The stubborn cost vacuum helping drive down banking pay and reduce headcount
Compensation is falling in investment banking and headcount is tumbling – which is logical as firms are under increasing pressure to cut costs. And yet one significant cost remains on an upward trajectory and shows no signs of stopping – technology. Are banks really doing all they can to reduce IT budgets?
For the legions of IT and ops staff affected by investment banks’ increasing tendency to shift jobs from major financial centres like London and New York into low-cost destinations as diverse as India, Salt Lake City, Texas, Scotland and Poland, the answer would be a definitive ‘yes’. However, technology costs continue to increase.
Mckinsey says that technology and operations costs in investment banks amounted to $23bn last year, up from $19bn in 2007, while pay for front-office bankers has shrunk by $3bn over the same period. Inevitably, technology staff comprise a significant proportion of this expense – 26% of banks’ IT budgets in the U.S. and 37% in the U.K., according to Deutsche Bank research.
“Investment banks do want to cut technology costs, but there are a few factors at play that make it hard to do so,” said Adam Honore, CEO of Marketstech and a capital markets IT expert. “Firstly, there’s the cost of data, which is spiralling – data doesn’t care about the financial crisis, it keeps growing and growing. Then there’s the fact that investment banks still don’t have a real handle on identifying the technology that gives them a real competitive advantage.”
Banks could, of course, make greater use of off-the-shelf technology from vendors in areas where in-house technology is unlikely to give them an edge. However, even here there are problems, believes Honore: “If you look at the scale of applications written at somewhere like JPMorgan, it’s difficult for a vendor to go into an institution and apply functionality on the size and scale demanded by the bank – it’s a legitimate problem. However, banks don’t do a very good job of periodically assessing the available vendor landscape.”
The cost of support
There is, at least, a recognition among investment banking CIOs that technology costs have to come down. While most would assume that it’s the large, innovative IT projects that eat up tech budgets, the cost of supporting traders and applications can’t be underestimated. Honore believes that around 60% of banks’ tech employees are engaged in a support function, but firms are under pressure to reduce support costs while dealing with ever larger volumes and complex technology.
"IT expense has to decrease, sharply,” said Pierre Dulon, CIO at Crédit Agricole Corporate and Investment Bank, speaking at the European Trading Architecture Summit. “It can't be immune to a decrease in general expenses, and we have to make do with less money. Secondly, it's clear that you can't arbitrate the quality of service. All CIBs are taking less market risk, because we can't afford to do so. But we have to deal with higher volumes, and the service has to be at a high level. You have to do more 24/7 service, and you have to adapt to the new market conditions. You can't lower your IT investment, either, because business requirements are so high.”
The real challenge, says Honore, is for investment banks to maintain this level of support, while freeing up technology staff with domain expertise for more innovative work that will provide competitive advantage.
“An obvious way to cuts costs is to embrace modern architecture like the cloud, which is something investment banks have been slow to do,” he said. “The decision about whether to move to the cloud often ends up on the desk of the head of infrastructure who would see most headcount reduction in their department – there’s not much common sense.”
There are some signs that banks are adopting cloud computing. Goldman Sachs, for instance, has been provided a virtual desktop and server infrastructure for a couple of years now, and has plans to move to a ‘hybrid cloud’ model in order to avoid the security concerns of the public cloud. Meanwhile, Deutsche Bank developed an Infrastructure as a Service Platform in 2011, which enabled developers to deploy up to 2,000 virtual environments.
Similarly, the perception that investment banks rely on proprietary code to get ahead of competitors may be something of a myth. According to Black Duck, an open source software and consulting firm, 75% UK investment banks’ trading applications are supported by open source code, and just 18% is proprietary.
JPMorgan, Bank of America and Credit Suisse all signed up to open-source messaging programme the Advanced Message Queuing Protocol, while Deutsche Bank’s Lodestone Foundation – now only available to registered users – is attempting to encourage investment banks to share commoditised IT functions. Investment banks are also realising the benefits of tapping into the whole development community – see Goldman’s GitHub page – and accessing technologists who may have avoided the sector otherwise, but still maintain security concerns about open source.
Nonetheless, Honore maintains that banks are still overspending in certain areas: “Reference data is an example of an area that generates huge expense, but isn’t really a competitive differentiator.”