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IT STRATEGY – You’ve cured the bug – so now what?

Hurricane Mitch is expected to cost the insurance market aboutoff. How do they spend their IT budgets now? $1bn.

Bill Gates is the world’s richest man, with a fortune estimated at $62bn.

His company, Microsoft, is worth over $250bn. Brazil has the world’s eighth largest economy with a GDP of $710bn.

The latest estimate of the cost of the year 2000 bug is $858bn. According to Cap Gemini, creators of the Millennium Index from which this figure is taken, the cost of solving the bug is 20% higher now than it was six months ago, and it seems that every time companies and governments look deeper into the problem it gets more expensive to fix. Merrill Lynch, for example, has seen Y2K budgets rise from $300m to $400m, and Xerox from around $115m to $135m.

While the budgets for IT in large corporations tend to be huge anyway, many organisations will not have been able to put other IT projects on hold while they solve Y2K. As our industry commentators point out (page 40), the last three years have seen massive shifts in technology, with the arrival of the Internet and the growth in enterprise resource planning software. So the Y2K costs, in many cases, have been taken from outside the IT budget.

The consequences of not fixing the bug are potentially too awful to contemplate.

Even Scottish Secretary Donald Dewar recently called for a delay in the downsizing of the Territorial Army in case the collapse of infrastructure technology caused civil disturbances requiring troops on the streets.

But all this spending may cause FDs mindful of an economic slowdown, and the bill from their Y2K fix, to take a hard look at their IT spending.

Forrester Research is predicting a slowdown in some areas of the IT industry in any case. In a report entitled PC Industry Roller-Coaster, researchers predict that corporate spending on PCs will peak in 1999 as companies replace older kit that may be vulnerable to the Y2K bug, then slump towards the end of the year. “Y2K is accelerating desktop replacements,” concludes the report. “But firms plan lower spending after 2000. Users figure that once they’ve upgraded their desktops for Y2K compliance, they’ll forego upgrading them until there is a clear need.”

For a company like Intel, this is a major headache. Manufacturing technology is allowing them to maintain extremely fast product cycles, with a new generation of chips appearing every three to six months, but the cost of research and fabrication plants isn’t falling in the same way that PC prices will have to to maintain revenues in the post-2000 slowdown.

Global economic worries will also hamper the market’s growth, particularly since predictions that Europe and Asia would catch up with the much higher spending on IT in the US now seem far-fetched at best. (Note also that Europe has allocated lower budgets, in general, for fixing the Y2K problem than our cousins across the pond: US budgets total $655bn, while the UK has allocated around $41bn, France $31bn and Germany $82bn, according to the Cap Gemini research.)

The “rip-and-replace” solution has also been popular this side of the Atlantic, but many companies, as the Forrester research suggests, are taking the opportunity to satisfy latent demand for technology within their organisations. After 2000, IT spending may be fixed on more concrete business drivers.

“Prior to this year we only spent small amounts over time, and we’ve now gone for a step change by installing an ERP system,” says the FD of a UK engineering firm. “We’re spending a chunk of money on upgrading everything before the millennium. So we’d expect to spend less after the year 2000.” For this company, the Y2K problem has been a good excuse to make a sizeable one-off payment on systems, then, rather than an absolute bar on big ongoing projects. But what about after the year 2000?

“We’ll probably look for opportunities to increase functionality where it’s cost justified, where the benefits will be greater than the cost,” says the FD. So the big spend has focused financial minds on return on investment – ironically, it needed a project where there was none to highlight its importance.

Stakis FD Neil Chisman takes a slightly different view. The company has several on-going IT projects which have been affected by year 2000 considerations, and that will alter both the way they deal with the problem now and what they do with IT afterwards.

“Our approach to dealing with the year 2000 has been to try and upgrade things at the same time, so we come out of it with better systems,” Chisman says. “But there are definitely things that we’d like to do that we’re just not doing at the moment because we don’t have the resources – that doesn’t mean we don’t have the money, we just don’t have the pairs of hands.”

