Businesses tend to resist government regulations, but new rules bring new opportunities. Such is the case with the recently passed financial reform bill.
The Dodd-Frank bill, among other things, will create a federal oversight body to help prevent another Wall Street meltdown. This means banks and other financial institutions will need better reporting and transparency in their transactions. It’s the sort of problem that people turn to information technology to solve. A survey last month by IBM (NYSE:IBM – News) suggests that the effort is already under way.
In the poll, 45% of 240 Wall Street IT professionals expect their budgets to increase this year, vs. 18% last year. Analytics led, with more than 90% expecting an increase in that area. The top driver was the need to analyze the risks associated with investing, respondents said.
IBM’s Suzanne Duncan recently spoke with IBD about the findings.
IBD: What impact is financial reform having on Wall Street’s IT spending?
Duncan: Three main areas of financial reform are going to affect the future of the (financial services) industry. The first is they’re looking to create a lot more transparency. The second has to do with capital and liquidity — increases in capital liquidity, countercyclical forms of liquidity, and better-quality liquidity. And the third is the need to look at misaligned incentives: properly balancing risk and return, and balancing short term and long term.
The survey was fascinating — actually, very counterintuitive to us. We found that firms are focused on transformation types of activities. Probably the most surprising finding was that half the participants expect to allocate a big chunk of their technology budgets — 20% to 30% — toward transformational activities.
IBD: What do you mean by transformational activities?
Duncan: The broadest area is building intelligence. The No. 1 area they expect (to build up) is risk analytics, knowing that they need to do a much better job of understanding risk in a more scientific, less artful manner. In fact, 90% expect to increase their investment dollars in risk analytics.
The second area, in terms of building intelligence, is systemic risk regulation. That is expected to be the largest external driver of IT investments. As the systemic risk regulator is going to be set up (as a result of the new law), the (financial services) industry is recognizing that’s going to be a huge driver in terms of needing to get their act together.
Related to that, we found there is a bigger appetite for new technology models in order to build this type of intelligence. There’s been an uptick in terms of cloud computing — 61% expect to invest in cloud computing as one of these disruptive technologies that will help them transform.
Another area is process sourcing. Outsourcing is something we monitor very closely, and we found that the industry has (outsourced) a lot of the day-to-day tasks, such as data centers. But we’ve seen a big uptick in process outsourcing, which is getting closer to the back office. So, 90% expect to source one or more of their processes.
It’s rare that we get two 90% numbers. That indicates the industry needs to build a greater amount of intelligence to respond to financial reform. That was encouraging to us, because we believe these are necessary changes.
IBD: You said this was counterintuitive. What were you expecting?
Duncan: We were expecting “Let’s wait and not do anything until the legislation is actually legislated.” Our point of view is that there are two main phases to (regulation). Phase one is what we’re going through now, the Dodd-Frank bill. Phase two is the much bigger phase as it relates to being able to assess the real impact on financial-markets companies.
We assumed it might be too early for the industry to know what they need to do. But they’re saying the writing’s on the wall, and they actually need to be proactive.
Based on face-to-face interviews, they are saying they want to get ahead of the curve. They wanted to do these transformational types of initiatives, but they haven’t necessarily had the budget to take these on. The boom years were focused on the front office, and that’s where a lot of the investment dollars went. It’s still going there, but now they’re using financial reform as a lever to fix their operating model.
Source:http://news.yahoo.com/s/ibd/20100729/bs_ibd_ibd/542090
