Cautious optimism shapes new year

It's a new year and things are looking brighter, but there's no going back. Fundamentals have shifted.

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The recession has changed IT priorities, shortened the yardstick used to measure investment success and even shaped the outlook for certain technologies. Software-as-a-service and other cloud options, for example, are suddenly more alluring.

"The downturn has forced companies to focus even more strongly on how they deploy their assets, how they make investments, and whether or not it makes sense to put a lot of capital into their own IT plants, their own data centers," says Nicholas Carr, the author and IT industry analyst who has been evangelizing utility-like IT services for years.

But while IT teams are mulling potentially dramatic changes to their core infrastructure, it's unlikely they'll have generous budgets to execute those changes. Resources remain tight, and there are few signs that things will bounce back to the old normal any time soon.

"We're definitely more optimistic, though we're still in the mode of doing more with less," says John Turner, director of networks and systems at Brandeis University in Waltham, Mass. "Expectations are higher. Folks see the economy recovering, and access to capital funds is a little easier this year, but the team is still small."

Don't expect extra hands

The tech industry had been growing nicely in 2008, right up until the financial meltdown kicked off a panic that caused enterprises to curb investments and start hoarding cash. Still, buyers drove more than 4% growth in U.S. IT purchases in 2008, according to Forrester Research. Last year purchasing shrank 9%.

"One of the key phenomena of this particular downturn was the degree to which it was concentrated in capital investment," says Andrew Bartels, a vice president and principal analyst at Forrester. "The financial crisis pushed companies into a panic state in terms of their ability to borrow and consequently caused them to do everything they could to conserve cash."

Now tech spending is looking up. A tad. Gartner is predicting IT spending in the United States will grow 2.8% in 2010 to reach $958 billion.

Forrester is more bullish. The firm is forecasting 7.7% growth in 2010, citing economic data from the U.S. Department of Commerce, expectations for gross domestic product (GDP) growth, and signs of a return to more normal lending conditions.

"That growth will still not bring us back to 2008 levels, but we're on a path of recovery that will get stronger in 2011 and beyond," Bartels says.

Dave Rudzinsky is among those planning to spend more this year. CIO of Hologic, a $1.6 billion medical device maker in Bedford, Mass., Rudzinsky fought to keep IT initiatives on track in 2009, despite pressure to cut back.

"We didn't shelve our projects because of the economy," Rudzinsky says. "We knew we had to get through them, so that on the other side of this we've enabled the business for the next wave of growth. We're spending for what we consider to be enabling technologies and platforms for the future, so we can support other areas of the business that are facing budget restrictions and trying to do more with less."

But while IT budgets are expected to recover some, IT executives and industry watchers aren't expecting a flood of hiring in 2010, even as the economy improves. Among 1,043 IT decision makers queried in a poll by CDW, 80% said they plan to keep their personnel counts at current levels.

Most companies plan to hold headcount steady because they didn't make overly drastic cuts during the downturn, says Lily Mok, a vice president at Gartner.

"The majority of IT organizations this time around were very cautious about how they reduced staff," Mok says. "As companies move to get ready for a recovery, I think they will take the same approach, not adding too much. I don't think companies will ever go back to the big IT organizations they may have had in 2000."

IT management generally is loath to cut staff because those are the people who understand the business. "You cut your consultants and you cut your capital before you cut your staff," Bartels says. "Similarly, when the economy starts to improve, you look for those variable cost options, like contractors and consultants, so you don't end up staffing too much ahead of your needs. You'll add staff once it's clear this recovery is sustained."

That's not to say everyone gets it right. In fact, Mok says IT leaders need to pay closer attention to workforce planning. Gartner research shows only 30% to 40% of companies have a formal workforce plan in place, which includes tools for tracking workforce supply and demand, as well as implementing changes in recruiting, training and development to address skills gaps. In addition, the majority of companies only consider workforce needs for the next 12 to 18 months. That's not enough time, particularly for IT roles that require business knowledge, she says.

