Tech Spending Hit by Subprime Mess
Subprime meltdown expected to negatively impact what financial institutions spend on IT
The subprime meltdown that has roiled the financial markets since last fall will negatively impact the amount large investment houses, banks, and brokerages will spend on IT overall -- and on software development projects in particular -- in the coming years.
That was the assessment at last week's annual Securities Industry and Financial Markets Association (SIFMA) conference in New York, which drew more than 7,000 IT professionals and developers.
Reversal of Fortune
Before the subprime mortgage market began to collapse, technology spending among financial services firms was on the upswing. The reversal in spending is noteworthy in that the financial services sector is considered the most aggressive at adopting new technologies, particularly Web services, high-performance computing and service-oriented architectures.
Prior to the meltdown, overall spending by the largest financial services firms was on pace to increase at a compounded annual growth rate of 8.5 percent over the next three years, rising from $26.3 billion this year to $33.6 billion in 2011. That's according to the Tabb Group LLC, a Westborough, Mass.-based market research firm that tracks IT spending in the financial services sector.
In the wake of current market conditions, the Tabb Group now estimates that tech spending declined 10 percent last year and is currently down about 3 percent this year, with a possible modest rise projected for 2010. "It's getting pretty ugly," said Tabb CEO Larry Tabb.
According to Tabb, spending on development is being refocused on projects that can help firms improve their margins and, not surprisingly, do a better job at risk management. As such, investments in capabilities such as algorithmic trading and complex event processing (CEP) are likely to be pivotal in some firms' efforts to become more competitive and improve their efforts at mitigating risks.
But for some banks that have deployed such technologies -- the now-defunct Bear Stearns, Lehman Brothers, Citigroup and Merrill Lynch -- the question is: How did these companies fail to mitigate the risks that have slammed their businesses if their development teams were developing and deploying sophisticated systems?
"There is definitely an awareness that perhaps the systems that existed in place to assess the value of portfolios or judge risk [are being scrutinized]," said Stevan Vidich, an industry architect in Microsoft's financial services group.
He added that there is strong interest in CEP and other risk management methodologies. A growing number of shops have started deploying such solutions based on the .NET Framework, Vidich said, and he believes such investments will continue.
"Clearly, there's a lot of need to deal with the immense influx of data and being able to analyze data in a timely manner," Vidich said. "It also drives need for systems like business intelligence, or BI, applied to a near-real-time scenario, which is a very attractive proposition."
Indeed, providers of financial services applications say customers on Wall Street have shown more reluctance to spend on new projects in wake of the market collapse.
"There's a lot more emphasis on ROI, total cost of ownership and savings," said Amnon Raviv, senior director of strategic alliances at data grid provider GigaSpaces Technologies Inc.
-- Jeffrey Schwartz