Merged systems mean IT spend plunges in Financial Services

(By Richard Holway 7.00 am 22nd May 09) Yesterday I had a working lunch with the CEO of one of the biggest suppliers executive search and IT resourcers to the UK market. He told me that the demand for executive search in financial services (FS), worldwide, is down 60-70%. Given that FS this represents c30% of the global market - that's a big hit. This is obviously causing major problems for the global executive search companies with many reporting financial woes and some being put 'up for sale'.

He also said that demand for IT contractors was down 10-15% in the last year with FS much more badly hit. Of course, this should come as no real surprise as the headlines have been full of news of job cuts with contractors taking the biggest blow. Indeed, it is not just fewer contracts. Many contractors have had to slash their fees by up to 30% in order to keep their jobs. What is stunning, even to me as an analyst, is the steepness of the downturn.

Halting recruitment and cutting contractors are the two easiest, fastest and least painful ways to cut costs. Then you get into voluntary and then compulsory redundancies.

The stage after that will hit even harder; providing both huge threats and opportunities to the largest SITS players. When financial services companies merge, it takes time to merge IT activities. One of the ‘benefits’ of mergers is cost savings and financial services operations spend proportionally higher on IT than most other sectors.

The last 18 months has seen unprecedented turmoil – and mergers - in financial services. We are just about to enter the period when IT activities start to be merged and much bigger savings are made. The FT today carries news that CitiGroup is aiming to slash IT costs by more than $1b by integrating its disparate IT systems. We will see huge ‘rationalisation’ as a result of the Lloyds and HBOS, RBS, the many mergers at Santander (where Santander has a record of bringing outsourced activities back in house) etc.

Some might create opportunities for SITS companies in terms of new outsourcing contracts – although the grand total is bound to be lower. But merged banks, where both had outsourced IT, will see at least one major loser. This ‘nervousness’, as in ‘of course, we are not quite sure what is going to happen in the medium term at x, y or x’ is a feature of most of the CEO conversations I have right now.