Let's get the bad news on the floor first thing: In a major report to be published this month by Cap Gemini Ernst & Young, the firm notes that for the first time in a decade, a "significant number of [the world's financial services] organizations have projected zero growth or even negative compound annual growth rates for IT expenditures."

The good news is that CGE&Y believes the bad news is not playing out quite so badly, as it happens.

The austere projections, gathered in a fall 2000 survey of mostly chief technology and marketing executives at 120 financial institutions in 13 countries, represent a "sincere desire to rein in technology spending," say the authors of CGE&Y's "2001 Special Report on the Financial Services Industry."

The reality, however, is that IT spending by the bank holding companies, insurance companies, asset management firms and diversified financial services companies surveyed late last year grew about 6% in 2000, not drastically below the 9% rate the previous year's survey anticipated, and is likely to increase at about the same pace for all of 2001.

"This year," says Jim Scurlock, a New York-based senior manager in the financial services industry practice at CGE&Y, one of the world's largest management/IT consulting firms, banks and other financial services businesses "aren't going much lower [than 6% IT spending growth], because they can't."

The principal reason they can't is captured in the subtitle of the new report: "Creating Differentiation in a Commoditized Marketplace." CGE&Y, which employs about 57,000 people in offices around the world, provided Bank Technology News with a draft copy of the annual report, which covers a variety of strategic issues and trends, in addition to the statistical findings of its industry survey.

Primary research in the new report also is based on interviews earlier this year with a number of "the more than 250 senior executives from top-tier financial service institutions worldwide" who participated in the study, according to Keith Stock, executive vice president and head of CGE&Y's Global Financial Services Sector.

In 2002, financial institutions would like to hold IT spending growth to between 3% and 4%, which the researchers note would be a return to "traditional" growth rates-essentially, rates of growth seen before the Y2K-related spikes of the late 1990s.

CGE&Y analysts aren't convinced the bankers' projections of 3% to 4% growth in IT spending next year will hold. "We believe that's going to be very difficult for them," Scurlock says.

In fact, CGE&Y researchers believe financial services companies' spending on customer relationship management, or CRM, technologies alone will double in the next three years.

And global e-commerce spending by financial concerns is projected to grow by 50% in the same period, albeit almost exclusively on the business-to-business, rather than business-to-consumer, side.

B-to-C financial technology spending will remain flat, Scurlock says, while B-to-B "is definitely going up."

This finding is consistent with a study just published by Newton, MA-based Meridien Research that bodes well for the B-to-B side of e-commerce. The bank technology research and consulting firm's co-founder, Bill Bradway, writes: "By 2003, we believe online commercial financing will become a viable channel, primarily for lease financing."

The world's large banks aren't about to leave B-to-B e-commerce to interlopers-not if they can help it. Yet, Scurlock believes, too, that financial institutions have every reason to reassess their investments in this area.

"E-commerce hasn't paid off," he states flatly. CGE&Y research indicates that in 1999 and 2000 bankers generally hoped to achieve cost reductions of 6% to 8% as a result of IT spending in this broad category. The firm's survey shows that actual savings ranged between 1% and 2%.

In the recent survey for this year's annual report, financial executives told Cap Gemini Ernst & Young they expected little cost savings from e-commerce; but, again, Scurlock says their institutions probably will continue to pursue B- to-B initiatives vigorously in 2002 because the payments and financing operations inherent in B-to-B e-commerce are at the core of the banking business.

Spending on financial IT will be more selective than it has been in the past several years, CGE&Y reports.

"Not surprisingly," Scurlock says, "the focus today is on cost reduction. That doesn't mean banks are going to crawl into a hole and stop doing new things, but it does mean they're going to be making sure the business case is there and that the returns are measurable."

As long as the economy remains stagnant, some small and midsize banks, securities firms and insurance companies will spend only what is necessary to keep their infrastructure up and running, Scurlock said in a recent telephone interview. "This is really the first year where we've seen financial services industry companies openly debate whether they were going to cut IT spending across the board."

Make no mistake: The bad news for information technology spending is probably least bad in the financial services industry than any other, but the new research from CGE&Y, as well as a new report from Boston-based AMR Research Inc., indicate a no-nonsense determination to hold down IT expenses.

As the latter report declares, "Many 'nice-to-have' projects have been swept away, along with the dot-com madness that drove FIs' agendas over the past few years."

Randi Purchia, author of the AMR Research study of banking and insurance companies' IT spending plans, writes: "At the end of the day, if it doesn't contribute to earnings growth, it's probably on the chopping block." [See sidebar at right]

Scurlock says the world's large banks will cut technology spending in a number of areas, including hardware. Nonetheless, CGE&Y expects spending for technologies related to product offerings, sales and customer service to continue going up.

