IT consultancy Ovum recently predicted that financial markets IT spending would hit almost $90 billion by 2015. But earlier this year, Celent said it expects financial institutions' global IT spending to reach $363.8 billion in 2011, and $393 billion by 2013.
So is it $400 billion? Or $90 billion? As I wrote in a previous blog, a $300-plus billion dollar difference is not negligible. So what is going on with analysts' predictions? Is anyone truly able to predict global IT spending?
After I posted my earlier blog on IT spending, several analysts from competing firms contacted me with their own figures and views on the massive discrepancy in numbers.
Howard Rubin, president and CEO of Rubin Worldwide, sets the global capital markets IT spending figure this year at $401 billion. (Which is actually $37 billion more than Celent, and countless billions more than Ovum's prediction for 2013 -- unless IT spending is expected to take a huge dive in the next four years).
On the other hand, Adam Honore', research director at Aite Group, suggests that the capital markets don't spend anything close to even $90 billion.
"That would be 54 Morgan Stanley budgets. Assume there are 10 Tier 1 firms and Morgan Stanley is one of the bigger spends of that 10. Even if theirs was the average, that's $16.6Bn," he says. " How can all tier 2 and 3 firms, spend $53.4 billion? "
Quizzed about their research methods, all the above analysts clarified how they obtained their figures.
Honore' says he pulls as much as possible from quarterly and annual reports. "For instance, in 2010, Goldman Sachs spent $758m on technology & communications. Morgan Stanley spent $1.665 billion. That should get you a good idea of Tier-One and Two budgets."
The next step is to ask CIOs their budgets and percentage growth or reduction over prior years, as well as anticipated growth/reduction for subsequent year, Honore' continues. "We do it every year in a survey and in conversations."
Lastly, you need to figure out how many firms fit into each tier and average the known spend and growth/reduction results, he says.
Rubin, who collects data for Gartner as well as his peer-to-peer network, says he gathers continuous survey data from more than 3,000 companies worldwide, including 10% in the financial services.
"From such data on technology spending it is possible to produce models that approximate spending on technology relative to revenue and operating expense in the context of business mix (retail, investment bank, commercial bank, etc.) and then using lists with coverage of perhaps 80-90% of the world's financial institutions by country/region, to actually model the range of expected expense," he says.
Further, on a country by country basis, data is available relating to the percentage of GDP attributed to financial services, Rubin says, explaining that it is therefore possible to model and estimate technology spend from that vantage point too.
"So if one works from the bottom up with a sample size of a few hundred institutions... and then extrapolates using world banking data from the Global 2000 and national/regional lists, you get one approximation. And then it is possible to work from the top down using percentage GDP data," he adds. Smoothing the two figures together gives you an overall estimate.
Still, "$90 billion is a ridiculous number," Rubin argues. "If you take the top 10 banks in the world.. together they spend perhaps $50 billion... the whole rest of the world's financial markets can't be spending only 80% of that." With different analysts shooting down Ovum's $90 billion figure - either for being way too small or much too big - I asked Ovum itself to clarify how it obtained its figures. (I also reached out to Celent who did not reply).
Ovum also has a clear research method that the firm was happy to clarify. Ultimately, it turns out that the difference between its figures and other research firms' figures is less about methodology, and more about taxonomy.
"Financial markets is only part of financial services. It's a third of total financial spend. For Ovum, financial markets is capital markets, institutional asset management, corporate banking, market infrastructure and investment banking," says Daniel Mayo, practice leader, financial services technology, and author of the original Ovum report that announced the infamous $90 billion figure.
"Other areas we do not include in our research are wealth management, retail banking and insurance," he continued.
Key figures that are included in Ovum's research are corporate banking - which represents around $30 billion. "So if people are just looking at capital markets, it is $60 billion. If you're looking at the total space it's different," he argues.
As for Ovum's methodology, Mayo says the firm's primary focus is on understanding operating costs and looking at what a financial institution is spending on IT within that.
One of the key things Ovum does is to analyze how much institutions spend on IT, understand operating costs and to look at what they're spending on IT within that, he explains.
Ovum also runs a benchmarking service, which is key to its analysis. "Say IT spend is projected to grow 20% but operating costs are only growing 3%," he says: you need to look at the context or you will misinterpret results. Mayo points out that the difference in Ovum's figures compared to other analysts' firms lies in the taxonomy.
"U.S institutions structure themselves differently to European ones. A lot of our competitors view the world in terms of traditional U.S. taxonomy. Our European viewpoint is more of a global viewpoint. In Europe you have a more universal banking structure, so we group together corporate banking and capital markets within financial markets. The trend is for banks to group them together," he argues. "In the U.S., capital markets is separate from corporate banking."
Ultimately, the explanation for such wildly diverging figures between research firms might just lie in a lack of communication, rather than in a problem of methodology or even taxonomy.
Put simply, research firms need to be able to clearly communicate in their reports and press releases what they are including in their figures. Is it global spending? Global financial services? Just capital markets? And capital markets inclusive or exclusive of corporate banking?
The best advice for an advisory firm might just be to focus on clear and simple writing after they have gathered all their research.
As an editor once told me at the start of my career in journalism, 'Write so that even your grandmother could understand you, no matter what the topic is."
If research firms followed that advice, it would certainly avoid a lot of confusion, even among their analyst peers - let alone among the people who act on their reports.Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio