Umpqua Holdings CIO Dan Sullivan says the Roseburg, OR bank remains on course to spend $5 million on three planned IT initiatives, including a Web platform swap. But in a major shift for a bank that slaps interactive plasma screens on its store walls, those funds now come only through exhaustive dog-and-pony presentations. Justify, or die.

"These are things in the past that would have been considered must-have, no negotiations necessary. Just do it," says Sullivan. Now, he says, projects are under intense and "more rigorous" examination by the bank's capital gatekeepers. However, just because scrutiny is intense doesn't mean spending is declining-as Umpqua's decision to continue with its $5 million outlay attests. In fact, spending across the industry is relatively healthy, according to several analysts and financial technology executives who spoke with BTN.

For a new report due out last month, TowerGroup cross-industry research director Virginia Garcia saw plenty of healthy signs for continued IT investments, particularly in automation, e-channel investments and analytics infrastructure that can render quick-turn cost savings, as well as long-term risk management and integration requirements. In her survey of banks, she found that North America bank spending will be up slightly to $47.5 billion in 2008, compared to $46.4 billion a year ago. And that upward trend should continue despite the prospects of another year to 18 months of uncertainty in financial services; total spending could reach $53.3 billion by 2011.

"Between 2007 and 2008, we're seeing 11 percent growth in delivery channel IT spending [alone], and we had forecast 7.3," Garcia says. "Obviously, it's a very interesting market. You would think that given everything going in, you would see IT spending budgets collapse. That's not what we're seeing at all."

Forrester Research found similar signs of life when it polled bankers and insurers to find increased spending plans for areas like business continuity, server hardware and security, according to senior analyst Ellen Carney. In most categories, including risk management, "they're replacing manual processes," says Carney. "And let's be honest here-some of those manual processes are why they're in the mess they're in to begin with." The financial services industry, including banking and mortgage, is expected to cut 200,000 jobs in 2008, according to Celent.

Last December, Celent forecast a decline in spending growth, from 4.2 percent to 3.6 percent as banks would tap the brakes on some IT initiatives. It would be hard to see a dramatic drop in IT spending, says senior analyst Jacob Jegher, since "75 percent, on average, of bank IT spending goes to maintaining existing systems. The other 25 percent that's destined for new projects-that's scarce to come by anyway."

What has come across in recent months on the vendor side is how certain pockets of IT spending are drying up. Jack Henry & Associates reported in August its quarterly licensing revenue fell "dramatically," about 25 percent, from $24.3 million to $18.3 million, and hardware sales were down eight percent. But the company did enjoy a 23 percent gain in its support and service area, which includes remote capture and Check 21 investments.

Metavante Technologies had a decline in operating income in its financial services group, due to revenue mix, price and increased investments in product development, "which more than offset the benefit of higher volume," according to the company's quarterly earnings statement. "There were some project delays, slow roll-outs-that and the big-ticket software sales that slowed down in the second half cost us a point and a half of growth," says Tim Oliver, Metavante's CFO.

Where are the strong points? Garcia sees many banks, particularly mid-tiers above $6-8 billion, still proceeding with core deals. And "not just point solutions, but a wholesale overhaul of their technology environment," she says.

Those core deals could continue the trend toward declining maintenance revenues used for upkeep of legacy processing systems. According to TowerGroup, the IT spending toward services and outsourcing will grow a combined 20.6 percent of the total $126.6 billion IT spending pie (including insurance and capital markets) to 26.3 percent of 2011 projected spending.

No matter how the economy performs, there's no escaping compliance and security. When Forrester crunched the 2008 numbers, it found 56 percent of banks will increase spending on security software. Nearly every other IT category-information management, applications, infrastructure-show most banks planning to keep spending at 2007 levels.

Server investments remain the largest overall hardware buy; 55 percent will spend additional funds this year. Only 38 percent plan to spend more in storage products, which explains EMC CEO Joe Tucci's gloomy outlook for the year, despite double digit gains in quarterly net income and sales. Also expected to drag EMC's performance is its 85 percent stake in virtualization software firm VMWare, which is forecasting fewer long-term deals in the pipeline. VMWare went public a year ago and has lost 75 percent of its peak $48 billion market cap.

What may serve vendors best in this time, analysts say, is diversification. Fiserv, which is also feeling the impact of the software licensing revenue fall-off, is benefiting from cross-sale opportunities across its arena of payments and platforms. Fiserv signed up 146 new clients for CheckFree electronic billpay services in the quarter and landed some key core banking deals. "We are seeing pressure on discretionary technology license spending among large investment banks and financial institutions," said president and CEO Jeffrey Yabuki in Fiserv's earnings call. "At the same time, this pressure is creating opportunity as the entire financial services industry is aggressively looking for ways to increase efficiency."(c) 2008 Bank Technology News and SourceMedia, Inc. All Rights Reserved.

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