"Some of these skills take time to develop, so you need to put that timeframe in place to really build up your bench strength," Mok says. "If you haven't started, now is the time."

Greater scrutiny, shorter ROI

As money got tighter in 2009, so did the budgeting process.

At Brandeis University, the largest initiative on Turner's radar -- an 802.11n project -- only passed budget muster after vigorous cost analyses. "We're planning a large scale network refresh, with one of the major areas focusing on edge technology," he says. "In some areas we're anticipating eliminating wired access altogether, and in other areas we're looking at maybe a 30% reduction in wired access."

Total cost of ownership is the name of the game now, Turner says. "Everything that comes across the desk today goes through several budget checks before it's even sent to budget. In the past that wasn't as critical as it is today." The 802.11n deployment has taken into account everything from the cost of switches and power requirements to space usage, maintenance costs and other associated expenses.

In addition, Turner and his peers are getting used to a newly established project review and advisory committee made up of senior university leaders. While that can mean more red tape, Turner says it helps more quickly align the puzzle pieces. "It's great because we have more integrated planning than we've ever had before. At a university, that's rare."

The review committee has also wound up highlighting areas where IT is helping the university by not only providing better technology, but also saving money and improving the university's bottom line. "It's exposing some of our wins," Turner says. "That puts us in a better light, as opposed to just being seen by the rest of the university as a service provider."

Another sign of the times: Companies are looking for shorter payback. "A long time ago we used to be able to justify IT projects with an ROI of 18 months," says Andi Mann, vice president of research at Enterprise Management Associates. "It came down to around 12 months a couple of years ago, and now you've got to be able to justify spending within six months on a solid business case."

New IT priorities

Spending didn't grind to a halt in 2009, but the recession shifted investment priorities. In general, projects that got the green light were about gaining efficiencies -- lowering operating costs, making users more productive, streamlining business processes.

Tools such as videoconferencing and unified communications remained popular, since they help employees get work done. Business intelligence and analytics projects also held up well. "Companies wanted to get a better understanding of their costs, their business metrics, what was going on," Bartels says. "It made sense to invest in business intelligence because there was going to be payoff."

The desire to conserve cash had a clear influence on the software market, in particular. Licensed software revenue fell, while subscription revenues for SaaS applications continued to grow. Gartner estimates SaaS revenues hit $7.5 billion in 2009 -- an increase of nearly 18% over 2008.

While interest in SaaS was growing even before the downturn, adoption accelerated in 2009 as IT leaders looked for ways to avoid capital investment and make their IT costs more flexible.

"SaaS has benefited from the globally depressed economy," says Chuck Schaeffer, CEO of on-demand CRM and ERP provider Aplicor. "SaaS demand continues to increase and new customer acquisitions continue to increase."

Sales cycles have lengthened due to the need for more stringent ROI justifications and increased due diligence, Schaeffer says, but in general enterprises are drawn to SaaS for the same reasons: Lower upfront costs, shorter implementation time, reduced demand on IT staff, and fewer implementation risks than on-premises software.

"IT departments are challenged now, but most are expecting the economy will return to better days," Schaeffer says. "When that happens, SaaS will provide them on-demand scalability. Computing resources can be dynamically provisioned and scaled when needed, and companies don't have to procure, implement, manage and upgrade incremental servers and hardware just in case the company grows."

Server consolidation and virtualization projects also remained a priority in 2009, since they're associated with clear cost savings. By eliminating and consolidating hardware that's underutilized or inefficient, companies have been able to cut the number of servers deployed by 5% to 20%, Gartner reports.

At the same time, virtualization has allowed enterprises to eliminate entire server farms, slashing operating costs and raising asset utilization rates from the 10% to 30% range to the 70% to 90% range. Removing a single x86 server from a data center can result in savings of more than $400 a year in energy costs alone, Gartner says.

