Technology Spending Won't Come Back For A While

These days,  chief information officers at Fortune 500 companies are spending a lot of their time saying “no.” The good ones are masters at it.

They have to turn down pleas from department heads for new software and hardware all the time.  Salesmen better be prepared to prove their latest version of their software or their newest gizmo will help the firm’s bottom line.  Saying it’s an upgrade chock full of new, exciting features will not cut it. The reasons why CIOs are tight with a  buck is simple:  they have no other choice.  IT  has to prove its return on investment like every other department in corporate America.  Evidence of this trend is already starting to emerge.

Cisco Systems Inc. (NASDAQ: CSCO) spooked Wall Street Thursday when it gave cautious guidance after posting worse-than-expected second quarter revenue.  The news dragged down shares of other tech bellwethers such as International Business Machines Corp.  (NYSE: IBM),  Dell Inc.  (NASDAQ: DELL) and Hewlett-Packard Co.  (NYSE: HPQ).  Tech researcher Gartner Inc. said worldwide enterprise IT spending would increase 2.9 percent in 2010, down from an earlier forecast of a 4.1 percent gain.   On the bright side, this is an improvement from 2009 when spending plunged 5.9 percent.

This creates enormous problems for tech companies.   CIOs have them over a barrel and they know it.   Customers are now in a position to ask for and get loads of freebies such as training and software upgrades.   Vendors also will give away products and services dirt cheap or even free to companies that let them be a reference customer who will vouch for them to potential clients.

It’s a great time for tech buyers, a lousy time for  sellers and an even worse time for investors.  Wall Street firms should be a huge beneficiary because of their never-ending appetite for technology.  Bankers also hate to waste their IT dollars.  A few years ago, Jamie Dimon stunned the IT world when he canceled a $5 billion contract with IBM and brought the work in-house, figuring JPMorgan Chase & Co.  (NYSE: JPM) could do the work cheaper.  He was right.

Already, there are some signs of a pullback in spending.  Wall Street has taken notice, sending the tech-heavy Nasdaq Composite Index down more than 9 percent during the past 3 months.

For instance, IBM’s mammoth Global Services business saw second quarter revenue rise 2 percent. It  signed services contracts totaling $12.3 billion, at actual rates, a decrease of 12 percent. The estimated services backlog at June 30 was $129 billion, down $2 billion from a year earlier.  IBM is vulnerable to a decline in corporate IT spending since it does very little business with consumers.

There is plenty of money at stake since one of their biggest attractions to investors is their ability to generate cash flow. H-P’s deferred revenue as of April 30 was $6.53 billion. Oracle Corp. (ORCL) listed $5.9 billion in deferred revenue, money coming in from licensing and maintenance contacts, as of May 31.   In its 2010 Fiscal Year, Microsoft had $14.83 billion in unearned revenue.

Until there is a significant improvement in the economy, the balance of power in corporate technology will be on the side of the user.   Customers will exploit their advantage to the fullest.

Jon Berr