With capital markets in tatters and investment banks disappearing, rampant consumer pessimism, and the national unemployment rate already at a five-year high, you might think that the financial sector's IT departments are in dire straits. Think again.

There is good reason to be a little bullish on the industry's IT workforce prospects near- and mid-term, despite the onset of cost-cutting skirmishes that will no doubt once again appear punitive and short-sighted.

Clearly the pressure on corporate expenses has gotten more acute in the banking and financial services industries, as it has with industries that depend on them. Embattled Wall Street firms will start high, shedding expensive mid-level IT management first, and fast. But within their general IT populations there is a richness of critical, highly specialized skill sets that will be tough to abandon. Misfortunate castoffs will be welcomed into new jobs by second- and third-tier financial industry companies that covet such talent, albeit at a lower salary and maybe a different geography. Some will make successful jumps to less beleaguered industries.

But only a small portion of the sizable financial sector job losses over the next several months will actually be IT workers, in contrast to cost reductions expected in other industries. That's because of what will occur when these companies plow deeper into the inevitable and unenviable task of separating mission-critical from non-mission critical spending, with an eye towards slowing down or braking hard on the latter. The fact is, as industries go, banks are the ones perpetually looking for ways to dramatically reduce their IT costs. They have been battling IT complexity and burgeoning budgets for years, devoting the majority of their IT budgets to avoiding the failure of monolithic systems and countless applications rather than to advancing competitive advantage. Sure, they spend millions on discretionary projects aimed at new functionality to address a range of issues, from improving customer experience to enabling sophisticated analytics to repeated stabs at reducing complexity (most recently with service-oriented architectures and Web services). But the frequency of industry mergers and acquisitions in recent years have kept them preoccupied with infrastructure integration issues, and maintaining the status quo has remained their fundamental budget gravity. Even in the financial services sector, discretionary project spending is a relatively small amount, about twenty percent of the IT budget.

So, IT workers in mission-critical areas-the vast majority of the IT workforce--will be reasonably safe. This group supports daily operation of core systems; maintains strategic trading, order management, and evaluation applications; develops and maintains enterprise level business applications, processes, and services, especially SAP and Oracle; ensures core network connectivity and latency; manages high-volume transaction data processing; manages compliance systems, disaster recovery, and a wide range of IT security functions and activities; and supports key risk management systems.

It is in non-mission critical projects and initiatives that IT budgets and jobs will be more at risk. Unless there is a payback period of 12 months, or even less, expect slowdowns, outright spending holds, or increased IT and business process outsourcing.

In this smaller industry budget segment are numerous data mining and analytics initiatives; CRM projects; systems upgrades and infrastructure improvements; and a range of technology-enabled business innovation activities. Fewer customers with customized needs driving esoteric computing requirements equals fewer cutting-edge IT cowboys to hatch advancements and innovations. Labor cuts will also come from suspended lending units and workers supporting many proprietary trading activities.

For Bank of America and the other beneficiaries in the recent investment bank acquisitions, consolidating operations and analyzing their IT workforce "bloat" will commence. But those labor reductions are down the road, in the neighborhood of 10 percent of the IT workforce.

Finally, how did IT senior- and middle-management come to be so much more exposed than the rest of the IT organization: indeed, why do they earn so much? As technology has matured and enabled more and more delivery and support of products and services via the Internet and other technologies, the IT function has naturally evolved into a more strategic, customer-facing role. With the huge migration of IT jobs and skills (and IT budgets) to the business units also came the sharing of business risk.

Dramatic salary increases for workers with new hybrid IT/business expertise have come at a steep cost, as they will soon see.

The typical lag time between business decisions and direct labor market reaction means not many IT workforce reductions or outsourced jobs this quarter, except from companies under bankruptcy protection. But starting next year, thousands of permanent IT professionals will be incrementally cast off. This isn't a big deal though, considering the overall size of the U.S. IT workforce is approximately four million and IT unemployment rates are well below everyone else. It's less of an issue for IT departments in the financial sector.

 

David Foote, CEO and Chief Research Officer, Foote Partners LLC

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