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."