Financial services organisations face an uncertain year amid predictions of an economic downturn, but IT budgets will continue to grow.
Companies in the sector have been hit hard by the fallout from the US sub-prime mortgage crisis, which has created uncertainty and reduced the availability of credit in the market.
The crisis became evident in the UK when the Bank of England lent Northern Rock billions of pounds to enable it to stay in business. And business volumes are falling at their fastest rate since 1991, according to the latest survey of the financial services sector by PricewaterhouseCoopers and the Confederation of British Industry.
But rather than slashing IT budgets, financial services companies are planning to invest more in IT as they seek to reduce costs.
"By far the biggest reason for IT investments is to improve the efficiency and speed of operations," said Chris Potter, partner at PricewaterhouseCoopers.
This is in sharp contrast to the priority a few months ago, when the financial services market was more optimistic. "Financial services organisations were spending on technology to support new services and increase their capacity," he said.
"They are now holding back on activities that are to some degree flexible, such as PC replacements, and focusing on IT to reduce costs in the business."
Analyst firm Celent has forecast that IT spending in the financial services sector will grow at a reduced rate of 3.6% in 2008 compared to 4.1% in 2007 because of the economic uncertainty.
At the same time, the industry is experiencing major regulatory changes, which are forcing financial institutions to upgrade IT. This will put pressure on IT budgets and lead to greater internal competition for IT resources. "IT dollars will be hard to come by after regulatory/compliance spending and maintenance expenditures," said Celent.
Analyst Axel Pierron said, "There are a lot of changes being introduced that are eating into the IT pie."
Banks will be forced to make their funds go as far as possible. One area where they are being creative with IT funds is through the use of service oriented architecture (SOA) to extend the life of legacy systems.
"It will replace a specific system without impacting the overall process. The banks can re-use systems through SOA rather than spending a lot of money replacing individual systems," said Pierron.
Bob McDowall, senior analyst at TowerGroup, said IT budgets were up slightly on last year, but he expected banks to cut IT spending during 2008. "Budgets have been set, but these can be changed when reviewed every quarter. Organisations will hold back until they are certain about the environment."
McDowall said organisations would hold back IT spending in parts of the business where companies expect reduced activity.
"IT spending in maintenance and infrastructure development will continue, but areas where companies are not planning an increase in activity will be hardest hit," he said. These areas include businesses fixed income, credit provision and property lending.