Two weeks of
meltdown in the financial services sector will have major
repercussions both on City IT professionals and the IT suppliers
that directly and indirectly support the sector.
As the sector that spends the most on IT cuts its budgets,
suppliers will be met with falling revenues and demands from IT
departments for higher returns on their investments.
CIOs attempting to cut costs through IT will have to deal with
suppliers that will themselves be under pressure to remain
profitable.
According to Gartner, the financial services industry across
Europe will spend more than £74bn on external IT this year, more
than any other sector.
The credit crunch started to bite early in the month with the US
government's decision to bail out mortgage lenders Fannie Mae and
Freddie Mac (see below). The recent bout of consolidation
culminated with UK bank
Lloyds TSB agreeing to takeover of HBOS. It signalled that the
trouble in the US has reached UK shores.
According to financial services analyst firm Towergroup there
will be "a dramatic drop in technology spending across the
[investment banking] industry as several top spenders either exit
the business or reduce their overall commitment to IT
investment."
Lehman Brothers, which filed for bankruptcy last week, invested
a total of £600m on communications and technology in 2007 while
Merrill Lynch, which was rescued by the Bank of America, spent
£1.1bn.
"Tactical software and hardware spending will be hit first,
followed by the more-strategic IT services in the long run," says
analyst Gartner.
Anthony Miller, managing partner at analyst TechMarketView, says
the problems in the financial services sector will impact IT
spending in other sectors. "It has ramifications in other sectors,
particularly retail, because there is less credit available and
consumers are not spending." This he says will lead to other
sectors tightening their belts.
Daniel Meyer, director of analysis financial services technology
at Datamonitior, says IT suppliers will begin to feel the impact of
spending cuts in the second half of this year and throughout
2009.
He says that in 2007 retail banks spent £21bn on IT and firms in
the financial markets paid £13bn for IT products and services. "The
retail banking spend will be relatively flat this year but the
financial markets, including investment banks, will see falls of
between 5% and 6% this year and next year."
The crisis could lead to the introduction of new pricing models,
according to John Higgins, CEO at IT industry suppliers' trade
association Intellect.
He says suppliers will have to look at their pricing models
because banks will be less willing to pay up front for IT.
"Software as a service could be a winner from this as could any
model where people pay on consumption rather than up front
cash."
Chris Skinner, CEO at financial services think-tank Balatro,
says there will be lots of application development suppliers losing
business. "This is because firms will not invest strategically
because they know their strategies will have to change because of
the current turmoil."
As a result innovation in software development and outsourcing
could stall as suppliers cut back on investments.
Geraldine Fox, global sourcing lead at consultancy Compass
Manmeyagement Consulting, says, "Financial services firms will be
looking for the cheapest deal possible and this will stop
innovation by outsourcers."
After a week of carnage in the City, IT professionals are faced
with a new reality that will change a large potion of the IT
industry for ever. Apart from the massive redundancies expected in
financial services IT and the IT industry that supports it, CIOs in
all sectors could struggle to get more out of suppliers for less at
a time it is most required.
IT staff walk out of conference as disaster
strikes
This week saw attendees at the SWIFT International Banking
Operations Seminar (SIBOS), the annual financial services IT event
in Austria, face an atmosphere of gloom as news broke on day one
that
Lehman Brothers had gone bankrupt. Thousands of visitors had to
leave and return to their desks as financial services firms were
uncertain how they would be impacted.
12 days that shook the City
07 September - US government bails out mortgage lenders Fannie
Mae and Freddie Mac and promises £110bn cash injection
15 September - Lehmans files for Chapter 11 bankruptcy
15 September - Bank of America announces plans to acquire
troubled investment bank Merrill Lynch for £28bn
17 September - US government injects £47bn cash into insurer AIG
to shore up its business
18 September - UK Government brokers a deal for Lloyds TSB to
acquire mortgage lender HBOS for £12.2bn.