Regaining a Positive Attitude

The word on the street is that economic conditions have improved to an extent that growth - rather than cost cutting - is the primary focus of financial institutions this year. If the findings of recent research by Bank Systems & Technology affiliate InformationWeek Research are any indication, this is more than just rhetoric. Business technology executives in the financial sector are very optimistic about the U.S. economy and industry conditions, and this optimism is translating into larger IT budgets and on-time project starts, according to InformationWeek Research's Q2 2004 Outlook/Priorities Study (based on 333 telephone interviews that took place in March, 112 of which were from the financial services sector).

Business technology executives in banks and other financial services organizations see this as a time of investment to support optimism toward improved business prospects. In fact, InformationWeek Research found that four out of five banks surveyed anticipate revenue growth above and beyond 2003 levels.

This potential increase in revenue is driving financial services companies to invest in IT for 2004. More than half the financial institutions surveyed anticipate IT spending to exceed 2003 levels, and a whopping seven in 10 (71 percent) banking firms expect 2004 IT spending to exceed 2003 levels, while only 10 percent of respondents anticipate a decrease. Already, in banking the IT budget represents 13.5 percent of expected annual corporate revenues, respondents reported.

One thing that hasn't changed is that salaries and benefits continue to take up the largest portion of banking IT budgets - 30 percent this year, the study reveals (see chart, page 36). This is followed by applications and new technology in most cases.

While many financial institutions expect revenue and IT spending to grow in 2004, however, many are reserving the right to re-evaluate budgets through the year if necessary. More than half of the bankers polled said they anticipate re-evaluating IT budgets in the next three months, due to either cost cuts (15 percent) or for budget increases to support new initiatives (38 percent).

Corporate Confidence Grows

The generally positive outlook on IT budgets and spending reflects a high level of industry optimism about the economy and business strategy, according to InformationWeek Research, which found that seven in 10 financial institutions feel positive about the U.S. economy and 76 percent are optimistic about the industry as a whole. These percentages are up from just three months ago, from 67 percent and 64 percent, respectively. The mood is even brighter in banking, where 82 percent of respondents said they are positive about the industry's economic conditions, and only 2 percent were negative. Furthermore, more than three-quarters (78 percent) of bankers surveyed said their outlook on their companies' business prospects is positive; 22 percent were neutral.

To look at the attitudes another way, InformationWeek Research's IT Confidence Index grew 18 percent in March 2004, to 1,655. This level is more than 100 percent higher than in March 2003. What's driving the prolonged optimism? While indicators report a stronger economy, the most significant drivers of the positive shift in the index stem from increased confidence in business prospects and IT spending plans, across all business segments. This holds true for the financial services sector as well.

Again, this translates into generally encouraging prospects for strategic IT activity in banking. Slightly more than half of respondents reported that the outlook for their firms' current IT budgets and spending plans is positive, and slightly less than half said the outlook is neutral. Three-quarters (74 percent) of survey participants from banking think the outlook for current IT project starts and initiatives is positive, while only 4 percent consider it to be negative.

Shifting Priorities

So, how does all this good feeling translate into actual IT initiatives and strategies? Based on the InformationWeek Research Q2 Priority Study's findings, banking IT organizations will continue to be heavily focused on improving customer service, keeping up with the pace of change, increasing worker productivity, using IT to comply with government regulations and streamlining business processes.

In comparison, the hot topic of outsourcing actually does not appear to be one of the top business priorities in banking. Half of the banking respondents identified outsourcing as a key business priority (slightly more than financial services respondents as a whole). Meanwhile, 16 percent reported their organizations will be taking back outsourced functions, and another 12 percent reportedly will take back offshore outsourced functions.

Technologies that will be used to support these key business initiatives include PC upgrades, network security management software, server upgrades, Web development tools or products, Web services, XML-based applications and enterprise storage.

For more information about the InformationWeek Research Priorities Study and Confidence Index, visit www.informationweek.com/benchmark/ITconfidence. Lisa Smith produced this report.