A Spur To Spending

As government data indicated that the economy has contracted for the first time in eight years, President Bush last week urged Congress to quickly pass an economic-stimulus bill by month's end. Democrats and Republicans are divided over the details, but both support tax incentives for businesses aimed at spurring capital expenditures, including spending on computers and software. Business-technology executives say the tax proposals could indeed prompt IT spending at their companies-but nothing close to the unbridled outlays of the past.

The Commerce Department said last week that business spending on equipment and software fell 11.8% in the third quarter, to below the level of late 1999. Even tech innovator Amazon.com Inc. reduced spending on its IT systems by 24% year over year in the quarter as part of a broader cost-cutting program. Forrester Research predicts IT spending will remain flat next year and won't reach double-digit growth again until the second half of 2003 at the earliest.

An economic-stimulus package should help. Jack Cooper, CIO of Bristol-Myers Squibb Co., says he'd expand several IT projects if Congress enacts more-favorable depreciation provisions for capital-equipment expenditures. The $18.2 billion New York pharmaceutical company would add features to an Internet portal that lets customers check prices and order status, invest more heavily in software that lets it buy and sell supplies through online auctions, and expand an E-procurement project that's under way. Such projects can grease the wheels of commerce, Cooper says. "The key is technology. It will lead the recovery."

The Republican-led version of the bill that the House passed last month calls for a temporary provision that would let companies write down 30% of capital investments, in the year they buy the equipment, for products purchased between Sept. 11, 2001, and Jan. 1, 2004. Currently, companies can depreciate 15% in the year of purchase. It also calls for a permanent repeal of the corporate Alternative Minimum Tax, which requires companies to pay a minimum tax regardless of deductions.

The Democratic-led Senate proposal supports a one-year-only 25% rate for new capital-equipment depreciation, while making no changes to the Alternative Minimum Tax. Its supporters argue that tax relief should be aimed more at consumers and that overinvestment in technology and production capacity are partly to blame for the current economic woes. "We don't want to increase production when we've already produced too much," says Dan Maffei, communications director for the Democrats on the House Ways and Means Committee.

But new investments in IT will make companies more efficient and improve their financial performance, says Phil Go, CIO of Barton Malow Co., a $1 billion construction management and general-contracting firm in Southfield, Mich. IT investments are different from other forms of capital investments, such as those for expanding factories, he says. Technology doesn't lead to overproduction of materials. It just makes production more efficient, he contends.

How might companies take advantage of the tax incentives? Storage, backup, and recovery rate higher on the priority lists of many companies now.

Miami logistics company Ryder System Inc. will hold a meeting this week to set IT spending for next year. Key projects include a new off-site data center that would provide real-time backups as "insurance against disaster" and funding for increased IT security, says CFO C.J. "Corky" Nelson. Ryder's IT steering committee will begin with a top-to-bottom evaluation of the security of all its systems. Nelson couldn't estimate the amount of money the company will spend on new projects next year but says the business incentives now being considered by Congress would help.

Yet, while accelerated depreciation could help overall corporate cash flow by reducing taxes, that's generally not the sort of detail factored into an IT project's return-on-investment calculation. Roger Hull, CIO of First American Corp., is just beginning an effort to standardize the Santa Ana, Calif., business-information company's four main units so they can present a more unified product to banks and other financial-sector customers. Any project he brings forward needs a clear ROI that doesn't depend on savings from faster depreciation. "It's more icing on the cake," Hull says. "It probably wouldn't affect a go, no-go decision."

Tax incentives wouldn't help many of the businesses that are hurting the most. "We're not in a profitable situation, so we won't be a taxpayer anyway," says Lawrence Kellner, president of Continental Airlines Inc. Continental is "taking a breather" on new IT projects for the next three to six months to preserve capital, he says.

The tax provisions also wouldn't address some of the costliest aspects of starting new IT projects. The services or personnel needed to launch them can be double or triple the cost of equipment. Companies are ratcheting back services and personnel costs, according to a recent InformationWeek Research survey of 300 business-technology managers. It found that 58% of respondents have a hiring freeze in place, and 20% say spending with consultants or outsourcing partners has been curtailed.

Still, IT industry lobbyists are pressing legislators to support an even more aggressive depreciation schedule-one that would let businesses expense 50% of the value in the year of purchase and 50% the next, allowing a full write-off in just two years. Barton Malow's Go would like to see that happen before the company's next scheduled upgrade of PCs and notebooks. These computers, he says, have a useful life of three years at most.

The Center For Responsive Politics, a nonprofit research group that tracks money in politics, says the IT industry is taking advantage of recent events to push long-held agendas. The computer and Internet industry contributed $39.6 million to political campaigns in the 1999-2000 elections, the group reports. It said last month that the result of the stimulus bill "could be an old package filled with long-debated issues-only this time it has a new wrapping: the American flag."

--with Robin Gareiss, Steve Konicki, Chris Murphy, and Aaron Ricadela