Strategic consulting and research firm Datamonitor PLC believes most of the world's major financial services institutions will resist the urge to actually cut technology spending next year, although a slowdown in the rate of spending growth already is evident.

Datamonitor analysts project that the U.S. banking industry's 2002 spending on IT will approach $33 billion-not hayseed, to be sure, but up by only $1 billion, or 3.1%, from the firm's current projection of this year's final tally.

"The durability of IT spending in the banking sector is much higher than you will find in any other industry vertical," says Michael McNamara, a managing analyst specializing in financial services strategy at Datamonitor, which has dual world headquarters in London and New York.

"In many respects, you could say a bank is a glorified IT provider," McNamara adds. "Financial institutions don't have much wiggle room [on spending plans] because technology is such an essential part of the company."

Even so, Datamonitor's most recent research on financial IT spending suggests that discretionary IT investment by the world's banks and other financial companies has begun to drop in an economy that appears to be playing dead.

"While banking is insulated," says McNamara, "it's not immune. Business is really not that bad-not nearly as bad as some people make it out to be-but we do see a pullback in discretionary spending."

Nonetheless, Datamonitor predicts discretionary spending on financial IT will begin to go up again in the fourth quarter of this year.

Because the banking market is about as mature as they come, the analyst says, the only practical way to achieve growth is to capture market share. Consequently, "Smart bankers know they have to continue spending money on IT. If they're not ready when the economy picks back up," McNamara says, "they're going to get burned."

Like other industry specialists consulted for this story, he believes sour economic conditions during the past year have prompted bankers to focus their IT efforts primarily on technologies related to the introduction of new products and those tied directly to serving customers.

Vendors in the market undoubtedly feel the pain of a slowdown, but few serving financial institutions in particular have yet to crash and burn.

At S1 Corp., a provider of a broad range of banking and financial services software and services, Charles Ogilvie says the company has "seen a slight lengthening of the IT sales cycle ..., with an emphasis on wealth management and CRM technologies."

More than ever, says S1's chief strategy officer, "Providers are adopting an ROI type of philosophy." Bankers are demanding genuine value to justify their spending decisions, Ogilvie says.

For LSVi, a San Ramon, CA-company specializing in network and systems management, the trend toward greater outsourcing of IT applications and infrastructure services represents quite a boon.

"We've seen our best two years ever," the company's chief executive, Stan Pomerantz, said in a recent telephone interview.

A significant portion of that business has involved integration projects in the wake of mergers and acquisitions, while in other cases LSVi has benefited from banks' conversion to a Windows platform.

"It's not that banks don't like [IBM's operating system] OS/2," Pomerantz says of institutions' steady migration to Windows. "It's just that so many of the new functions are coming out on Windows NT or Windows 2000."

This move away from DOS and OS/2 comes quite late in the game; but, as Pomerantz notes, "banks are sometimes the last to update their technology."

LSVi's chief executive certainly isn't complaining.

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