Capital Markets Outlook 2013: Firms Will Focus On Reducing Data Center Costs in 2013

Why It's Important: Building, maintaining and running proprietary data centers is a long-standing tradition in the capital markets, but it's tremendously expensive. As costs continue to escalate--energy, real estate, maintenance and technology--and as revenue across the industry declines, firms are rethinking their proprietary data center strategies.

Where the Industry Is Now: During the past few years, capital markets firms have seen a drastic shift in their business model and revenue sources. With income under pressure, they've reduced head count and streamlined operations to cut costs.

Financial firms have gone to great lengths to virtualize much of their data center infrastructure; that, in turn, has fostered the creation of internal private clouds. Cloud technology lets firms redistribute existing compute power as needed, resulting in efficiency gains and higher server utilization (which has traditionally been extremely low and inefficient). Higher utilization and the flexibility of internal private clouds have let firms consolidate and, in some cases, close redundant data centers. Citi, for example, completed a five-year data center consolidation in 2012 and reduced 72 global data centers to 20, says Jagdish Rao, head of Citigroup's Enterprise Operations & Technology.

Focus In 2013: As the industry continues to adapt to market conditions following the 2008 financial crisis, financial firms will continue to evaluate all aspects of the business, including technology. With certain business lines decreasing in importance (trading, mortgages) and others vanishing completely (proprietary trading), most firms have excess data center capacity. Further, as more business processes are no longer considered core competencies (CRM, human resources systems, accounts payable), banks are using cloud software, moving applications to external hosting services and even moving some apps to public cloud infrastructure such as Amazon Web Services, again reducing data center capacity needs.

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In 2013 and beyond, the drive will be to make data centers as efficient as possible in terms of energy used to run and cool equipment. Likewise, firms will move to make the most out of existing assets, and increase utilization of servers and storage devices that once sat idle most of the time. For instance, Citi has increased server utilization to almost 50 percent, up from 5 to 10 percent just five years ago, says Citigroup's Rao. Likewise, Citi has increased storage utilization to 60 percent, from 10 percent.

Industry Leaders: The major banks are all reducing their data center footprints, energy costs and redundancies while increasing efficiency, virtualization and server utilization. Small and midsize banks are using the same tactics but don't have the same opportunities to leverage large existing data centers as their bigger peers. For business processes that are no longer considered core competencies, hosted software services offer some opportunities to move applications out of the data center.

Technology Providers: Nasdaq OMX and Amazon Web Services recently partnered to offer FinQloud, a service that lets firms manage and store financial data in the cloud. NYSE Technologies has offered its Capital Markets Community Cloud since 2011. Providers of hosted and managed data center services, such as Dupont Fabros Technologies, Equinix, Savvis and Verizon Business Services, all have financial services clients and continue to attract new ones as more companies move applications out of corporate data centers. Most financial services software vendors also offer the option to run and host a version of their applications as a service from the vendor's data center.

Price Tag: The cost of running a large proprietary corporate data center is tremendous. A 10-megawatt data center is considered merely medium sized and can cost $300,000 per month just for power and cooling. Hardware and technology generally make up about 40 percent of the overall cost, while energy, cooling, maintenance, real estate and staffing account for 60 percent or more of overall costs. With such high fixed costs, capital markets organizations will work to make sure corporate data centers are as efficient as possible. They can't afford not to, given the declining revenues the industry has faced in recent years.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio