2008 IT Budgets Up More Than 10% for Financial Services Firms
If the confidence of financial services firms was shaken by this year's subprime mortgage lending crisis, it certainly isn't reflected in their IT budgets for 2008, judging by a joint survey of securities firms, banks and insurance companies conducted by Wall Street & Technology and its sibling publications, Bank Systems & Technology and Insurance & Technology. The responses of roughly 140 senior technology officers from representative companies in financial services indicate a continuation of the better budgetary times that have been the rule since the economic turnaround following the dot-com bust.
A closer look at spending priorities, however, shows anything but a "fat and happy" picture, as companies seek to invest in technologies that can help distinguish them in a time of intense competition. Furthermore, much spending may be characterized as essential rather than discretionary, as companies grapple with compliance demands and labor shortages. But whether driven by opportunism or necessity, financial services IT organizations are getting more money to spend.
IT Spending on The Street
Surprisingly enough, considering the rough year they've had (including billions in write-offs due to leveraged loan funding commitments and collateralized debt positions), capital markets firms are planning to substantially increase IT spending next year. On the sell side, almost half (42 percent) of the firms surveyed expect to increase their IT budgets by 11 percent to 30 percent in 2008. On the buy side, more than a third (35 percent) of firms plan to increase spending by 11 percent to 30 percent; another 35 percent plan to up IT spending 1 percent to 10 percent.
Part of this spending increase, however, is due less to optimism than to necessity: A widespread IT labor shortage is driving IT salaries up, and basic IT infrastructure costs -- particularly energy and cooling costs in data centers -- also are rising rapidly. "The competition for skilled labor in the technology industry has rebounded from the dot-com bubble," notes Steve Rapp, SVP and CTO of Nicholas-Applegate Capital Management, a global investment firm based in San Diego. "We're finding the [pay] rates are back up for both consultant labor and for full-time employees. We have to remain competitive, so we're trying to be on top of that."
Buy-side firms expect to increase IT spending most on developing new applications (74 percent), followed by security (42 percent). Meanwhile, improving data management is their top IT priority (58 percent). "People had to buy a lot of sophisticated technology to adapt to the markets in the past couple of years -- now it's time to clean the house," says Adam Honore, senior analyst at Aite Group. "It's the right priority to have. You can't be prepared for the next wave until you get your data in order."
Application integration (42 percent) and business intelligence (42 percent) also are of high interest for buy-side firms. At Nicholas-Applegate, for instance, an existing business intelligence solution is being mothballed, the firm's Rapp says, in favor of the free Reporting Services add-in to Microsoft SharePoint. "One of the ways we're going to manage our budget below a 5 percent increase next year is by ceasing to pay for business intelligence software," he reports. Although the older BI solution allowed people to create their own reports, that turned out to be impractical, Rapp relates.
"First of all, people have to have the wherewithal and the skills and the energy to do that. But more important, they have to understand the data they're working with in order to get a good result," Rapp explains. "Instead of business intelligence, you end up getting business ignorance. You can't expect people to do their jobs and understand all the nuances and bugaboos of the data so they get the right answer." With the implementation of SharePoint's Reporting Services, the responsibility for creating reports and dashboards will be put back in the hands of the data/report professionals who know how to get the right result, Rapp says.
On the brokerage side of The Street, IT spending priorities are a bit different. Data center infrastructure will be sucking up the majority of 2008 IT dollars at 82 percent of firms. Trade volume increases, the huge demand for more compute cycles, higher energy costs and cooling issues all are a part of the equation.
Application development also will consume new IT dollars at 64 percent of brokerage firms. Building a services-oriented architecture is the No. 1 IT priority for sell-side firms (47 percent). "This is critical as we adapt our technology portfolio to support cross-function, cross-asset and cross-border trades," says Swamy Kocherlakota, director at Merrill Lynch. "We are consolidating our systems and applications toward a services-oriented architecture, event-driven computing and business process modernization." The construction of an SOA also will help Merrill Lynch meet some of its IT cost-cutting goals, as it will promote reuse, standards and shared services, Kocherlakota adds.
The next two most important IT priorities for the sell side in 2008 will be creating or upgrading customer portals and integrating applications (both at 41 percent). Aite's Honore says many of his Wall Street clients are working on application integration. "People have had to string this stuff up so fast -- compliance systems, derivatives, trading systems, risk management -- whatever's coming down the pipe, somebody grabs a system and throws it up," he says. "At some point, you have to take a step back and say, 'We didn't do this in the most efficient way. How do we leverage our spend here?'"
Another area of IT spending that Honore believes will be big on Wall Street in 2008 is back-office functions, such as corporate actions. "Corporate actions are a pain and a mess for everybody," he says. "It's a manual process in a lot of places."
Workflow or business process management also should get a lot of attention, Honore adds. "There's a lot of focus right now on workflow and plugging big holes in accountability with workflow tools," he relates. "There are a lot of legacy systems that still use printouts, faxes, phone calls and ad hoc E-mails. When somebody goes on vacation, there's no accountability for their workload."
Smaller Banks Spending More
As with the capital markets sector, IT spending for 2008 among banks will see an overall increase. Though institutions of all sizes report IT budget increases for the coming year, the largest spending increases appear to be at midsize banks -- 60 percent of survey respondents in that category said they would increase their IT budgets by at least 11 percent to 30 percent, compared with a minimum increase of 1 percent to 10 percent at small and large banks.
This overall modest increase in spending among banks is in keeping with recent trends, according to Celent Senior Analyst Jacob Jegher. "Spending will be similar to trends over the last two or three years when we saw an average growth rate of about 4 percent. But it is moderate," he comments. "My one concern with this moderate growth is whether banks will have much to invest in innovation since they'll have to invest more in regulatory/compliance and maintenance." This compliance and maintenance burden, Jegher adds, has been an ongoing problem for bank IT, particularly for small and midsize banks, and might explain their slightly higher budget increases for 2008.
According to Fifth Third Bank ($101 billion in assets) CIO Raymond Dury, often smaller financial institutions can't handle the high cost of security and compliance. "Although the larger banks have more compliance to worry about, there's not as much revenue to spread that spending over at the smaller banks and they just can't innovate," Dury states.
When asked about the three areas of IT in which they expect to increase spending the most, security, by far, was at the top of the list for large (80 percent) and midsize (50 percent) banks. Other important areas of spending for large banks include network infrastructure, storage and outsourcing, all at 40 percent. For the midtier financial institutions, enterprise applications and application development also factored into the top three (both at 50 percent).
The smaller banks, meanwhile, place emphasis on three very interconnected areas: 75 percent identified both network infrastructure and communications -- such as phone, E-mail and teleconferencing -- and 50 percent pointed to mobile computing. This could indicate that the little guys know they have to offer similar channels and services to the big guys in order to survive going forward.
Among the top three IT priorities at banks for 2008, cost cutting in IT only appeared on large banks' lists, though it was at the top, at 60 percent. This finding could just be a sign of prudence on the part of banks if Fifth Third's Dury's response is any indication. Fifth Third's 2008 IT spending will "increase in real terms, but not percentagewise," he explains. "We're a growing bank. We've made several acquisitions and are investing in new products and services for our clients. But I am also challenged to find efficiencies."
Among midsize banks, results showed that improving risk management was most important (50 percent). Adopting mobile devices and applications was far and away the top IT priority for small banks (75 percent). But, similar to their larger counterparts, they also showed interest in improving security (25 percent) and risk management (25 percent).
Investing in Online
When it comes to spending on specific banking applications, the results varied widely. For large banks, the online channel (60 percent) was tops, followed by core systems (40 percent). However, anti-fraud technology (20 percent) and branch optimization (20 percent) also were among the targeted applications. According to both Dury and Celent's Jegher, this prioritization makes sense.
"The mobile banking blitz by the big banks is an extension of their online channel," says Jegher. "They want to find ways to increase access to their online offerings."
Fifth Third's Dury explains that the large banks can realize good payback from investments in the online channel as they divert customers from the branch and call center. He notes that his bank is busy updating its Internet offering.
Meanwhile, for midsize banks, lending technology topped the list at 50 percent. The credit crunch aside, Jegher says midsize banks still can gain many efficiencies at both the front and back ends of the lending process. Core systems, payments, risk management and anti-fraud technology all tied for second place at 33.3 percent.
As for small banks, risk management technology and payments technology (both at 75 percent) appear to be the front-burner issues, followed by core systems (50 percent) and lending technology (50 percent). "There are a lot of niche players in payments," observes Jegher. The small banks have to find a way to compete with the 'anti-banks' that have great technology," he states. "Banks have to innovate to compete."
Insurers Seek an IT Edge
Like the banking and capital markets industries, the majority of insurance companies continue to enjoy at least modest budget increases. More than 70 percent of respondents from the least predictable sector, property and casualty, reported budget increases of up to 10 percent, with 15 percent reporting even larger gains. More life insurers (25 percent) reported modest decreases in spending, but among the 75 percent that reported increases, a greater proportion (17 percent) indicated budget increases of more than 10 percent. Health insurance respondents reported increases across the board, with an average increase of about 20 percent.
These figures indicate a continuation of the more opportunistic investment seen since 2002/2003, when the only business cases approved needed to include a direct IT cost take-out, according to Matt Josefowicz, Boston-based Celent's insurance practice manager. "Cost take-out is not enough to get projects approved now," Josefowicz contends. "Companies are now looking for the creation of some business advantage, and that means the creation of some kind of productivity enhancement or new business capability."
That characterization is borne out by the survey results. Each insurance sector identified application development as a top priority, with P&C choosing it most often (63 percent). Health insurers identified enterprise applications most often (67 percent) and life insurers identified security among the top three areas of spending increase (67 percent).
In terms of the top three initiative priorities, creating/ upgrading portals was high on every sector's list, but highest within P&C (37 percent). Life insurers identified "accelerating applications and building SOA" most often, and health carriers most often chose business process management.
Policy administration was far and away the highest priority for P&C and life insurance companies' spending on business application areas, with about 82 percent of P&C companies saying they would focus IT resources in that area. This was followed by underwriting (59 percent), accounting/billing/finance (48 percent) and claims (41 percent). Though fewer life insurers identified policy administration as a spending focus (67 percent), the category nonetheless stood out as a top priority.
These priorities are consistent with key drivers of business cases identified by Celent, namely time to market, distributor support and better ability to access and analyze data, Josefowicz says. "Those drivers filter down into investments such as policy admin or product definition and management platforms, transactional portals, ... and claims," he says.
According to Russ Bostick, EVP and CIO at Conseco, "We're spending less money on the running-the-business items, such as mainframe costs and maintenance programming. Overall we'll spend a little more cash due to the investments we're making in our business."
As noted, Conseco's increased investments are representative of a trend among insurers. But globalization of IT organizations is driving a more complex budget picture, as explained by respondent Scott McKay, SVP and CIO of Richmond, Va.-based Genworth Financial, who also reports increased technology investment dedicated to both operating efficiency and competitive capabilities.
Globally, the cost of technical talent is increasingly driven higher by growing demand for applied technical expertise and declining education system graduation rates, according to McKay. "In the near term, businesses with globally deployed technology teams will also be pressured by foreign exchange rates," he comments. "Contrasting higher labor costs, we see continuing deflation when purchasing technology infrastructure and are realizing efficiencies from emerging software-as-a-service (SaaS) offerings."