More money has been allocated to the IT budgets to help with the additional costs of Y2K, although Chisman points out that the company also has to gets its systems Emu-compliant. “Rip-and-replace” can kill both these birds – and the upgrade issue – with one stone.

“Our accounting system had been in use for far more years than you’d have thought possible, and was very old,” Chisman admits. “So when the year 2000 came along, and we had to change it, we did a major upgrade rather than a little increment.” In this sense, Stakis is similar to the smaller company, but it’s the next step that sees a difference emerge.

“Thereafter, we will probably get on with developing projects, but there is now a backlog to get on with,” he says. “In our case, we’ve never really had a backlog of projects before: the IT department has been ahead of the users rather than the other way around. So now we’ve got the users wanting developments and we’ll have to work on that. In our case we’ll probably have a pause for breath and have a strategic review to decide the order we’ll proceed with things.”

Chisman is fairly philosophical, and can’t really see IT budgets falling dramatically after the event. If a project is going to generate returns for the organisation, then it’s worth doing no matter what has happened before. “It’s an annoyance that this has happened; but the closest to resentment about it that I’ve heard is my IT director who said something along the lines of ‘whoever decided to go for the single currency at the same time as the year 2000 certainly has a strange sense of humour’. The benefits of the upgrade (to the financials system) will be pretty vast in the sense that there will be significant cost reductions.”

Whichever way companies look at their own year 2000 problem – and whichever fix they implement – one thing seems to be certain: for the IT industry, it’s like five Christmases rolled into one. Companies have embraced the idea of “rip and replace” and used the opportunity to upgrade vital systems, and this has pumped hundreds of billions of dollars into the industry.

For some user companies, that will mean a cutback on IT spending after 2000.

Of course, there are also a whole slew of new IT projects that perhaps ought to have been implemented in the last couple of years of the millennium, but which were shelved until resources will allow. At that’s the kicker: it’s almost as if the IT companies have got everyone to upgrade to the latest systems while still giving them reason to spend on projects which will add value to their businesses in the future. That said, the IT world will need to prove now more than ever before that genuine business benefits can accrue from massive investment in technology. Much hope is pinned on e-commerce (see page 40) as a means of annihilating costs, opening up markets and streamlining supply chains, justifying the ongoing spend.

The timing is almost made for a conspiracy theorist. Businesses simply cannot afford to miss out on the opportunities afforded by new communications systems and more ‘intelligent’ databases over the next five years or so.

Y2K has concertina’d technology spending into the last two or three years of the decade, then the IT industry will offer a brand new set of toys for companies to play with. It’s like the biggest clearance sale the world has ever seen, a trillion dollar stock shifting exercise. Just pity the players who don’t have something different to put on the shelves after 2000.

Overleaf: industry commentators discuss IT budgets in the new millennium …


Are you anticipating a reduction in spending on corporate IT after Y2K?

Absolutely not. After the year 2000, IT spending will shift dramatically toward making the business agile enough to respond to the demands of the Internet economy and building the systems for taking business to the Internet.

How long after the year 2000 will Y2K projects continue? Why?

Until the problems are fixed, perhaps two more years. There will be a large falloff once people do their code revamps and SAP-style implementations.

What will the main drivers in the software market be after Y2K?

On-line commerce

What will happen to all the Cobol programmers?

They’ll get retrained as application assemblers, integration specialists. The Fortune 1,000 tells us that they plan to train 9% of their developers in Java by 2000.

How do you see the software industry developing up to 2005?

We don’t have numbers for this slice, but it will grow significantly (unless we have a collapse in the world economy).

What are the business imperatives for companies to continue developing their software strategies after 2000?

Commerce, commerce, commerce. Companies have to become much more agile internally so that they can shift to respond to the higher level of service on the Internet economy and the lower price points that the Internet economy will drive.


Are you anticipating a reduction in spending on corporate IT after Y2K?

