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2005 budgets: Where's the money?

Hope springs internal. Inside just about every major Wall Street firm -- and throughout the financial services industry -- technology managers are eagerly looking to spend more money this year than at any time since the tech bubble burst nearly five years ago.

With their companies' profits rising amid a generally favorable economic outlook, many executives expect to go beyond the bare essentials and invest in tech projects and upgrades that they had to forgo when times got tough.

Just how much more will financial institutions spend on information technology this year? Less, most likely, than many IT managers anticipated as they entered the new year. Their employers have gotten into the habit of squeezing budgets after they are approved, and this is unlikely to change in 2005.

Getting a handle on spending plans is never easy; most IT budgets aren't disclosed in advance. But chief information officers, because they like to have bases for peer comparisons, participate in surveys that give analysts and economists fodder for making projections. One benchmark, from Stamford, Connecticut­based research and consulting firm Gartner, indicates that global IT spending across all industries will climb 5.4 percent in 2005, to $2.6 trillion.

If the financial industry matches that pace, it would be the sector's biggest percentage jump since 1999's 9 percent. But analysts don't see that happening. The most optimistic -- among them Stamford-based Meta Group, which agreed in December to be acquired by Gartner -- peg financial services IT growth at 7 percent, fueled by pent-up demand and higher-than-average increases at smaller and midsize firms with more budgetary flexibility than the giants have.

A more typical estimate is Needham, Massachusetts, research firm TowerGroup's projected 3.9 percent increase this year. That's the same level of growth as in 2004, when the global financial industry spent $347 billion.

Citing the industry's entrenched cost-cutting mentality, TowerGroup in a year-end report shaved its 2005 projection from 4.2 percent last fall. Institutions "are scrutinizing their IT investments for new value and showing less appetite to invest in its absence," the firm concluded.

The biggest investment banks have tightened the reins on tech even as their profits have soared -- helping, in fact, to keep them soaring. In their most recent fiscal years, Goldman, Sachs & Co., Morgan Stanley and Merrill Lynch & Co. grew their net incomes 52 percent, 18 percent and 16 percent, respectively. Yet Goldman reported that communications and technology spending declined 3.6 percent, Merrill's communications and technology line was flat, and Morgan Stanley's information processing and communications costs were up a scant 1.7 percent.

Data from San Francisco­based FTVentures, a financial technology venture capital firm, suggests that the period of austerity is far from over. A recent poll of its limited partners -- 38 top financial companies, including Allianz, Citigroup and HSBC Holdings -- showed that the average 2005 budget increase is less than 4 percent and that some organizations are pushing for as much as a 4 percent reduction in IT and operations.

Postbubble, cost pressure has taken on a life of its own, irrespective of profits. "A lot of the control over spending has returned to the business lines, and technology groups are accountable to them and their more disciplined processes," notes Robert Hegarty, who heads TowerGroup's securities and investments research. "It's natural that the outlook at budget time in the fourth quarter can look a lot less rosy in the new year."

Averages, however, mask some outliers. For instance, Lehman Brothers, which is investing heavily in advanced trading systems, grew its technology and communications expenses by 28 percent in fiscal 2004, to $764 million. (Its net income rose 39 percent.)

Even where overall increases are meager, "some business units are in double digits, depending on the robustness of their top lines and the opportunities they perceive," explains FTVentures co-founder and managing partner Robert Huret. "Companies are also willing to spend for process improvements and efficiencies, which they can then use to fund their other priorities."