With dot-com upstarts falling by the wayside and fears of a U.S. recession in the offing, many analysts and pundits have assumed that major corporations will take a hatchet to their technology budgets for 2001.
By Jeffrey Kutler
February 2001
Institutional Investor Magazine
Earnings problems at computer companies such as Gateway and Hewlett-Packard Co. only seem to confirm these suspicions. And one news outlet after another has picked up on the fear. The Wall Street Journal has described "a technology slump of stunning proportions." A headline in The Industry Standard magazine recently declared, "The buzz stops here."
Maybe the generalizations should stop, too. At least one big-spending group of technology buyers - financial services companies - seems to be defying the slowdown.
Survey data and anecdotal evidence alike suggest that major banks and brokerage firms, though increasingly careful about so-called discretionary expenditures, are planning to stick to their ambitious technological spending plans - at least, until there are indications of a severe or prolonged recession.
"We're in different businesses," says Mellon Financial Corp. vice chairman and chief information officer Allan Woods. "For a lot of those companies you read about, technology was their business. For us, it's an enabler of business strategy. We're looking to increase earnings per share 12 percent this year. We're counting on technology to help get us there."
Adds James Pellicane, a leader of e-commerce initiatives at Merrill Lynch & Co.: "We do months of planning, spending and building in expectation of years of benefits. Once you get started down that road, it's very difficult to suddenly stop. In most cases, that would be foolish. The technology that is supporting our global financial activities is not discretionary."
Pellicane, who spent the last year working on BondBook, an online marketplace developed by Merrill and several other brokerage firms, believes his competitors won't be cutting back either. Other observers concur, saying that virtually all types of financial institutions have achieved such great technological momentum in recent years that slamming on the brakes would cause serious damage.
"We have to realize that technology spending doesn't decline just like that. In the 15 years I've been in this business, it has never gone down," says Robert Hegarty, a technology research director at TowerGroup. The Needham, Massachusetts, company, a leading financial industry research and consulting firm, expects asset managers and brokerage firms to boost technology spending this year by high single-digit percentages. Investment managers, the sector Hegarty follows most closely, have been maintaining that steady pace. "Historically, they have lagged behind broker-dealers in tech spending, and the investment managers have to keep up," he says.
To be sure, says TowerGroup, brokerage firms' budget growth has dropped below the 10 to 20 percent increases of the past two years. But those reflected some extraordinary expenses related to year-2000 remediation, decimal pric- ing of stocks and, for multinational firms, euro conversions.
Richard Rzasa, chief information officer of TD Waterhouse Group, boasts that his company consistently allocates 10 percent of revenues to technology - the same commitment that it makes to marketing. "Are we prudent? We'd like to think we have been from the outset," he says. He's supporting a rapidly expanding international branch network and a recently launched Web site for active traders, as well as adapting TD's online delivery system for various handheld wireless devices.
"We continue to spend aggressively to build out our technology infrastructure," says Rzasa. "It's an investment we have to make in business efficiencies, revenue growth and enhancing the customer experience."
Commercial banking remains the top-spending category, at a projected $31.4 billion this year, according to TowerGroup, almost $10 billion more than the securities industry will fork over. That would be $17,000 per employee - more than any other business will pay out. Commercial banks' total spending is expected to be up about 4 percent this year, well below TowerGroup's compound annual growth assumption of 6 percent between 1995 and 2005. But the dollar amounts are already so great that it's difficult to characterize the banks as being in retreat.
Moreover, the spending is increasingly concentrated at the top of the market. The top three U.S. banking companies - Citigroup, Bank of America Corp. and Chase Manhattan Corp. - account for 40 percent of all banks' 2001 budget total, according to TowerGroup, which had yet to factor J.P. Morgan's total into what is now J.P. Morgan Chase & Co. (TowerGroup also has not completed its 2001 international financial technology report, but in 2000 Citigroup led the world in spending - $5.9 billion - followed by Bank of America's $3.9 billion, Deutsche Bank's $3.2 billion, German insurer Allianz's $2.9 billion, UBS's $2.8 billion and Chase's $2.6 billion.)
With the top ten U.S. banks devoting more than 6 percent of their revenues to technology and the rest of the banking industry earmarking 3 to 4 percent, the gap is widening between the haves and the have-nots. This underscores how far the big-company executives have come in recognizing the strategic importance of technology. They will be loath to squander advantages that have cost them billions.
"Size matters because so much of the business is now leveraged off of technology," says Beth Morrow, senior industry analyst in Ernst & Young's financial services practice. "The largest banks and Wall Street players are in a similar situation - they must keep spending despite cyclical events."
Ronald Braco, a former executive with Chase.com, a high-technology division of Chase Manhattan, who recently became president of Spectrum, an electronic bill-payment company part-owned by J.P. Morgan Chase, says: "There is still no shortage of money for a good deal. We're very realistic; we won't look at a pie-in-the-sky business case."
The bursting of the dot-com bubble may mean that "technology will get more scrutiny," Braco says. "But Chase was always looking at potential transactions, and I don't see any pullback from that."
More scrutiny, though, can go only so far. Michael McEvoy, director of TowerGroup's information technology investments practice, says that at commercial banks only about 20 percent of tech spending, including new-system development, can be considered discretionary. The rest is for maintenance and minor enhancements, necessities less susceptible to cutting. The fact that 80 percent is nondiscretionary shows how much technology has gained in strategic importance at banks. They are ahead of their securities industry counterparts in lowering costs through outsourcing and in taking steps to make their remaining in-house operations more efficient, but that leaves less budgetary wiggle room.
Mellon's Woods doesn't recognize a clear discretionary-nondiscretionary divide. He distinguishes between mature businesses, such as retail banking, and faster-growing asset management and e-commerce activities. Mellon invests in all, but the latter get more. Says Woods: "We have to be discriminating. If you feed all the kids equally, you'll starve those with bigger appetites."
Says Sandra Devine, the Washington, D.C.-based head of Sapient Corp.'s financial services consulting practice, "A lot of Internet-based projects had squishy business cases, and if they get scrutiny, that's healthy. But if it's a portal for institutional clients to communicate with institutions, it will be seen as revenue producing and cost reducing. It's mission-critical and has high strategic value. That's not discretionary."
Devine says her company's clients - which include Credit Suisse First Boston Corp., Goldman, Sachs & Co. and Janus Capital Corp. - won't let strategic e-business projects slip. Adds Patrick Callinan, a Forrester Research senior analyst in Cambridge, Massachusetts, "Financial services companies might want to trim some fat if the recession warnings pan out, but the trimming won't happen in projects that cut costs, generate revenue or please customers."
A recent Forrester study revealed that, within the next five years, financial companies aim to derive about one fifth of their revenues from e-business transactions. "They need to invest in the systems that will get them there or risk being left behind," says Callinan.
Of course, in a worst-case scenario, all bets are off. Just the thought of a recession caused many corporate IT executives to reconsider their planned 37 percent average increase in Web-related spending for 2001, according to a survey late last year by Bear, Stearns & Co. But the firm's Internet infrastructure analyst, Robert Fagin, sees that reaction - at financial and nonfinancial companies alike - as temporary. "As the economy strengthens once again, we believe spending levels will revert to the intentions indicated in the survey," he says.
Even a temporary downturn could rattle executives who haven't been through one before. But, says Sapient's Devine, "the financial industry is so dependent on IT for strategic advantage that any slowdown now would be complete lunacy."
