2007: Why IT Spending Will Continue, despite Economic Challenges

If 2006 was the first big year of bank technology "rationalization"--or the right-sizing and shaping of IT-2007 may go down as a time when the industry kept chugging along on its slow, long path of operational improvement. Separate strands of development--Six Sigma process work, data integrity management efforts, services architecture, channel efficiency projects, or even IP networking--each in their own way have enabled a new form of leverage for bank CIOs, one where necessary tactical expenses can pan out in multiple ways. For example, at a company where data management is a careful affair, adoption of an anti-money-laundering application will also yield customer channel usage pattern insight that has implications for marketing and sales efforts, according to Rodney Nelsestuen, senior analyst financial strategies, TowerGroup, Needham, Mass. While optimistic economic forecasters believe recession will be avoided, even those with the starriest eyes admit that there will likely be a dip in growth generally. This may cause banks to, if not put the breaks back on, then spend as wisely as capabilities allow. Nonetheless, the best banks will continue broad, multi-year efforts to get their IT houses in order. Andrew Bartels, vice-president, Forrester Research, Cambridge, Mass., predicts some form of slowdown in his annual outlook report. Forrester defines the IT budgetary environment as including "IT investment" (concerning general infrastructure treated as capital investment, including telecomm); "IT purchases" (which include consulting costs and other related add-on charges); and "IT spending" (which includes all software and hardware that's a part of the operating budget). We mention it here to remind that it's not just about the desktop of the data center or the development project sent to India, but about all of them, in their messy, complex, glory. While the overall global spending figure will hover at a 5% growth rate, down from 8% growth in the previous two years, software investment will do better than average at a 7% rate--reaching about $1.55 trillion, according to Forrester. Gartner, in a presentation given earlier in the year on "digital disruptions," points out that financial services continues to lead all industries in IT spending and that banking has invested $206.6 billion globally. What business challenges may, in turn, impact IT purchasing decisions among bankers? Intense regulatory scrutiny continues to be an issue. A tepid mortgage origination business, higher costs of funds, and, in general, a challenging environment may lead to changes in lending. Moreover, according to Gary Curtis, global manager, strategic IT effectiveness unit, Accenture, based in San Francisco, if the economy should stumble, activities to scale back the tech environment broadly (i.e., rationalization) could touch everything from server utilization and storage and redundancy strategies to any reengineering efforts that have a penultimate goal of taking out maintenance cost. Basically, strategic and tactical spending will only get more serious consideration. "Infrastructure transformation will be a constant in banking over the next several years," Curtis predicts. "Technologies such as services-oriented architecture (SOA) will help banks create back-office simplicity and organization that yields richer sales and service applications that benefit from better use of all the information banks have already," Curtis explains. Increased competition has exposed a significant weakness in today's retail banks, notes Jerry Silva, TowerGroup. That is, its unwillingness in many cases to change its internal organization to reflect the changing banking industry. Decreasing net interest margins are forcing banks to derive more revenue from fees, therefore, from deeper relationships with existing customers. This requires banks to deliver more products and services consistently across channels, Silva notes. …