The CGE&Y research is devoted to financial services strategy in today's market, including the issue of IT spending but also the firm's recommendations for how to succeed in the global banking marketplace going forward.

"I think the bottom line is that financial services institutions have got to achieve differentiation," Scurlock explains. "That is where they have to get."


Getting there will require structuring the entire business around customers, rather than products or geography, the report says. The power of customers seems almost scary when CGE&Y analysts warn that, today, "the practical options are rapidly narrowing for CEOs of financial service firms."

Ultimately, the consultants believe, "Today's financial services arena offers just two viable ways of achieving a sustainable competitive advantage":

Become a product producer. There are two approaches to producing products: commodity player or niche player.

Orchestrate superior customer experiences. This alternative, which few firms can achieve, involves focusing on customer relationships and addressing the needs and preferences of specific segments.

"Either choice is valid and viable."

Much of CGE&Y's "2001 Special Report on the Financial Services Industry" is devoted to this theme, both in terms of what each strategy means, as well as its execution.

In light of financial products and services commoditization, which continues "galloping forward," the report notes, industry consolidation will continue unabated.

While consolidation might be expected to have a negative impact on customers, a host of industry research suggests that, on the contrary, it is the cost of meeting the demands of today's customer profitably that is driving the quest for scale. Meridien's Bradway, for example, has said the degree of competition for wallet share in the U.S. commercial banking marketplace "simply will not allow all boats to rise."

In such an environment, CGE&Y's consultants maintain, "open finance" becomes critical. While it's true that "the fall of the dot-coms and other recent events have tended to strengthen the hands of the traditional companies," CGE&Y believes banks' historical reluctance to hawk others' products and services actually becomes self-defeating as fewer and fewer giant institutions dominate the global financial services marketplace.

"Financial service firms need to break the mold and offer all products and services no matter the origin-as long as they can earn a profit," the report says. But, this year's analysis also observes that "the vast majority of institutions are still unwilling or unable to make the shift to selling competing products and services."

Among other findings, the new report emphasizes the continuing importance of bricks and mortar. CGE&Y says its latest research "clearly indicates that new sales and the majority of transactions will still flow through physical locations for many years to come."

The firm expects the number of financial customers served online to float around its current level of 37% to 40% through 2003. Branches still carry 40% of transactions, the survey shows, and 80% of new accounts are still opened at a branch.

Despite the unambiguous importance of physical operations, the consultants anticipate no decline in the necessity of providing excellent customer service through all other channels as well.

"Among the salient demands of today's financial services customers," the firm reports, "are access, friction-free interaction, speed and responsiveness, consistency, and intelligent feedback and preemptive help."

Indeed, the "PC Internet" category of financial IT investment is expected to command the greatest share of discretionary spending again next year. And despite the current economic environment, CGE&Y projects that financial companies' discretionary IT spending, as a share of total IT investment, will continue to increase in 2002 and beyond.

The Internet, in short, remains a key area of attention, according to Cap Gemini Ernst & Young's research; but, then again, so does the call center, where bank executives anticipate steady increases in call volumes.


No area of strategic IT, however, can match the amount of dollars or intellectual capital financial institutions are investing in CRM. The outcome of these efforts has been mixed at best, the report says, although Scurlock points out that the most recent survey results show signs of improvement.

For instance, the number of financial companies that cannot measure their cross-sell ratios after implementing a CRM project has declined from 68% to 40%, the latest research indicates.

"That is significant progress," Scurlock says, "but, unfortunately, more than half of the institutions still can't tell whether a customer is profitable." Here again, though, the figure last year was also 68%, so companies' efforts to manage their customer relationships are improving.

Authors of the report point to "confusion" within financial services, among other industries, about what CRM really means.

"The time has come to redefine CRM and take action on it," the CGE&Y analysts write. They offer the following definition of the term: "increasing the number of profitable customers and retaining those customers with the purpose of maximizing their contribution to the institution's profit during their lifetimes or for the duration of their relationship with the institution."

Because much of the 2001 report centers on an analysis of what it takes to provide a "superior customer experience," CRM naturally figures prominently in the study. Space will not allow for a comprehensive outline of the consultants' treatment of the topic here. Suffice it to say that CGE&Y believes "true CRM is a complex undertaking that must be an ecosystem-enterprise-wide and all- inclusive."

For the few financial corporations that succeed in "orchestrating" superior customer experiences, as opposed to companies that choose to be financial "product producers," CRM may well make the difference. A select few-CGE&Y says Citigroup is one example-probably will manage to pursue both strategies successfully.

"This is a critical and hopeful period for CRM implementations," the firm says.

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