Technology bright spot in otherwise-pessimistic CFO outlook

A new study finds CFOs are deeply pessimistic about the U.S. economy. One bright spot: information technology.

Don't be surprised if your CFO looks glum these days. Chief financial officers are more pessimistic about the U.S. economy than at any time since 2001, predicting slow earnings growth, flat employment and low capital spending for their companies next year.

I think it's going to be tough, with the amount of debt out there.
Steven Names
CFOSendik's Food Market
But technology emerges as the lone bright spot. CFOs expect technology spending to increase 4.1% at their companies over this year -- not a spectacular boost but better than the anemic 3.2% growth forecast for capital spending. "Overall, it is one of the stronger numbers in a weak quarter," said John Graham, professor of finance at The Fuqua School of Business at Duke University in Durham, N.C. A "more normal" capital spending increase is 5.6%, he said.

The findings are from a quarterly survey of CFOs conducted by Duke University and CFO magazine. Asked about their expectations for the economy, pessimists outnumbered optimists by roughly a four-to-one margin in the latest polling. The response marks a record low since the survey's "optimism index" launched six years ago. Nearly 62% of CFOs are more pessimistic about the U.S. economy than they were last quarter, compared with only 13.6 % who are more optimistic.

As in years past, wage inflation is the No. 1 concern among U.S. businesses, according to the Duke/CFO study. But the subprime mortgage crisis is making itself felt. More than a quarter of companies said they have been directly affected by the constricted credit market. "Oftentimes companies, for unknown reasons to me, seem to shrug these things off, but it actually seems that a fair number of companies are explicitly cutting back on capital spending because of the credit crunch," Graham said.

The grim prognosis does not bode well for the economy at large, in his view. The correlation between CFO responses and what happens the following year "has been high," he said. "They seem to predict the future pretty well."

"The checks they are signing now indicate what is happening at their companies in the next three to six months," Graham said. "When you add all that up, assuming our representation is fair, you get a pretty good sense of the U.S. economy as a whole."

Pessimistic, but not down and out

Survey respondent Steven Names, CFO at Sendik's Food Market, a family-owned grocery store chain in the Milwaukee metropolitan area, counts himself among the pessimists. "I think it's going to be tough, with the amount of debt out there. In some states, like California, there just isn't enough income to meet the debt obligation. It isn't quite as bad here, but we have a lot of the same issues."

Names was considerably more upbeat about IT. Technology spending will be relatively strong next year at Sendik's, relative to the company's size, he said. But, contrary to the survey findings, capital spending will outpace tech spending in 2008, because the company is adding two new locations to its four-store chain, Names said.

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Going forward, Sendik's "will continue to lean more heavily" on IT. "IT is very important to managing our business. We try to stay ahead of the curve in terms of upgrades and technologies, I think ultimately it allowed us to keep our overhead costs at a minimum, while rapidly expanding from one to six locations during the past 36 months," he said.

Sendik's uses a virtual private network to allow much of its accounts/payable work to be done offsite by lower-level employees. Most of the 400 vendors it does business with weekly are paid using Automated Clearing House (ACH) deposit. The company just added signature capture and electronic check conversion to the point-of-sale systems at its new stores and plans to convert its other stores in the next 12 months, Names said.

CIOs might also want to take note of another result: while CFOs expect hiring to be flat next year, they predict outsourced employment at their companies will rise 5.9% over last year. Technology-sector CFOs pegged the increase in outsourcing at 8.5%, the second-highest growth rate after the financial sector CFOs, who predict outsourcing to grow about 10% in 2008.

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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