Financial IT Budgets Dip for the First Time, By 3.7%, But Will Quickly Rebound
New research from TowerGroup finds that overall technology spending by U.S. financial services firms is declining for the first time in U.S. history, by 3.7 percent. However, the analyst firm expects new technology spending to recover and increase at a compound annual growth rate of 5.8 percent between 2009 and 2012 and replacement IT spending to increase by 20.5 percent in 2009.
How do these numbers even line up? "You have to remember that the vast majority of a financial firm's overall technology budget is consumed by maintenance, putting money into systems to keep them running, compliance upgrades and repairs," says Virginia Garcia, senior research director in the cross-industry practice at TowerGroup. "A smaller percentage, typically around 10%, is new technology spending, discretionary spending. Those are the things you can pull the plug on and that's where we're seeing the drop."
Also factored into TowerGroup's estimates is the number of large financial firms that have gone out of business or merged in the past year. "When the industry consolidates to such a large extent and entire organizations like Lehman are gone, a lot of technology and operational cost is erased as a result," Garcia says.
The third category TowerGroup looks at, replacement technology spending (which is getting that 20% increase), refers to overhauling technology that doesn't cut it any more; for instance, by modernizing data centers and consolidating data centers and platforms. "In a merger, a lot of money goes into bringing technology environments together," Garcia says.
Where Garcia sees increased new spending among financial firms is in enterprise risk management, as a result of regulatory mandates and a realization that existing risk management technologies don't meet today's requirements. Alongside that, Garcia sees investments in better data management, business intelligence and storage.
"Low impact" technology projects are being scrapped, TowerGroup found. According to Garcia, these projects include large enterprise modernization efforts like building services-oriented architectures. "SOA has been a big theme," she says. "Not that it's going to stop, but some of the larger enterprise projects are floundering. Many large-scale SOA projects have been taken off the table."
However, Garcia points out that there's a danger to stopping modernization projects. "Everyone right now is focused on survival and crisis, and a lot of institutions are looking at the short term, how many cuts can we make as soon as possible," Garcia says. "But the market doesn't stop, it continues to evolve, and those institutions that sacrifice innovation will be stuck in the rain without an umbrella." There's a particularly big risk for firms that have extremely old back-office technology and are unwilling to update — it's only a matter of time before some of these systems break.
Visionaries, Garcia says, are going to accelerate enterprise architecture projects to make their organizations more agile. "Along with architecture initiatives, they're spending a lot of money on innovation at the self-service level," she says. "A new generation of consumers is out there demanding product and service innovation and competitors can move ahead of the pack with innovative technology." Mobile, web-based and call center self-service projects continue at these forward-thinking firms, as well as investment in CRM and customer segmentation tools.
"It's a very tough market out there, there's no doubt about it," Garcia notes, adding that TowerGroup has overhauled its model for building IT spending estimates, taking into account layoffs and changing dynamics among vendors. She wouldn't divulge details of their process, but generally TowerGroup triangulates knowledge it gathers about financial institution budgets with firms' plans for year and with vendor data and economic data.