In addition to streamlining and making IT infrastructure more economical, projects such as server virtualization have laid the groundwork for more strategic IT initiatives going forward. "What I'm seeing is a trend towards leveraging virtualization as a building block for an internal cloud methodology," says Chris Poelker, vice president of enterprise solutions at FalconStor Software.

Cloudy skies ahead

As the freeze on capital investment begins to thaw, companies will move ahead with projects that were delayed in 2009, industry watchers say. Certain categories of hardware will see early gains, for instance.

Delayed PC purchases are likely to take priority, particularly since Windows 7 is now available. Storage, too, it set for a recovery, Bartels says. "You can hold your breath for a while, but with the inexorable growth in the amount of stuff that needs to be stored, sooner or later you're going to have to go out and buy more storage equipment," Bartels says.

In general, mindsets are shifting from how to cut IT costs to how to help the business grow.

"There was definitely a wave of cutting and consolidating and wringing out costs in 2009, but at the same time a lot of enterprises kept their eyes on the ball in terms of where they want to be when we come out of this," says Phil Hochmuth, a senior analyst at Yankee Group.

Companies want their applications and infrastructure to be more flexible and elastic, and they want their employees to be able to work collaboratively and have access to the tools and data they need, no matter where they're located. These priorities became clearer during the downtown, Hochmuth says.

"Companies have polished their ideas around what their architecture is going to look like and what they want to be able to do," he says. "I think we're going to see people hitting the ground running when they do get some money back."

Projects such as desktop virtualization will get the green light, along with remote access programs for teleworkers. These are projects companies wanted to undertake last year, but were forced to delay, Hochmuth says.

Increased virtualization in the data center is also on tap, as enterprises look beyond the server to storage, Poelker says. "Once you combine storage virtualization with server virtualization, you create that abstraction between the two and now mobility of data can occur without reference to geographic location. That's going to be the technology that actually allows a cloud to take place."

While the hype around cloud computing is at an all-time high, there are signs that IT's attitude about cloud computing has changed tremendously over the last year. The lousy economy accelerated enterprise interest in the cloud, Carr says.

SaaS, one of the many cloud-based services out there, will see adoption speed up considerably in 2010, even among big companies, Carr says. He expects corporate use of Infrastructure-as-a-Service (another flavor of cloud computing in which the buyer relies on equipment owned by the service provider) and Platform-as-a-Service (IaaS with a software development framework on top of that) also will grow, though at a slower pace since these types of services tend to be used to augment, rather than replace, existing in-house resources.

"What surprised me is how rapidly companies have at least embraced the idea of cloud computing, even if they're not rushing to invest in it," Carr says. "Even a year ago, and certainly two years ago, it wasn't considered a serious option by most companies. Today it really is on the agenda."

Hologic's Rudzinsky is getting ready. His teams have put a lot of time and effort into cost-cutting projects such as centralizing IT infrastructure, rationalizing enterprise applications and consolidating IT vendors. "Those kinds of things are really important to try to keep the shop under control," he says. The next logical step is to tap the cloud.

In 2010 he plans to explore more outsourcing and managed services opportunities with an eye toward "keeping what's core to the business in IT and getting rid of the rest." For instance, it may be time to turn over applications such as ERP and CRM to an outside provider.

"We host those things today, but we're looking to move them out of our data center into someone else's data center. We want this capacity on demand. I want to be able to say, 'Hey, we've got a really busy time coming up, you need to make sure you're allocating more processing power, memory, and disk for me,'" Rudzinsky says. "That will take away some of the big chores that we have today and allow us to focus on things that will provide business value."

That's what the new normal requires: judicious use of sparse resources.

Yes, budgets are tight and staffs are lean. But barring an economic relapse, IT is poised to move forward on projects that portend big changes in IT service delivery. Thrift and innovation don't have to be mutually exclusive.

This story, "Cautious optimism shapes new year" was originally published by Network World.

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