The heightened credit squeeze and bad debts are ongoing financial crisis is forcing banks to seek for ways to significantly reduce costs in the short-term, while attempting to run the business as usual. While technology investment is likely to be scaled back, banks will continue to focus on certain key areas.
Lessons are slowly being learnt and IT will be seen as an enabler going forward.
Banks are undoubtedly reining in technology budgets, this is mainly impacting spend for change-the-bank operations, and a significant amount of investment will still be necessary to maintain run-the-bank operations. Key areas of investment in the next couple of years will be:
Outsourcing: Banks key focus is to cut costs where possible and to focus on the core business. A more reserved approach to banking will be taken. They will increasingly consider outsourcing beyond the existing agreements in place, as they seek to redirect scarce resources to strategic parts of the business. For instance, Citigroup sold its offshore BPO business to TCS. Significant cost savings can be achieved through outsourcing and/or shared services - and all areas will be more seriously considered from non-core to core banking.
Risk management: Basel II failed to address liquidity risk, and this will be a key focus for all banks. In addition, while many banks have been investing in risk management practices, they continue to do so in a silo manner.
Enterprise-wide risk management will be key to increased transparency and enhanced efficiency around the sharing of risk and finance data. So far, many banks have been reluctant to make such a significant investment for an enterprise-wide initiative, and have been investing on a departmental basis. This may now change in light of the current situation and the importance of increased transparency across the organization.
The expected introduction of new/enhanced regulations (there has already been discussion around Basel 3 and a global approach to regulations) will inevitably encourage technology spend across all areas of core software and IT services.
Disparate and legacy systems are a key challenge facing banks, which presents high barriers to data integration. A single view of business and customer data is necessary on which to build sound risk management.
Integration of systems and processes: Increased consolidation in the banking industry has given way to the increased need to integrate and optimise systems and processes in the banks to be merged. This will be necessary to eliminate redundant technologies, increase transparency and cut costs. Consequently, demand for consulting and systems integration will rise.
The outsourcing segment in the overall UK banking sector is expected to see growth during the economic downturn, while the project services expenditure will be most negatively impacted of the core SITS. We forecast that the average compound growth rate to be 6.8% and 2.2% between 2008 and 2012, respectively. On the other hand, application software products are forecast a CAGR of 4.9%.
Rajeena Brar is a consultant at technology research firm Pierre Audoin Consultants