Published: July 18, 2008
By Elizabeth Salecka
Economic downturn and the credit crunch will hit banks IT budgets’ this year, but banks worldwide will still spend more money on new technologies and services across all regions than any other sector, according to recent research by Gartner.
Banks in Western Europe and North America will remain the biggest spenders in 2008, but financial players in the Middle East, Africa and Eastern Europe also have sizeable IT budgets to spend, says the research company.
In its latest report, “Cost cutting for IT in 2008”, Gartner forecasts a spend of US$10bn on banking technologies in the Middle East and Africa and a spend of US$7.6bn by Eastern European banks.
This compares to a spend of US$103.3bn by North American banks and US$70.6bn by Western European banks, which are facing economic downturn and have been harder hit by the credit crunch.
The report unveils that, despite the credit crunch, spending by financial services organisations worldwide on IT in 2008 will surpass that of any other industry. Bank spending alone will reach US$270bn, making this the biggest sector of all IT spending.
However, the technologies and services invested in by banks will differ considerably across the regions. In emerging markets, telecom services are the biggest area of expenditure and will account for nearly half of all IT spending by Eastern European banks (US$3.2bn) and more than half of spending by banks in the Middle East and Africa (US$6.4bn).
North American and Western European banks, meanwhile, are putting the greatest proportion of their budgets into professional services – US$34.3bn and US$20bn respectively. Not surprisingly, professional services comes much lower down the list for banks in the Middle East, Africa and Eastern Europe, which only plan to spend US$802mn and US$426mn respectively in this area.
The emerging market banks are also still spending larger chunks of their budgets on hardware and internal services. In the Middle East and Africa, spending on IT hardware will reach US$1.3bn in 2008 while internal services spending is forecast at US$807mn. Eastern European banks plan putting even more money into these two areas – US$2.1bn and US$949mn respectively.
The recent Gartner report also looks at how the credit crunch and economic uncertainty is impacting banks’ IT spending and makes recommendations on how they should address pressures on their IT budgets.
Here, it notes that IT spending on back office operations will be hardest hit with 21% of financial organisations worldwide cutting their spending in this area. Spending on customer management technologies will remain unaffected, while only 4% of financial organisations plan cuts to spending on middle office technologies.
Interestingly, 11% of the banks surveyed said they would increase spending on technologies that help them to understand and manage their customers.
More importantly, however, most banks plan to keep their IT budgets at similar levels to 2007 – despite the ongoing movement towards greater automation of financial services transactions generally.
“In real terms a static budget is a declining one when the volumes of electronic transactions (payments, trades, market data and so on) in this industry are all booming,” warns Gartner. “IT costs represent a relatively small proportion (approximately 13% on average) of all operating expenditure at a financial services company. This means that running a tight IT department is important but making drastic cuts in the IT budget is more likely to harm the business than to improve the bottom line.”
In line with this, Gartner argues that banks and investment services firms hit by the credit crunch should assess the medium-term impact of any cuts to their IT spending in 2008.
They must hold onto IT investments that will generate business value, and should maintain spending on technologies that enhance their competitiveness or help them to take advantage of economic upturns.
Although IT spending has to continue for day-to-day operations and “must-have” projects, banks should continue to spend money on technologies that will differentiate them from their competitors. Gartner also advises banks against copying their rivals by spending their IT budgets on similar projects.
Whatever routes CIOs take to reduce costs – outsourcing their IT being one of the most likely – banks must remember that governance and cultural fit are the most important long term IT strategy considerations. They outstrip the value of any short-term savings on price, adds Gartner.
The research company also recommends that banks resist calls to reduce their IT budgets radically. They should, instead, examine how their IT can be run more efficiently, and review how investments can support their business strategy. CIOs at banks and investment firms should focus on reducing the cost of running the overall business or increasing profits and revenue.
Gartner also recommends that banks spend more money on customer “onboarding systems.” Such technologies can help them to save money through the use of increased automation while also improving customer satisfaction. This type of spending is particularly important in the event of an acquisition
Finally, Gartner advises banks to bargain aggressively with IT providers and to take advantage of emerging IT vendors.