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Techs' Daring Dance on IT Cutting-Room Floor

Basing a 'second-half recovery' on the illusory demand for products of companies that all make the same thing.

Editor's note: This column, condensed here, originally appeared April 28 on To sign up for RealMoney, where you can read Bill Fleckenstein's commentary every day, please click here for a free trial.

The Checking of Check-Writing Privileges

: I would like to share an email from a top technology officer at a major information-intensive Fortune 100 company. He provided an update (from his thoughts

aired here late last November and December) to both Herb Greenberg and me about the status of tech spending. Herb reprised his email on

Street Insight

, but because most Rap readers don't get to see that, I wanted to include the email here. Given that it's rather long, I'm going to shut up and let my expert do the talking (with italics to show my emphasis):

"As the market begins partying here, I thought I would provide some perspective (yet again) to any RealMoney readers who again may be thinking about joining the fun in technology. In essence, nothing has changed since I last emailed you in December in regards to tech spending or future tech budgeting. We continue to plan for no additional funding required for our budget. In addition, we plan on cutting several projects back due to

business users being unwilling to pay through their budgets

for any further IT implementations.

"What seems to be so shocking is that we are now entering what has always been the slowest time of the year for IT to spend money. I am completely awed at the utter disregard shown by Wall Street to this. It's as if somehow war changes this. By my current numbers, only 7% of our spending was impacted by the war, and of that 7%, 75% of the money we had planned to spend, we ended up just returning to the budget, as the customer decided they no longer needed to spend.

"My experience is that it is fairly similar at other companies as well. Business users make requests to corporate IT for specific maintenance, new application features, or upgraded software/equipment. They then pay IT from their budget to implement these changes. As budgets are fairly fixed (based to planning sessions), we are able to anticipate/measure the level of demand from various business groups and staff resources appropriately. That's why I consider them my major IT spending indicator.

"If business groups or users need more features, they will give us money out of their budget to spend. The more technology we require to implement a solution (whether it be new or whether it be an upgrade), the more money we will get. That in turn would lead us to spend that money on technology products from vendors and ask for budget increases to pay for new resources and equipment on our end (as our internal budget is primarily based on the money that we estimate business users will provide us).

"That's where my percentages/figures come from. In the summer months, those numbers go down, so we have less money to spend, along with less need. As I have stressed before (and which this stock market rally has not changed), there are two reasons why this trend continues. One, business users are fairly content with what they have now. Thus, they are not requesting new software implementations, or even upgrades. They would prefer only that we keep what we have up and running and well-maintained.

"Second, if we need product, we have a dinner menu of vendor choices. So wecan get all we need with the limited amounts given to us by business users. ...

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Few actually understand the capacity problem tech vendors have. The capacity issue is real and continuing. THERE ARE TOO MANY COMPANIES THAT SELL THE SAME THING. This allows us to bid low on any product we need and play companies against one another for service contracts.

"The difference is stark. In the late 80s and early 90s, we did not have much choice on who we chose, for example, database products or business intelligence software from. In the late 90s the choices grew, but luckily the demand grew as well. Now, though, the large amount of choices still remains, but there is not enough demand. That leaves the conundrum; either the number of choices must decrease, or the demand must grow. Demand growth would show up rather quickly for an IT department (they would get more requests for work). Guess what? Not ONE person I talk to in IT has seen any demand increase, and I talk to a lot, big and small.

"My second indicator is our department hiring trend. If we are hiring more resources to staff IT needs, that indicates increased spending as we ramp up our resource levels to accommodate future demand . That also is not happening. It's actually going the other way. We are laying off IT staff that we do not need, and outsourcing anything we can to India (not good for job growth here). Staff level planning remains flat to lower.

"We have spending slated for down 10% year-over-year for Q2, and 15% year-over-year for Q3 from last year's levels. Every person I know in IT, at companies big and small, has told me that this May-October period will be no different. They see no uptick in IT spending. In fact, the downticks

they report are larger than last year

. They also tell me that they see

no pent-up war demand from business users

. It's business as usual, with a wind-down planned for the summertime. As business users/groups drive the requests for new hardware/software, they are the frontline indicator of whether corporate IT spending is improving.

"Why is IT spending slow in the summer? It's simple, really: 1. We simply do not buy technology in the middle of the year unless it is emergency-related (meaning we need to implement it now). Something like a software purchase takes a long time to implement, and thus would have a hard time being completed before the end of the year (to justify the investment). 2. We traditionally find pricing to be the best in the October to December timeframe, so we normally conserve our budgetary planning to making major purchases in that timeframe. 3. The people to do implementations are simply not around in the summer (vacations), so we simply do not buy anything new or start any new projects until winter comes.

"Why this gets lost to investors is beyond me. Moreover, why investors somehow believe that the war in Iraq changes this is perplexing. ALL of the IT people I talked to on this told me that many purchases were made


the war to ensure that they were made prior to any possible budget cuts in the summer. That probably would explain the 'better than expected' results you see from tech companies. We have seen that pull-through in our company as well, as we made our major purchases prior to March 15 in order to ensure all equipment/software we knew we needed was bought. We have no major orders for PC upgrades, network equipment, new ERP software, or new server upgrades planned until October.

"Again, I just wish Wall Street analysts would talk to corporate IT departments before making prognoses about a second-half rebound. So, as we watch investors embark on another voyage toward 'the second-half recovery,' I hope you can keep letting RealMoney readers know that they are about to be awoken to reality if they expect corporate IT spending to suddenly take off."

William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. Outside contributing columnists for and RealMoney, including Mr. Fleckenstein, may, from time to time, write about securities in which they have a position. In such cases, appropriate disclosure is made. At time of publication, Fleckenstein Capital had no position in stocks mentioned, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Mr. Fleckenstein's columns are his own and not necessarily those of While Mr. Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to