Industry Research

Publication Date: 2 October 2008 ID Number: G00161881

What the Financial Crisis Means for IT Spending Among

Banks, IT Vendors
David Furlonger, Susan Cournoyer, Vittorio D'Orazio, Peter Redshaw, John Rizzuto

Volatility in the financial markets will cause financial services providers and IT vendors to
focus on cutting costs. Jobs and IT projects will be immediately reprioritized.

Key Findings
• Gartner has revised downward its overall August 2008 forecast for IT spending among
financial firms because of the volatile nature of financial markets in recent weeks. Global
financial services IT spending growth, which we had forecast at 6%, is now forecast to
2% to 3% growth at a compound annual growth rate for 2008 to 2009.

• North American spending, which we had forecast to increase 2.2%, is now forecast to
decline to -4% growth.

• The brokerage segment, which accounts for nearly a quarter of global financial services
spending, will be hit the hardest, followed by the banking segment, which accounts for
nearly half of global financial services spending.

• The biggest cuts will be initially in internal bank staffs and then in layoffs at IT services
firms.

Recommendations
CFOs, CIOs and business unit heads of financial firms:

• Revise and reprioritize your business cases for any type of IT spending. You will need to
justify the investment from a short-term perspective (for example, no longer than 90
days).

• Plan for all contingencies. Your firm might acquire a failing institution, or it might be
acquired by someone else. You must ensure that your IT environment is able to
accommodate that uncertainty.

• Assess your skill inventory and the return on investment of those skills, and prioritize
new hires. Conversely, determine which skills you can let go, and decide how you will
replace those capabilities via third-party or outsourcing firms.

© 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form
without prior written permission is forbidden. The information contained herein has been obtained from sources believed to
be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although
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omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein
are subject to change without notice.
ANALYSIS

Introduction
Gartner analysts covering industry market strategies and the banking and investment services
sector of the financial services industry convened recently for a round-table discussion on the
current financial crisis that is gripping the U.S. and other regions of the world. The analysts
focused on the impact of the turmoil in financial markets on banks' and financial institutions' IT
spending, and on the IT vendors that provide products and services to those firms. We recognize
that the impact of this financial upheaval on banks has been greater than most observers
expected and that trust between banks has been eroded to a degree that few — including central
bankers in many countries — could have foreseen.
The research emanating from this discussion is targeted to CFOs, CIOs and business unit heads
of financial services firms.

Overall Outlook for Financial Services IT Spending Declines

Gartner has revised downward its overall August 2008 forecast for IT spending among financial
firms because of the volatile nature of financial markets in recent weeks. Global financial services
spending growth, which we had forecast at 6%, is now forecast to decline to 2% to 3% growth at
a compound annual growth rate for 2008 and 2009. North American spending, which we had
forecast to increase 2.2%, is now forecast to decline to -4% growth. The brokerage segment,
which accounts for nearly a quarter of spending, will be hit the hardest, followed by the banking
segment, which accounts for nearly half of global financial services spending.
Most geographies will see a decline in their forecast for the balance of 2008, which we believe will
put pressure on 2009 spending, and persist likely into 2010. Western Europe is most affected by
the spillover of the financial crisis in the U.S. However, emerging markets in the Middle East,
Latin America, Asia/Pacific and Africa are not experiencing a similar anxiety and are showing
growth, while Eastern European countries are under pressure due to their dependency on
interbank lending, which poses problems for banks to survive. No sector of the IT marketplace will
be immune to reduced spending.
Participants of the round-table discussion agreed that the slowdown in spending will persist
through 2009 and likely linger for 12 to 18 additional months. The U.S. government's financial
bailout in recent weeks of such large firms as Bear Stearns, American International Group (AIG),
Fannie Mae and Freddie Mac — as well as the government's pledge to invest $700 billion to buy
up bad loans — will likely provide reassurance and time to enable large and midsize financial
firms to take the next three to four months to regroup and consider their strategic options in a
changed economic environment.

Targets for Cuts in IT Spending

Gartner expects that all technology segments will encounter spending pressures throughout the
balance of 2008. The biggest cuts will be initially in internal bank staffs and then in layoffs at large
IT services firms. Following are our revised forecasts for the affected technology sectors globally:

• IT services spending, which we had forecast to grow by 9.6%, is now forecast to be flat.

