Tough Budget Sessions Loom Ahead.

I pay attention to the economic forecasts issued by the investment banking firm of Morgan Stanley, one of the foremost financiers of U.S. computer firms.

In a March 21 research report titled "PC Saturation?" chief economist Stephen Roach writes that next year's profits for U.S. corporations are expected to decrease by 2.5%.

That's the first time in eight years that we can expect a broad decline in profits. It follows a long period of prosperity when profit growth averaged more than 3% per year. Mounting competitive pressures from excess global capacity will keep prices down, and increased productivity wont compensate for inflation.

Furthermore, Roach says he expects the U.S. Gross Domestic Product growth to decline from 3.1% this year to only 1.9% next year. Roach concluded that, therefore, a period of stagnation in information technology spending is likely.

The Stock Market as a Predictor

For instance, when the market was up early in 1995 by 2%, IT stocks gained 13%. In the first quarter of this year, the market fell 2% and technology stocks plunged 13%. Investors seem to understand that whenever business suffers, computer budgets get squeezed.

IT Budget Implications

By and large, CIOs are accustomed to easy IT budget reviews and ample increases in funding. After all, most of them took their positions after the recession that ended in 1992.

In the past three years, IT budgets have become encumbered with all sorts of ambitious ventures that depend on a steady increase in available dollars. It's unlikely that CIOs have put together contingency plans for when the budget crunch suddenly sets in.

CIOs will undoubtedly argue that a company can't afford to cut current operations and projects, such as year 2000 fixes, information security programs and highly visible programs.

That means 1998 budget reviews will start with all IT resources already oversubscribed. If austerity sets in, there may not be much funding available for new initiatives.

Later this year, everyone should prepare to see many projects canceled. Resumes may start circulating again, as happened during each of the five cyclical turns during the last 40 years of computerization.

Preparing for a Downturn

Stretching out schedules and postponing innovation will be by far the most frequent compromise in the negotiations for funds. That may be workable, but it will hurt IS's reputation to deliver on their promises.

My advice is to face budget adversity with an aggressive cost-reduction program.

The typical $200 million major corporate IT budget includes at least $40 million to maintain existing computer applications. Maintenance received very little attention in every organization I examined. With technology costs dropping at well over 20% per year, there's no reason why a smart CIO couldn't come prepared to fund development in a no-increase 1988 budget through savings on operations.

If IS management wishes to sustain its commitments while the IT budget remains level or declines, the best way to do so is to uncover savings in IS operations.

It's May, and there is still time to prepare a prudent cost-reduction plan, just in case that may be necessary.