Businesses Quit Slashing IT Budgets

Worst Is Over, Corporate Tech Executives Say, But They Want to See Stability Over Several Quarters By BEN WORTHEN After reducing their budgets sharply for months, many businesses across the U.S. have stopped slashing information-technology spending, a shift that could stem revenue declines at tech companies, including Hewlett-Packard Co. and Cisco Systems Inc. Spending on computer hardware, software and services used to be one of the fastest growing segments of the economy, increasing 9% in 2006 and 13% in 2007, according to Forrester Research. But growth in corporate tech spending -- the primary source of revenue for such behemoths as International Business Machines Corp., Dell Inc. and Oracle Corp. -- slowed to 8% in 2008, and it is expected to contract 3% in 2009. The shift toward stability isn't likely to show up when H-P and Dell report quarterly earnings over the next two weeks. Both companies are expected to announce declines in profit and revenue from a year earlier. But interviews with more than a dozen chief information officers and corporate technology executives who oversee tech spending indicate that a range of U.S. businesses have finished cutting. At oil company Sunoco Inc., for instance, there have been no tech-spending reductions since March, even though the company trimmed its tech budget repeatedly up until then. Overall, the Philadelphia company's $90 million tech budget for fiscal 2009 is down about 20% since it was set in October. "I think that most people have made their cuts," says Peter Whatnell, Sunoco's chief information officer. "You would've seen any reductions by now." He adds that Sunoco's budget cuts have leveled off because for now at least the company doesn't anticipate further declines in the economy. View Full Image Getty Images Chief information officers and corporate technology executives who oversee tech spending indicate that a range of U.S. businesses have finished cutting. Above, an employee works at Dell's plant in Lodz, Poland last year. The stabilization doesn't mean the good times are back in tech. While spending may have hit a bottom, the executives say they don't intend to boost their budgets again until after their businesses and the economy as a whole have shown stability for several quarters. For 2010, they anticipate tech budgets that are mainly flat. "I don't think that we'll see the [spending] levels that we saw three or four years ago," says Catherine Brune, the chief information officer at insurer Allstate Corp., whose $1 billion tech budget has been flat for the last year and will most likely remain so into 2010. But for now, she says, "I'm not hearing the panic that I was six to nine months ago." Over the past year, the tech sector has had to grapple with rapid revenue declines. But in recent weeks, several prominent tech-industry chief executives, including Cisco's John Chambers, Intel Corp.'s Paul Otellini and EMC Corp.'s Joe Tucci, have said publicly that tech spending has started to stabilize. The change won't show up on tech-company balance sheets for awhile. Cisco's revenue for its most recent quarter was down 17% from a year earlier, EMC's fell 9.2%, and Intel's dropped 26%. Nonetheless, each company's CEO said that other metrics gave them confidence the worst is over. At Cisco, for instance, the number of orders placed by customers in the April quarter fell more than in the January quarter. But in a break from the recent past, the declines didn't get worse as the quarter progressed. "You have to have a leveling out before you have an upturn," Mr. Chambers said in a recent interview. And Mr. Otellini said Intel's recent order pattern indicates business in the current period is "a little better" than expected. Some tech researchers are also beginning to forecast a stabilization in tech spending. Goldman Sachs Group Inc.'s equity research department calculates tech spending will decline 9% in 2009 but will drop only 1% next year. "The early indication is that 2009 may be the low point," says Sarah Friar, a Goldman analyst. In some cases, the outlook is better. The IT department at Notre Dame University was told earlier this year to prepare three budgets for fiscal 2010, which begins in July. One cut the $25 million IT budget 5%, another cut it 2%, and the third built in a 2% increase. Facing a shrinking endowment and reduced giving, "we were all prepared to pull the trigger on either of the cut budgets," says Gordon Wishon, the school's chief information officer. But two weeks ago, Notre Dame's board approved the 2% increase, due in part to the lack of grim financial news over the past month. Mr. Wishon says he intends to spend the money on software from Oracle and storage systems from Net App Inc., among other things. Christopher Rence, chief information officer at Fair Isaac Corp., which makes tools that help financial companies determine creditworthiness, doesn't expect more cuts to his 2009 budget. It stands at about $65 million after $4 million was trimmed by renegotiating some vendor contracts and delaying some purchases. In 2010, Mr. Rence says, he will have to make some investments he has put off, such as buying some computers that can better run advanced software. To pay for the upgrades, Mr. Rence says he plans to ask for a modest increase from his 2009 budget. "Things are balancing for us," Mr. Rence says. "And other parts of the industry are starting to pick up." Write to Ben Worthen at ben.worthen@wsj.com