• Internal services spending, which we had forecast to grow by 2%, is now forecast to
decline to -13% to -15% growth.

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© 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
 • Hardware spending, which we had forecast to grow 6.1%, is now forecast to decline to
about 2% to 4% growth.

• Software spending, which we had forecast to grow 10.4%, is now forecast to decline to
about 3% to 6% growth.

• Telecommunications spending by financial firms, which we had forecast to grow 6.3%, is

now forecast to decline to about 3% to 5% growth.
In telecommunications spending, for example, we expect there to be an impact on market
information feeds (such as Bloomberg and Thomson Reuters), managed service contracts and
consolidation of networks, especially among banks with an international presence. In all
technology segments, there will likely be close examination of the need for multiple providers of
similar services. Provider consolidation initiatives and cancellation of nonessential services
should be expected among most firms.
In hardware spending, clients are telling Gartner in recent days that they will lengthen the
replacement cycle for PCs and servers, exempting mission-critical activity (such as securities
trading). However, some large banks and regional institutions are investing in such hardware so
that they won't lose out on the ability to take away market share from suffering competitors or to
aim for new target markets.
Not all firms will be standing on the sidelines, waiting for financial markets to return to a relative
level of calm. Changes in the executive suites at some large firms earlier in 2008 have spurred
the firms to aggressively pursue, with IT vendors, transformation projects to gain efficiencies and
better manage technology "silo" operations. Executives at some financial firms — for example,
regional and community banks and credit unions — see an opportunity for increasing market
share and targeting new markets in this environment. Such firms' activities underscore that banks
and other financial institutions know that technology is the key to how financial services providers
do business and gain new markets. Those initiatives require hefty technology investments.
The coming layoffs among financial firms and vendors will occur on a global basis. Some firms
will see today's environment as an opportunity to increase head count, and other firms will
establish an employee-hiring freeze, even though talent will be available that firms would normally
be eager to engage. However, there is a significant downside to layoffs. Most banks, and the IT
vendors that support them, can boast significant intellectual property among their staffers. We
see a worry that a firm might lay off the one person who knows a lot about the IT application or
exceptions process that manages risk or supports revenue flows. That could spur significant
operational risk and competitive pressure, as well as jeopardize business continuity or disaster
recovery relationships with other banks that no longer exist or that have outsourced a capability to
a third party.
Among IT vendors, layoffs may disproportionately affect firms relying mainly on technical skills;
this will stem the hiring spree in global sourcing locations such as China and India. Financial firms
have already demonstrated a so-called "flight to quality" among IT services firms earlier in 2008,
by increasingly diverting resources toward companies that have invested in building domain-
specific financial services skills.

Cost Cutting Is the New Focus Among Most Financial Firms

Gartner financial services clients are reporting a sea change in their spending outlooks from
2007. Then, many clients were considering investments in infrastructure to boost medium-term
efficiency. Now, however, that has rapidly disappeared at most firms, except for a few companies
that appointed new executive officers in early 2008. These firms are now focused on fulfilling
change agendas that the new leaders expressed early in their tenures.

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© 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
Gartner clients in this current environment are foreclosing any consideration of discretionary
spending and most new capital expenditures. The new focus is tightly on cost cutting across the
board and reduction of operating expenses. For example, business cases that require a return on
investment of longer than 90 days are not being welcomed. Instead, under the active direction of
CFOs, firms are exploring where they can cut costs and are aiming at employee head count and
renegotiation of contracts to extract more savings from revised contractual terms and conditions
and lengthened contract life cycles and service-level agreements (SLAs). We know of several
clients that have canceled major infrastructure investments in the past week.
In such a constrained financial environment, cash flow is the key. Any activity that can propel an
improvement in cash flow is being embraced by CFOs in most financial firms.
Gartner analysts see that there is a vast amount of uncertainty in the financial services
marketplace. This worry is exacerbated by inexperience among key players on the business and
vendor sides, and by concern over the looming or enhanced regulation of financial markets and
company financial performance. We don't see this condition fading away; Gartner expects that it
will exist through at least 2009.
The inexperience factor reinforces how bad today's financial situation is. For example, most
managers in financial firms and vendors who are younger than 40 years old (which is most of
them) likely consider this situation the worst they have ever seen. Their concerns about
unemployment are deep and panicky. However, more-seasoned leaders will recall that the
recession of the mid-1970s, caused by the OPEC oil embargo, brought about similar conditions,
especially quickly rising interest rates. The bursting of the dot-com bubble, combined with the
terrorist attacks of Sept. 11, didn't impact the markets as much as today's situation has. That
situation around 2001 found the market reacting to overly bullish equity market sentiment. Today,
however, we see a fundamental loss of confidence in the traditional market structure and its core
underpinnings of capital management.

