The demise of Lehman and the acquisition of Merill Lynch, along with the faltering of other financial institutions in the US and the UK, is creating a new, austere dynamic in the IT market.
The financial services sector has always been a bellwether sector for the IT industry as it is the sector with the largest IT spend as a proportion of revenue. Clearly as some of the largest institutions in this sector collapse and disappear, so do existing and potential revenue opportunities for the IT vendors.
On a day to day operational basis financial institutions will continue to purchase products and services to ensure data security and transactional integrity in compliance with governance and regulatory requirements.
Moving beyond these requirements, however, takes the IT industry to a point where it will need to begin delivering on the promise of standardised, automated IT environments. In this context outsourcing will continue to be perceived as a cost-cutting measure.
A flight to IT service providers with operational scale is to be expected. There will also be an increased impetus towards a migration to lower cost standardised platforms.
Indeed, it is likely that this economic downturn will increase the adoption rates of both thin client computing and SaaS delivery platforms. This is because both conform to IT austerity measures in relying on lower cost, standardised approaches to delivering IT services to end-user communities.
Spend will be slashed on projects that do not materially effect the bottom line. This category would include upgrade plans to migrate to Vista, or indeed any large scheduled application upgrades that can be delayed with minimal business impact.
Any application projects that are judged to be problematic because of changing business and economic circumstances will also be ditched: For example organisations may suddenly find that the expansion of a new business line, the development of a new product or the opening of new offices to be far less urgent priorities than they were 3-6 months ago.
This will have an impact on sales of Web 2.0 tools, on custom development and on ad-hoc spending on technical consulting and systems integration projects.
It is likely that remaining IT spend will be targeted on the more efficient and leaner running of operational systems. In this vein server and data centre consolidation plans will continue to be executed as will server virtualization projects.
As ever as market conditions weaken in the IT services sector, it is the mid-sized vendors that will be most vulnerable. Those that have high exposure to financial services within their customer base but that lack the size and skills to offer standardised services that clients are comfortable to buy into will suffer the most.
Those that have strong public sector lines of business will be buffered in the short term but as governments step in with rescue packages for banks paid for by taxes, there will ultimately be less money in national budgets for other expenditures including IT.
Dr. Katy Ring is a Principal analyst with the Bathwick Group , developing Bathwick’s new Global IT Services research programme. Dr Ring has been in the IT industry for 21 years.
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