Technology spending growth takes baby steps

The Nasdaq Composite Index is pushing 2000 again, but real technology growth is much more restrained, Silicon Valley analysts, consultants and venture capitalists say.

“It’s like starting up a big train,” says Michael F. Kelly, chief executive of Emeryville, Calif.-based Techtel Corp., which conducts marketing research on the information technology industry.

Technology is known for huge swings, and he says that a slow recovery is quite typical.

The pattern is for chief information officers to nibble on personal computers, dine on computer servers and application software, and finally – late in a recovery – gorge on mainframes and databases.

This recovery has reached the server and software stage.

Executives buy smaller computers and invest in software because they can be more certain of getting a return on these investments, Mr. Kelly says.

SPUTTERING TO LIFE

His most recent survey of 900 CIOs, which was conducted mostly during August and released in October, shows that companies are starting to buy servers in the $100,000 to $1 million range.

Companies with new orders include Dell Inc. of Round Rock, Texas, Hewlett-Packard Co. of Palo Alto, Calif., IBM Corp. of Armonk, N.Y., and Sun Microsystems Inc. of Santa Clara, Calif.

Sales of personal computers and laptops surged the previous two years as companies played it safe. Now, as server sales increase, Mr. Kelly says that companies have slowed their purchases of smaller computers.

Meanwhile, he says, purchases of financial software applications – the basic accounting and transaction systems that keep track of orders and revenue – are on the rise for the first time since 1998.

Companies put the brakes on this spending early because of Y2K fears. Mr. Kelly credits the surge to the need to meet new reporting requirements demanded by the Sarbanes-Oxley Act of 2002.

Kurt R. Jaggers, a managing director with Boston-based private-equity firm TA Associates Inc., agrees that “we’re way beyond doomsday” but that the halting process of getting CIOs to spend again is only beginning to sputter to life.

But Mr. Jaggers says that that could change rapidly if a certain disconnect is bridged between the finance and spending arms of the firms that buy technology.

“The CIOs are often the last to know” that new investment in technology is justified by an uptick in the economy, says the Menlo Park, Calif.-based executive. “If the [chief financial officers] see profits, they’re going to open up the spigots.”

Mr. Jaggers says his conversations with CIOs make him chuckle because they are all talking about increasing IT spending by 2%.

That is laughable, he adds, because they were falling all over each other to increase IT spending by 10% or more during the years leading up to the bust.

“What’s the biggest error you can make: spending too much or being passed by a competitor?” Mr. Jaggers asks. “Now the momentum is swinging back to: Where should I be investing?”

What makes it clear that this recovery is tentative, Mr. Kelly adds, is that bigger tech deals aren’t heating up. In other words, IBM isn’t cranking out mainframes, and Oracle Corp. of Redwood City, Calif., isn’t selling databases in great numbers.

gun-shy

Mark Lutkowitz, principal with consulting and research firm Telecom Pragmatics Inc. in Birmingham, Ala., says he sees a similar phenomenon in the telecommunications industry he covers.

Progress is measured in baby steps, he says.

“It says a lot when people in telecom are negative,” Mr. Lutkowitz says. “We believe 2005 is when things will get back to pre-euphoria normal.”

It also suggests that the gold standard of sales activity is just getting back to normal, he adds.

Part of the reason is that innovations in technology aren’t forcing CIOs’ hands.

“The basic computing environment is pretty mature,” Mr. Jaggers says. “We’re not going to see another Internet wave.”

Indeed, Mr. Lutkowitz says, the telecom industry is gun-shy about getting burned by heavy investments in fiber optics and ethernet connections.

He sees the next wave of telecom spending in enhancements to city phone line networks and digital subscriber lines that are both just ways to bolster old copper wires.

Mr. Jaggers says that the consensus is for more tech spending – as anticipated by the 40% rise in the Nasdaq from its lows – but that not all locomotives will hit Mach speed.

“There’s still a big question about 2006 and whether this [growth in tech spending] is sustainable,” he says.