Light at end of tech tunnel remains dim

By Jon Van
Tribune staff reporter
Published October 10, 2002

The technology slump analysts once thought would have receded over the summer shows few signs of leaving. Now many observers believe it may last another year--or longer.

Suffering from the economy's general funk, most chief executive officers have put a lid on new spending for information technology and investors seem inclined to give the sector a wide berth. And the tech-heavy Nasdaq index continues to trade at six-year lows.

"People make decisions on where to allocate their 401(k) around the end of the year," Cliff Higgerson, a partner in ComVentures, a venture capital firm based in Palo Alto, Calif., said. "It's hard to imagine that anyone will shift anything into tech. It's easier to see them shifting out."

Indeed, on Wednesday shares of Motorola Inc. hit a 10-year low during a brisk sell-off.

For tech companies to prosper these days, good technology just isn't enough. A firm must position its products as being vital to customer survival.

If a customer doesn't see an immediate need for new technology, the pocketbook stays shut.

A recent poll of chief information officers by CIO Magazine found few signs that the current slump is near an end, said George Elling, a managing director for Deutsche Bank Securities.

He said that the poll results "indicate the hope for recovery, which many CIOs thought possible in the beginning of the year, has not materialized and little optimism is expressed for the remainder of 2002."

And earlier this week Gartner Dataquest lowered its forecast for growth in technology spending for the remainder of 2002 and 2003 by several percentage points.

The company said it believes a tech rebound is at least six months away.

The profit warning last month by Electronic Data Systems Corp. that sent its stock into free fall underscores declining fortunes of the information technology sector.

EDS and IBM Corp. had been bright lights in an otherwise gloomy fog that settled over the technology sector at the time the dot-com bubble burst 18 months ago.

Now EDS and other tech companies are feeling the downside of the same herd mentality that drove tech spending to soaring heights a few years back, said Glen Macdonald, vice president of Adventis, a Boston-based consultancy.

"In the late '90s, everyone felt pressure to upgrade," said Macdonald. "They felt if they didn't, their competitors would and they'd be at a disadvantage. Now they see that their competitors aren't spending for IT, so they don't feel any pressure.

"The herd mentality created an excess that ran up spending, and now I think you're seeing the reverse."

But while tech is still slumping, many players say they are exploiting the situation and even thriving during the downturn, although sales are not easily made as customers are far more skeptical.

ITracs Corp., a Westchester firm that upgrades communications infrastructure, has doubled its size to about 100 employees during the past year, said Rick McNees, the firm's marketing vice president.

By adding hardware and software to existing infrastructure, the firm lets managers monitor and control the cables that carry voice and data for their enterprise.

A recent upgrade at Midway Airport, for example, enables technicians at O'Hare International Airport to manage Midway's networks.

"If you can show a manager how he can save hiring a body, you've got a good talking point," said McNees. "Also, while infrastructure spending might be frozen, there is funding for security, which our product plays a role in.

"We're doing pretty well, but life would be better in a good economy. We can see where every deal is a struggle to get funds released," he said.

A Barrington based firm, iValue, is a consultancy that uses simulations to predict whether proposed new information technology will really deliver economic value.

During boom times most businesses failed to ask whether new technology would prove to be a good investment, said Christopher Gardner, iValue co-founder.

Now they do.

"The dot-coms were a very public disaster," Gardner said. "But if you look at the total spending of Fortune 500 companies, there was a whole series of very private disasters. Add them up and they're bigger than the dot-coms.

The hype from dot-coms carried over into private industry, which was making decisions without asking the hard economic questions."

Gardner and his partner, Ray Trotta, said that large firms are far more willing to hire consultants to help them assess new technology.

Al Wasserberger, chief executive of Spirian, a Chicago software company, said that companies are still spending money on information technology "but only where they can do immediate savings--they're not interested in returns that won't come until next year."

He said there was a time when firms regularly replaced their personal computers with upgrades every three years.

"They're keeping those PCs now," Wasserberger said. "They only replace them when workers can't do their work on them anymore."