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Management Strategies

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If I Were The CFO Of A Bank Tech Services Company, I Would...

You can fill in the rest of that title statement as you see fit. The reason I am writing this analysis is because clear-thinking investment analysts believe that when banks are in trouble, they will cut back on tech spending, among other expenses. That's a logical position to take, at least on the surface, but there's more to this issue than a surface look, and I'd like to explain the details.

You can fill in the rest of that title statement as you see fit. The reason I am writing this analysis is because clear-thinking investment analysts believe that when banks are in trouble, they will cut back on tech spending, among other expenses. That's a logical position to take, at least on the surface, but there's more to this issue than a surface look, and I'd like to explain the details.This is how I would complete the title statement. ...do the following three things:

1. Identify the REAL problems first

• Is it the earnings and credit problems banks are facing that will curtail the revenue of any bank tech company? • Is it tech maturity that will slow down new sales? • Is it the absence of new first-time technologies that will slow down new sales? • Has all technology run its course as a high-growth industry?

2. Develop answers that represent the real world

• No, to recurring processing revenue; maybe to new projects scheduled for 2008 and 2009. • Yes. Most banks have been building their IT capabilities for the past 35 years, some would say 50 years, and now they have pretty much completed the building process. • Yes. There are eight hot apps that banks are buying, but they are not entirely new and there's nothing brand new coming in the future. The 8 are hot only because the stragglers have finally entered the market to buy. The nothing-new problem is a first-time phenomenon since I've been tracking the industry during the past four decades. • Maybe. The major generic software companies plus the top eleven systems integration companies might be putting on an optimistic face in public, but they are sweating bullets in the confines of their shrinks' offices as they wonder what happened to the good ol' days. None of these companies that cover all vertical industries are experiencing strong growth.

3. Arrive at a conclusion

Any responsible CFO had better adjust the operating costs of his company to coincide with the model of a Wonder Bread as opposed to that of an Apple Computer. The triple whammy of maturity, nothing new, and banker FUD is definitely going to have a reduced impact on bank tech company revenues.

In order to understand the impact of today's banking problems on IT, I'd like to address just a few examples of what one can expect. And none of this even comes close to insider information because I am the model of "outsider." These are my own thoughts as evidenced by the style of my writing.

• Countrywide may be a countrymile from recovery, even with Bank of America's rescue, but will Countrywide's technology suffer? NO. Even bad loans never disappear from the processing of a bank's work. So in-place technology will continue to run, maintenance will continue and reporting may even increase. Some day if BofA chooses to convert Countrywide's work to BofA's systems, that event will just result in more spending for BofA.

• Would the CFOs of troubled banks approach their Tech Provider to negotiate reduced charges? Only if those CFOs are under the age of twenty-one.

• If a bank using in-house systems fails, would the Tech Provider feel their loss? YES, to the extent that software maintenance fees would disappear. All other provider-related costs for the bank were sunk costs, paid for and unrecoverable, so providers got their due.

• If a bank using outsource services fails, would the Tech Provider feel their loss? Emotionally YES. But unlike the thirties, banks don't disappear completely anymore. The bank would still operate and the Tech Provider would continue to earn its revenue.

• When a bank loses money is it likely to delay new projects? YES. Regardless of how much intelligent analyses can be presented to the management of many banks, the FUD factor freezes intelligence and embraces emotions. "It's the psychology, stupid."

• Are any of the eight popular "new" technologies frivolous enough so as to be put in the back burner and not noticed? NO. In my opinion the eight are sound, practical and in some cases, solutions to present-day earnings deficiencies. For example, one is the application of IT to restore credit quality monitoring and enhance loan administration. On the side of customer service, Remote Capture is so practical, economical and efficient, that bank customers would revolt if their bank couldn't offer it. If you pinned me to the wall and forced me to drop one, it would be Wealth Management. I doubt if Northern Trust or Bank of New York would agree with me on that one.

• Is it likely that any bank IT operation will be "punished" as a result of losses from subprimes, credit crunch, or investment banking operations? NO. If some banks take a cleaver to IT, it will be because there was too much fat there to begin with.

• If a bank CEO forced his CFO to cut 10% from IT, without any discussion, where would the cuts be made? In a well-run bank, there are no good options. Cutting IT costs would be like doing 90% of the work. Whose accounts would the bank not process? In a poorly run bank, the cuts would have to come from HR.

So what will the revenue picture be for bank tech providers in 2008? Organic growth of from 3% to 7%. But the 7% is theoretical. If these companies changed their sales strategies to those of Accenturites, they could see the 7%.

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