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Management Strategies

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The Sky Might Be Falling, But IT Companies Are Protected

Three conditions affecting the banking business seem quite real and have already become visible in the form of poor earnings reports from the giants - losses in investment banking, the credit crunch and subprime mortgages. So it's natural to look to the left and right for other industries that might be affected. Of course, IT is a likely candidate for losses because as bank profitability goes, so goes IT investment. Maybe.

Three conditions affecting the banking business seem quite real and have already become visible in the form of poor earnings reports from the giants - losses in investment banking, the credit crunch and subprime mortgages. So it's natural to look to the left and right for other industries that might be affected. Of course, IT is a likely candidate for losses because as bank profitability goes, so goes IT investment. Maybe.Here's my take on what the subprime problem means to IT companies - very little. Take a ride with me and see if you buy my typical consultant-type extrapolations.

  1. There are approximately 67 million mortgages in the U.S. at the present time. 54 million are good. They are yours, mine and others that were acquired through traditional methods and paid for like coins on the tollway. Large mortgage companies like Countrywide would have loved to unwrap and display these mortgages to the bank examiners. Most of us would pay the mortgage before any other budget item. For example, I coulda gotten tickets to the Red Sox sweep, but instead I paid the monthly on my three mortgages.
  2. Taking my usual conservative approach, and after watching last Sunday's 60 Minutes, I have assumed that 14 million mortgages are subprime. That may sound high to some of you, but I have learned that bad things usually get worse once we've uncovered the first signs.
  3. Since mortgages have traditionally been a business for thrifts and large financial institutions, I'm arbitrarily putting half of them in the 145 large institutions, leaving 7 million subprimes in the 17,000 remaining banks, thrifts and credit unions that typically rely on outside help for IT.
  4. The protection gets even better because only 44% of the 7 million subprimes are under the care of a third party processor. Those FIs that went in-house sorta remind me of the sign in antique shops - "You break it, you pay for it." We're now down to 3.1 million bummers.
  5. Outsourced banks will pay a processor $6.00 per mortgage account per year just to do the computer processing. That means theoretically $18.6 million is subject to vanish from the revenue hoppers of outsource companies. I say theoretically because we all know even workout loans never really disappear. And we all know that IT vendor invoices are anything but crystal, so trying to get a credit for a hundred fewer mortgages is like asking American Airlines for a credit because I lost 10 pounds and they'll save on fuel.
  6. If you look at the combined projected 2008 revenue for the top eight outsource companies, the $18.6 million doesn't even represent a half of 1% of the aggregate. Most of the top eight won't even be touched by subprime, but if a company is big in the mortgage processing business, it just stands to reason that exposure might touch that company for maybe half of the $18.6 million.

All in all, subprime is a problem, but not for the companies that process transactions.

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