Benchmarking IT spending for the finance industry

Everyone''s spending, but are you spending enough? IT consultants seek to answer the question for you.
Back when the Y2K bug loomed large on the horizon and threatened to thrust us back into the dark ages, spending on information technology was at an all-time high. Many industry analysts at the time predicted that IT budgets would drop dramatically in 2000 as Y2K taskforces were dismantled and contract workers laid off.

While spending did decrease, it wasn’t by anywhere near as much as might have been expected. According to a study by Cap Gemini Ernst and Young, IT budgets that had tripled in the lead-up to the millennium only dropped by 25% in 2000.

One of the major reasons for the smaller decline is competitive pressure arising from the adoption of e-commerce and internet strategies. Even though financial institutions aren’t exactly clear on the actual return on these kind of investments, more and more money is being spent for fear of being left behind.

As a result of this, one of the most common questions asked of IT consultants is: “How much is our competition spending, and on what?” In an attempt to help answer this question, IBM’s Financial Services unit has launched a web-based tool (www.ibm.com/industries/financialservices/it_spend)  that allows institutions to benchmark their spending against industry data compiled as part of an ongoing IBM survey.

The Spending Calculator is divided into sections for retail banking, insurance and financial markets. Based on questions relating to geography, operating costs, number of staff and actual IT expenditure, it will work out an optimal level of IT expenditure as well as give you an idea of whether you may be over or underspending.

IBM claims the tool is based on an algorithm derived from data given by nearly 200 financial institutions as part of research into IT spending patterns it has been conducting since 1998. But, of course, the calculator comes with some disclaimers – it doesn’t for example take into consideration "exceptional" IT investments during the year of analysis. These would include things such as core systems replacement or post-merger integration work. IBM also says the tool is most accurate for financial institutions that spend between $200 million and $1 billion on information technology. 

And of course, if you have any further questions, the Spending Calculator encourages you to contact an IBM Financial Services consultant and hopefully spend some of your IT budget with them.

Big Picture

Those looking for a more industry-wide picture might look to some figures from Meridien Research, which annually publishes a forecast of spending on strategic technology for the worldwide financial services industry. Meridien broadly defines strategic technology initiatives as “investments in new or emerging areas that will help institutions identify and capitalize on market opportunities”.

It predicts that spending by worldwide financial institutions on wholesale or business-to-business initiatives will top $27 billion in 2001, up from an estimated $23.75 billion in 2001. Of this, the research firm expects 15% to be spent in the Asia Pacific region.

On retail financial services, Meridien expects worldwide expenditure to be $36 billion in 2001, up from an estimated $33.25 billion in 2000. Of this money, 23%  will be spent in Asia Pacific, it says.

Major areas for investment in 2001 are expected to include back-office initiatives such as middleware and enterprise application integration, data quality and integration, e-procurement and better measurements to improve accountability for strategic IT investments.