No, just a change in what the spending is directed at. Some companies will reduce expenditure because they had to spend beyond their usual budget thanks to Y2K. But most organisations took the money from their existing budgets and simply delayed other IT investments.

How long after the year 2000 will Y2K projects continue? Why?

Some organisations will have bugs that were not removed and will be left with repair work. As most sites work on an annual cycle it is quite possible that such bugs will only get noticed at end 2000 or even later. Some companies will have taken a ‘rip out and replace’ approach to year 2000. Such package implementations may also continue into the year 2000.

What will the main drivers in the software market be after Y2K?

My belief is that there will be a number of mergers and acquisitions that are provoked by the year 2000. Some of the companies whose systems fail will be acquired by companies that got it right. The euro will also provide work for the same set of vendors. Beyond that it is already clear that the real dynamic in the market is the move to e-commerce.

What will happen to all the Cobol programmers?

In all probability the few COBOL programmers who came out of retirement will go back into retirement, the rest will do what they were doing before.

How do you see the software industry developing up to 2005?

Some people have missed the point that there are genuine business reasons based on the economic factors of electronic commerce for the move in this direction. These business drivers have often been obscured by the hype surrounding the technology.

What are the business imperatives for companies to continue developing their software strategies after 2000?

The electronic economy will cut costs to ribbons, globalise the economies of nations and alter the way that business happens.


Are you anticipating a reduction in spending on corporate IT after Y2K?

No. There will be some Y2K follow-through work and also other factors such as euro, supply chain, customer relationship management and post-ERP implementation optimisation to replace Y2K as an investment driver.

How long after the year 2000 will Y2K projects continue? Why?

We anticipate that Y2K related business will continue well into 2000 but will be the laggards catching up and real crisis resolution activity. We would expect as much as an 80% reduction in Y2K business in our primary client base.

What will the main drivers in the software market be after Y2K?

The key growth areas will be systems integration and outsourcing services. This is consistent with business focus expanding from the ERP debate to supply chain and customer-oriented business advantage.

What will happen to all the Cobol programmers?

The euro impact is forecast by most analysts to be even more significant than millennium and we would expect that to place a considerable demand on resources.

How do you see the software industry developing up to 2005?

The componentisation of the ERP and supply chain vendors’ products will accelerate. The advent of new integration technology and intranet- and Internet-enabling will support this development.

What are the business imperatives for companies to continue developing their software strategies after 2000?

Customer service and retention coupled with supply chain management. There is much better return on investment available here than in an ERP implementation of a transaction processing engine.


Are you anticipating a reduction in spending on corporate IT after Y2K?

Yes. IT budgets showed a reduction in 1998 over 1997. 1999 will possibly require an increase, to cater for year 2000 (once the full requirements are fully understood), euro and ‘business as usual’. Then in 2000 and beyond I can see a reduction, although there will be a significant backlog of projects which have been postponed from 1998 and 1999.

How long after the year 2000 will Y2K projects continue? Why?

‘Year 2000’ projects will disappear as soon as year 2000 itself arrives. However there will be a lot of tidying up and renovation on systems that have experienced failure or minor errors. This will get included under the banner of general maintenance.

What will the main drivers in the software market be after Y2K?

Euro – not the phase one readiness that all of Europe is currently involved in, but making systems euro-based. System replacement will continue, the ERP market will pick-up again as will markets like web-enablement and data warehousing.

What will happen to all the Cobol programmers?

The rich ones will retire, some (the majority) will continue COBOL programming, and some will look at retraining into other languages.

How do you see the software industry developing up to 2005?

More outsourcing of the maintenance and ‘business as usual’ projects to software utility companies; a greater implementation of packages, especially on Windows 2000 when software becomes available. Large internal IT departments will become history.

What are the business imperatives for companies to continue developing their software strategies after 2000?

E-commerce, euro and cost reduction. Plus whatever fall-out the Year 2000 might deliver.

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