CIOs’ Top Priority: Managing IT Costs in a Challenged World

The industry needs to rethink its cost and processing structures -- and perhaps make some radical changes, says Special Contributing Editor Larry Tabb.

Managing IT costs will be the central theme for CIOs for at least the next two years. TABB Group estimates that industrywide IT costs will drop approximately 20 percent in 2009 alone and possibly 30 percent over the next two years as IT budgets across the investment banking, brokerage, investment management, hedge fund and affiliated businesses will be brought in line with revenues and prospects.

What will such dramatic reductions mean for IT? Is it all doom and gloom? Will staffs be decimated? What will happen to innovation?

There is no way to reduce budgets by such an extreme amount without rethinking a firm's technology strategy. Hardware and software budgets are fairly inflexible given a status quo environment. These expenses are contractually agreed to and are hard to modify unless depreciation and allocation schedules can be realigned, software contracts can be renegotiated, or organizations can be convinced to eliminate various businesses.

And while internal staffing can be more flexibly managed, wholesale staff-slashing can be problematic, especially since effective technology development can reduce operational costs by streamlining operations.

So What Is a CIO to Do?

To effectively manage costs in this environment, the firm -- not the CIO -- needs to rethink how it operates; what drives competitive advantage; how operational risk can be mitigated; and the balance between internal development, vendor-based solutions and application service provider (ASP)/outsourced services. In the absence of such rethinking, CIOs will not be able to cut enough heads, buy and integrate enough packages, renegotiate enough vendor agreements, or postpone enough technology purchases to get to their goals.

There are three main ways for firms to pare back technology spending, and they all revolve around the firms doing less and outside providers doing more. Firms can increase their outsourcing, prompt industry utilities to take on an increased role in day-to-day operations and, the most extreme option, enter into shared-back-office agreements.

Now, outsourcing includes the offshore initiatives that most firms already engage in, but it really means much more than that. While firms have engaged in offshore software development over the past decade, increasing a firm's use of offshore services will be difficult as trained resources are scarce (and even scarcer after the recent Satyam scandal).

What really is required is an investigation of new ways of looking at shared services, such as sale and lease-back arrangements for networks, storage and data centers, as well as traditional outsourced support services such as desktop, trading floor and market data support. As colocation facilities become more viable, and new server hardware and software enable more-efficient processing and easier deployment, firms likely will close and consolidate data centers and shift as much as possible to colocation and shared environments.

Moving toward the next level, the industry could pressure utilities such as the DTCC to incrementally increase the percentage of the industry workload they handle. While the DTCC has been effective in developing shared risk-based services for equities, fixed income, mutual fund and annuity products, most of DTCC's services revolve around facilitating interfirm communication and mitigating industry risk, not around the reduction of processing that most firms used to think of as a core function.

An extreme example of pushing more work into an industry utility would be to develop a shared back office for major institutional players. While these services (correspondent clearing) exist for smaller firms, I am talking about providing these services for the largest brokers. This requires a new way of looking at, servicing and pricing the business beyond what many of today's clearers provide.

Of course these ideas are not a panacea. Just outsourcing a firm's environment is not as easy as signing an agreement and writing a check. But if the industry really needs to rethink its cost structure, it also needs to rethink its processing structure. Just reducing bonuses or shifting the work to Asia alone will not get us there.