Despite all the doom and gloom in the economy, a recent study from Aite Group says overall IT spending will only drop five percent and that risk management and compliance were two of the highest priorities...
wallstreetandtech.com
January 12, 2009
As the gloomy economic data continues to pour in and the dust settles on the venerable Wall Street firms that went bust in 2008, financial institutions across the country are tightening their belts -- although at least in the technology department, budgets aren't being cut as much as some had previously thought.
Technology spend is expected to drop an average of only 5%, according to Aite Group's annual report on IT spending in the capital markets (Though some firms are expected to cut budgets by up to 20-30%). And firms across the industry are still projecting to spend almost $40 billion in technology in 2009.
"Just because large firms have disappeared as brands, people think that means they turned the technology lights off too. Impossible," says Adam Honore, senior analyst at Aite Group and author of the report during an interview. Wall Street & Technology promoted the survey and asked its readers participate. "Further, all of that technology now has to be integrated or phased out. A good part of every technology budget involves maintaining existing applications and infrastructure," Honore adds.
"Given the conditions now, everyone's taking a hard look at what their spending is and cutting unnecessary expenses where possible," says Peter Bergan, CIO at MD Sass, a New York-based investment management firm. "Instead of going out and buying a new system we're trying to maximize the value out of existing applications. We're also still making strategic investments where we can and potentially use technology to make savings on other expenses."
Steve Rapp, SVP and CTO at Nicholas Applegate, also confirms that in the current economic environment, tightly monitoring spending and cutting back on unnecessary expenses is essential. "Our major IT priorities work hand in glove with cost containment," he adds. Before the financial crisis hit, the company was already in full swing on a project to consolidate the applications and infrastructure of three affiliate companies on a single platform, with cost savings in the range of millions of dollars over several years.
"It is meant to yield efficiencies from a cost standpoint but also to enable new product support, as well as enhancing client servicing and support, cost containment, and the simplification and consolidation of multiple applications and hardware varieties," he explains.
Infrastructure Indigestion
Bergan points out that MD Sass also made a lot of investments in infrastructure last year, and put in some new back office systems as well as a new trading system. "So in '09 it's really about digesting those changes, making improvements where we can, cleaning up outlining pieces of functionality we didn't get to last year. And also see what we can do on blocking and tackling to clean up the client reporting process, in the hope that those technology investments can save money on operational staff. The idea is to see if we can spend a little money now to save money going forward."
Aite found that firms expect to spend roughly $39.7 billion on technology in 2009, compared to $41.8 billion in 2008 and $38.1 billion in 2007. Spending is expected to rise slightly to $40.5 billion in 2010 and up to $42.6 by 2011. With economic and financial news still dire, Aite says cost reduction is the number one business objective for technology spending in the year ahead, followed closely by risk management. (In 2008, technologists ranked operational efficiency as their top business priority for spending.)
"We're doing a lot in risk management and compliance," confirms Nicholas Applegate's Rapp. "On risk management, we have a long standing group and systems and tools. It was a well kept secret. Now we're being more vocal about the discipline we've had all along. We are reinforcing risk controls and tool set across all entities."
This year compliance drops from third to fifth place, although Aite said it expects regulatory changes to push compliance back up the priority list later in 2009.
Another 25% of respondents in the survey, comprised of 28 senior technology executives at hedge funds, retail brokerages, sell-side firms, private client groups, traditional asset managers and full-service firms, rated risk management as their number one priority for technology spending. Nearly 70% said they plan to address operational risk through their business processes.
Honore' agrees this area needs work in the capital markets, but says "technologists can be fickle regarding operational risk."
"You tend to look at it with a very macro approach, you tackle the big problems. But your real operational risk might not be macro but a micro process," he says.
The SocGen scandal last year, where rogue trader Jerome Kerviel caused a $7.2 billion loss to the bank by circumventing the risk management system, was caused by a manipulation of micro processes and gaps, says Honore. "Historically the IT groups under pressure from business groups have pushed these micro processes off the radar," he adds. "It's the mosquito on your arm. Can you deal with that when you have something much bigger trying to take a bite out of you? But probably, so many mosquitoes can make an impact."
Meanwhile, counterparty risk ranked only third in the list of priorities along with reputational risk, although Aite Group argues that counterparty risk should rank at least second in an overall priority list, given the issues that occurred in 2008.
Aite's study also expects risk managers in many organizations to have their own technology budgets for the first time this year. "Expect risk management groups to demand faster returns on information so they can make intraday adjustments for exposure," Honore says.
Overall, top priorities for technology solutions are trade processing for the middle office, followed by compliance solutions, risk management systems, global trading and settlement and pre/post-trade analytics, according to the study.
Meanwhile, despite all the recent merger and acquisitions action on Wall Street, integration has dropped from second place in firms' list of priorities to sixth place in 2009. But "this may be optimism on the part of some technologists," says Honore. "An inordinate amount [of IT budgets] allocated will be spent on integration, much more than IT managers would like it to be. You can't look at these systems and say they won't be."
Biz Intelligence, Doc & Wealth Management Get Downgrades
As for where technologists will see the biggest cuts, respondents ranked business intelligence platforms as the top area targeted.
This is due to the fact that traditional business intelligence solutions have not proven effective for capital markets firms, writes Honore'. "Information does not come fast enough to be useful, and these solutions prove unresponsive across effective multichannel strategies."
Document management solutions should also anticipate cuts, from more than one-third of financial institutions, according to the report. This is a shame, says Honore, because effective document management can cut costs. "Document management solutions are not the cheapest solutions on the street. But when you deploy them effectively, they help you reduce risk and improve workflow. There are all sorts of benefits associated with that, including reputational improvements."
Wealth management solutions are also on the short list for cuts in a third of all firms. Aite says it has already seen RIAs looking at ways to cut their technology cost in this area. "Caught between a rock and a hard place, advisors face the prospect of either starting to charge already-upset clients for planning ways to reduce the cost given their roughly 40% drop in fee revenue over the last year," Honore wrote in the report. "Conversely, look for custodial firms to increase spending in this area as they seek to attract breakaway brokers onto their platforms. Unfortunately Aite Group expects efforts to merge wealth management and brokerage platforms to slow as broker workstations also see cuts," he said.
Ultimately in 2009, core technology efforts are likely to fall under other priorities, Aite says. No firm is going to implement a core technology based on soft ROI. "Instead, look for core technologies to be rolled into deployments of other solutions," Honore' writes. "For instance, new EDM solutions may find their way into risk management deployments, or CEP engines may find their way into new pre-trade analytical solutions."
As for hiring in the technology sector, it will be a slow year. MD Sass's Bergan says his company has no plans to make any technology hires in 09. "We will selectively be using consulting resources where we need to. If we need to get a task done, we'll bring someone in for a couple of weeks."
Meanwhile, for firms that do expect to hire later in the year, developers will be the most in demand, followed by business analysts and project managers, Honore suggests. As the economy continues to struggle, most companies will also outsource more jobs, he adds, particularly in maintenance, network infrastructure management and application management. |
