Financial Firms Pull Back on IT Outsourcing

The financial sector may be rethinking the idea of IT outsourcing as a long-term strategy.

Computer Economics, a research firm based in Irvine, Calif., believes the financial industry is pulling back on outsourcing projects and bringing many IT operations in-house. The firm conducts an annual survey that benchmarks IT operations trends, staffing trends and salary trends in a variety of industries.

"This is peculiar to the financial sector," says John Longwell, the firm's director of research. "In most sectors, we're not seeing any movement to increase or decrease outsourcing. We're only seeing the retrenching in the financial sector. Financial services have a high priority in cutting budgets, and they're bringing functions back in-house."

Executives from several tier-one vendors - such as Cisco Systems, IBM, Hewlett-Packard and EMC - have confirmed a slowdown in spending from the financial services sector this year.

The study of 2008 IT budget plans found other enterprises are continuing incremental growth in outsourcing across 11 categories tracked by the study. For instance, about 15 percent of the organizations surveyed plan to increase their outsourcing of application development, compared with 11 percent who plan to reduce it. Notes Longwell: "From an IT employment perspective, there aren't a lot of cutbacks."

However, Computer Economics says IT operations budgets across all sectors are up about 4 percent this year, slightly less than 2007's 5 percent growth. This puts a halt to a three-year upward trend in spending growth for IT operations. Half of 2008's spending growth will go toward personnel costs such as salaries, supplies and training. While IT managers are generally not cutting staff, they are holding the line on staff increases: 39 percent plan to increase staff while 24 percent plan to cut back, the study found.

Finance IT Spending Growth Pegged at 2.5 Percent

Computer Economics says IT operations budgets for financial firms will grow 2.5 percent this year, compared with 4.3 percent in 2007. Financial companies' IT budgets are seen growing at a slower rate than the overall median, which includes companies in a variety of sectors.

"To be sure, IT spending and staffing levels are not generally falling," says Frank Scavo, president of Computer Economics. "Nevertheless, it doesn't take an outright recession for organizations to pull back on IT spending."

The Computer Economics study is based on a survey of more than 200 IT executives, who were asked to provide detailed breakdowns of their budgets, staffing and technology adoption plans for 2008 and 2009. The survey included respondents from small companies (with up to $350 million in annual revenues), medium-sized firms (between $350 million to $1 billion in annual revenues), and large companies ($1 billion in revenues and up).

Recently another research firm, Boston-based Celent, reported brokerage firms are prioritizing technology spending, with areas such as risk management, compliance and portfolio valuation remaining high on their lists. Celent says it expects brokerage firms to focus more on middle-office operational efficiencies rather than growth plans - a trend expected to last through 2011.

"Operational efficiency and cost-reducing initiatives will be the centerpiece of many brokerage firms' IT plans," says David Easthope, senior analyst with Celent's Securities & Investments group.