A major player in the industry recently remarked to me that his greatest concern was that the credit crisis would diminish innovation, something that would only worsen an already difficult market environment.
It's understandable why such fears have taken hold among advocates of technology as an engine of business innovation. The daily newspapers carry headlines of bank closures and losses of ever-grander proportions. Last month, the 19th U.S. bank was shuttered for insolvency, and Wachovia recorded a $24 billion loss for the third quarter, exceeding in total mortgage-related losses what it had paid for Golden West Financial Corp.
None of this bodes well for technology spending. The retreat from technology investment began last year, when it was clear that mounting losses at some of the largest U.S. and European institutions would prompt them to seek areas to cut costs.
The trend continues in 2008 and, with the 2009 economic environment expected to be far worse, many financial companies will make sizable cuts in technology, and IT priorities will be shuffled or put on hold.
But the federal government's investment in large and regional banks - some quite healthy - is reason to believe that the $700 billion earmarked for recovery doesn't have to be like pouring money into a black hole. Those "strong" institutions receiving investment from the Fed should put the money to good use, and that includes earmarking some capital for technology investment. This will be critical if institutions are to continue to provide customers with access to more innovative products and services, engage them in an appealing user experience and attract and retain new depositors.
To that end, investment in technology by institutions is evolving, and that has implications for how and where innovation will occur. Over the next three years, TowerGroup expects internal IT staff and hardware to lose market share to external software, services and outsourcing, according to a recent survey.
By 2011, the consulting firm projects that the IT spend by the U.S. financial industry will be $146.7 billion, compared to the $126.6 billion spent in 2007. Of that total 2011 IT spend, 36.3 percent will come from internal IT staff, down from 42.2 percent in 2007; 11.7 percent will be allotted for outsourcing, up from 8.6 percent; 19.8 percent will be for software, up from 18.5 percent; 14.6 percent from services, up from 12 percent; and 17.6 percent will come from hardware, down from 18.7 percent.
While change marches on, so too does innovation, as evidenced by BTN's profiling of the 25 most progressive people, companies and technologies. Its seventh-annual ranking of The Innovators is proof that big thinkers don't hesitate in times of crisis, they take action. And that is good news for an industry that rarely receives any of late.