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By Business Week

When it comes to technology purchases, business customers increasingly say, "show me the money" -- as in the money they'll save. That seemed to be the consensus at the BusinessWeek 7th Annual Digital Economy Conference in San Francisco this year. Take John McKinley, chief technology officer at financial powerhouse Merrill Lynch. He receives 80 to 100 calls a day from various hardware and software outfits. He listens only to vendors that provide him with concrete examples on how much their technology trims costs or how much it lifts the top line.

The rest of about 300 CEOs, CTOs, and chief information officers attending the conference on Dec. 5 and 6 agree that money remains tight. So much so that some companies offer their CIOs and CTOs bonuses for spending less than what was budgeted.

That's understandable. Many tech companies' clients are teetering on the edge. "I don't think there's any business that's doing O.K. at this point," says Shai Agassi, member of the executive board at e-business software maker SAP (SAP), with $7.5 billion in annual sales. McKinley's own surveys of large companies show that corporate IT spending will remain flat -- or even decline by perhaps 2% -- in 2003.

"THE EXTRA MILE." To survive their clients' economic troubles, tech companies have had to drastically change their tech focus to a customer focus. In the bubble years, they would push out a great gadget and hope it found buyers. Today, they first have to find out what the buyers want and then create gadgets that fit the bill. "Vendors need to start thinking about what the CTO needs and stop selling the fastest, the cheapest, the biggest," says Stratton Sclavos, chairman and CEO of the $1.2 billion Internet security software and services provider VeriSign (VRSN).

That approach pays off: "The companies that are willing to go the extra mile and actually get inside a corporation's mind -- that's what we're looking for," says Connie Bennett, senior vice-president for sales and marketing for information services at The McGraw-Hill Companies (MHP), which owns BusinessWeek. But buyers have other requirements as well. Merrill looks for suppliers with solid credit ratings that are going to be around in a year or two to provide support, says McKinley. It also scouts for vendors with broad product portfolios, making it easier for Merrill to integrate its systems -- and shave costs more.

As tech companies compete to offer the lowest cost and the best value, offshore outsourcing of engineering and product development is hotter than ever. Many of the conference's attendees say they're looking to India, China, Indonesia, and Russia for cheap engineers and programmers. Merrill has secured a staff of 900 engineers working abroad on its software to save money. That number should rise to 1,700 soon, McKinley says. And India -- with its cheap but highly trained workforce -- is where many tech companies are looking to go.

CUTTING R&D. Many corporations are turning to Wipro, an info-tech consultancy and services firm that in November received India's largest outsourcing contract, from Lehman Brothers (LEH). Wipro, which will set up a special offshore development center for Lehman, is already working with such companies as electronics giant Sony (SONE) and cell-phone market leader Nokia (NOK). And Bill Gates, CEO of software giant Microsoft (MSFT), recently toured Wipro's offices in Bangalore and spoke of collaboration, says Vivek Paul, vice-chairman of Wipro.

More cost-cutting can be done at home, too. That means slashing research and development expenses. "Big companies try to innovate everywhere, but there's not enough money to do that," says Shane Robinson, CTO at computing powerhouse Hewlett-Packard (HPQ), which still spends about $4 billion annually on research. "We need to focus on areas where we can differentiate ourselves."

Yet companies now often have to spend more on proving their technologies' value to their customers. Microsoft, for one, has recently commissioned management consultancy NerveWire to conduct nine customer case studies, detailing how its technology helps save costs and boost sales.

HARD TO MEASURE. Many tech companies remain in tough spots. "It's very, very difficult to associate a return on investment with a security solution," says Dan Warmenhoven, CEO of storage maker Network Appliance (NTAP). Still, companies such as Nationwide Insurance are realizing they can't measure the value of all of their technology purchases in dollars and cents. Nationwide invests in IT projects that might not offer an immediate ROI, says CTO George McKinnon. It might purchase sales-force-automation software to increase sales reps' productivity even as it watches sales growth decline in the near term because of the overall sluggish economy.

Still, despite ongoing struggles, evidence continues to mount that opportunities abound for tech companies. Although the economic environment remains challenging, the amount of data generated in the next three years will exceed the volume of data created in the previous 40,000 years, according to consultancy Teradata. Sales at online retailers Amazon.com (AMZN) and eBay (EBAY) are rising -- indicating a permanent change in consumer behavior in relation to the Web. "We just have to change our game a little bit," says Merrill's McKinley. And so the digital economy continues to evolve.

Article courtesy of YellowBrix, Inc.

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