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Financial services meltdown will re-shape IT industry

Karl Flinders

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.


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