Wall Street Firms Face Delicate BalanceWall Street Firms Face Delicate Balance

Look out below. in the wake of the stunning fall of Bear Stearns, financial services it organizations are bracing for big cutbacks--while being called on to implement systems to help prevent future debacles of the scale of the credit crisis now rippling throughout the industry.

Most analysts expect overall IT spending in the financial industry to flatten or fall this year, after growing strongly through the first half of 2007. "For some larger banks, IT budgets could be down by as much as 15%," depending on their degree of exposure to the subprime mortgage mess, says David Easthope, at research company Celent.

The slowdown started last year, says Larry Tabb, CEO of the Tabb Group. His analysts have lowered their estimates of 2007 tech spending growth by financial institutions to 8.1% from 10.6%. This year will almost certainly see a decline, he says, due in part to the collapse at Bear Stearns, which had to negotiate a buyout offer at a huge discount from JPMorgan Chase last week. "Bear Stearns alone was probably in the $800 million to $1 billion range in terms of IT spend," Tabb says, or 4% to 5% of total industry spending.

"I've heard bad things on the Wall Street side," says a technology fund manager, who declined to be identified, "10%, even 20% head-count reductions in IT, budgets being cut this year. Everybody's tightening their belts."

However, certain technology areas, such as risk management software and high-speed, low-latency network infrastructure for obtaining market data and making instantaneous trades, will continue to get IT dollars because banks and trading firms have no choice. That means IT directors at financial institutions face a delicate balancing act over the next 18 to 24 months. Paul Sutton, CEO of Kabira, a provider of real-time transactional systems to financial services companies, says he heard about a large bank canceling a major IT deployment because of the secondary effect of the subprime mortgage defaults, adding, "and this is a bank not even directly exposed to it."

Outside the United States, things are less dire. In Europe, banks and brokers must upgrade systems to comply with the new regulatory regime called the Markets in Financial Instruments Directive (MiFID), which went into effect last November. All of which means that if U.S. financial services companies sharply curtail their IT spending, they could be looking at a technology gap with European firms two years down the road.

James Goodnight, CEO of analytics software vendor SAS, says SAS has typically fared well during recessions "because it's a time that companies begin looking inward and try to improve some of their processes." If financial services companies don't make those long-term improvements this time around due to budget pressures, they may regret it later, he says. The prices for systems like his "are relative to how much money banks have lost," Goodnight adds. "We don't cost much in comparison to that."

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