Impact on IT Vendors
Gartner believes that:

• Large IT services firms — for example, Accenture, CSC and market leader IBM — will
weather the storms created by today's financial uncertainty because of their financing
capability, capital strength and diversified businesses. Moreover, financial firms
increasingly value the domain-specific skills of these large firms, and the cultural and
language affinity that facilitates timely and clear communications in times of crisis.

• Other IT services firms will need to accelerate their marketing efforts to keep a foothold
in a challenging market, strengthen core customer relationships and improve value-
added service capabilities.

• Second-tier IT services firms that specialize in capital markets are at risk of being
acquired.

• Software firms, such as Fiserv and Metavante, which have midsize banks as clients that
plan to continue their IT spending and that have a healthy payment business, will be
less affected. Other software firms focusing on business opportunities outside the U.S.
and Western Europe will be better positioned, as will firms that maintain a healthy
balance between license revenue and recurring revenue from services.

• Software firms offering a service bureau or software-as-a-service model, such as Fiserv

or Metavante, will find favor among financial firms looking for flexibility or seeking to trim
their operating expenses.

Publication Date: 2 October 2008/ID Number: G00161881 Page 4 of 6

© 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
 • Vendors selling core banking systems in the emerging markets of Eastern Europe, the
Middle East and Africa will likely find themselves somewhat unaffected by the turmoil in
the U.S. and Western Europe. This underscores that geography — where a vendor sells
and operates — is important to potential customers and as a mitigator of business
concentration.

• Banks should be careful not to make knee-jerk reactions in assessing vendor viability or
demand such excessive concessions from vendors that they drive them out of business.
However, banks should pay close attention to changes in vendor cash flow, service and
support provision (which is mapped to the SLA); loss of clients; and upgrade
cancellations or delays. The Gartner vendor rating methodology may help clients in
further assessing the potential viability of particular vendors.

Recommendations
CFOs, CIOs and business unit heads of financial firms:

• In all your business cases for any type of IT spending, stress the business benefits to be
derived. Determine how your organization can produce short-term returns on investment
and cost controls.

• Plan for all contingencies. Your firm might acquire a failing institution or be acquired by
someone else. You must ensure that your IT environment is able to accommodate that
uncertainty. For example, are your IT systems able to be consolidated in the event of a
merger or acquisition? Do you have contingency plans that can be rolled out should
such a situation occur?

• Your company's IT organization is in a state of flux right now. You must assure the
business side that you can address latency and support issues at a time when business
growth is critical to your enterprise's survival.

• Assess your skill inventory and the return on investment of those skills, and prioritize
new hires (if your organization is in a position to add selected staff).

• Consider the structure of your organization, and identify jobs that deliver the fewest cost-
benefits and that can be easily eliminated with limited risk. This will optimize costs
around the skills of existing resources and will enable your organization to reshape its
structure back to a healthy shape with more cost control.

• Understand that innovation will separate winning or surviving firms from losing firms. For
example, a bank that is relatively unscathed by this financial crisis has the opportunity to
drive market share by rapidly bringing innovative products to the market. Firms in
distress, however, will need to provide the flexibility and freedom to product, technology,
and marketing experts who can discover innovative ways to streamline operations and
bring in new revenue.

• Expect governments and regulators to introduce more-stringent legislation and rules for
transparency. That will require you to develop a more holistic and flexible approach to
compliance.

RECOMMENDED READING

"Emerging Spending Patterns for Banks, U.S., 2008"

Publication Date: 2 October 2008/ID Number: G00161881 Page 5 of 6

© 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
"Cost Cutting for IT in 2008 Must Deal With a Potential Economic Downturn at Banks and
Investment Services Firms"
"Market Trends: How the U.S. Economic Slowdown Affects Our Midyear Industry Market
Strategies Forecast"

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