An Examination of 2010 IT Spending: The World Isn't Flat
It is clear from all of the IT analyst statements that 2010 is has been the most difficult year to forecast ever in terms of financial services sector IT spending.
Predictions from Gartner, Forrester and others predict that there will be an upturn in spending later in the year while the early quarters will be "flat" -- along 2009 exit rate levels. All of these predictions indicate that everything currently is in flux and can change month by month. But the overarching pattern is that spending will remain at 2009 levels.
Unfortunately, the notion of "flat" is particularly hard to interpret at this point in time. Traditionally, IT spending in financial services (as well as other sectors) has been calibrated against revenue and operating expense. But the economic turmoil of 2008 and 2009, replete with writedowns and credit losses, has rendered these two reference points unstable. It is sort of like removing longitude and latitude from the globe and then turning on a GPS -- there will be a signal, but one wouldn't be able to tell where they were.
An alternative reference point could be absolute spending. An organization can then look at industry trends in terms of whether or not peer spending is going up or down. Surprising, however, this "benchmark" gives a false reading as well.
'Flat' Is Relative
Current December 2009 data from about 80 percent of the world's largest financial institutions indicates that at the highest level of reporting, absolute IT budgets for 2010 are "flat" with 2009. However, if application spending (maintenance and development) in infrastructure spending (processing, networks, desktops, help desk, etc.) are assessed separately, it is quickly apparent that the 2010 world of financial services IT spending isn't really flat when viewed "under the covers."
Following is an example that sheds light on actual 2010 budget phenomena apparent from recent data. Let's go back in time to 2008 and use an organization with a $5 billion IT budget:
The 2008 budget consists of $2.2 billion in infrastructure expense and $2.8 billion in applications expense. For 2009 the organization decreased both applications spending (down 12 percent) and infrastructure expense (down 16 percent). These numbers are truly representative of the 2009 IT budget patterns. The resulting total spend for 2009 comes to $4.3 billion -- applications at $2.5 billion and infrastructure at $1.8 billion.
For the 2010 budget applications spending is budgeted at an 8 percent increase over 2009 (bringing it to $2.6 billion) while infrastructure spending continues too be squeezed, facing a 10 percent decrease (bringing it to $1.7 billion). The total 2010 budget is $4.3 billion, which is "flat" with 2009 spending levels, but the strategic workings of current spending trends are far from "flat."
Infrastructure Still Slighted
Even in these early stages of the economic recovery, the pressure on infrastructure costs continues while discretionary spending is returning to applications.
On the infrastructure side, the ability to reduce costs is being enabled by a combination of Moore's Law, standardization, virtualization and demand management (this is the inverse of Moore's Flaw, which states that the lower the unit cost of an infrastructure service, the increased demand increases the total cost).
At the same time, the focus on demand management is manifesting itself in every aspect of IT infrastructure. Firms are driving down ratios of desktops to head count from as high as 2.1 to 1 to under 1.3 to 1 and rescaling their infrastructures in terms of mainframe MIPS and physical servers to be better aligned for the "next normal" of the financial services business. Simultaneously, there is a parallel shift from high fixed cost structures to more variability. Add cloud services to this and the next "normal" -- which should be evident by the end of 2010 -- begins to take shape.
Although 2010 infrastructure budgets indicate continued compression -- along with increased staff productivity, greater use of strategic sourcing and effective demand management -- the applications budget tells a story of business-aligned discerning investment. This is most evident in the investment banking segment, which appears to be rebalancing its IT portfolio. An analysis of absolute spending/budgets for 2010 versus 2009 shows development funding moving (in rank order) toward global equities, foreign exchange, commodities and capital markets.
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