beginning of the year. He saves an estimated $450,000 in initial outlay and operations costs, and plans to outsource more.

Rekos, on the other hand, is contracting for specific resources, such as programmers, rather than handing off entire projects. He wouldn't estimate how much this type of outsourcing saves him, except to say the savings are significant because he doesn't have to hire people and pay benefits.

Return on investment is what all network managers should focus on, Gartner's Gomolski says. She says they should actually expect slower growth in their budgets and may find those budgets pulled out of their hands and placed under the direct discretion of the CFO.

"Regardless of how well they make their case - many IS managers will have a difficult time getting funds for projects that don't offer immediate payback through the first quarter of 2002."

Next week: the impact on industry innovation.

Slim budgets test users' creativity

Doing more with less

Outsourcing

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