Big Spenders: There's Money To Be Made In Financial Services

Then he asked how many new IT employees were coming on board to support the new hires. Not a hand went up, leading Knotts to conclude that financial-services professionals are going to need outside help more than ever. "They are working harder than ever before and looking to VARs to help them do more with less," Knotts says.

Still not convinced this is the market for you? Then consider the sheer volume companies in this space are expected to commit to IT spending. According to TowerGroup, a Boston-based research and advisory firm focused exclusively on the financial-services industry, financial-services institutions (FSIs) globally are expected to spend more than $347 billion on IT in 2004 and $379.2 billion by 2006. That's a jump of almost 10 percent. No wonder vertical VARs and vendors alike are targeting the market with a vengeance.

And then, of course, there are the customers, such as Boston-based Windward Investment Management, which found itself growing out of a proprietary portfolio-rebalancing system. Without the expertise or the resources to improve the process in-house, Windward's president, Steven Cucchiaro, did what so many other companies are doing: He turned to a solution provider (see "Financial Services At Work: A Case Study of Windward Investment Management").

To help you make the most of the opportunity at hand, VARBusiness has partnered with fellow CMP Media publication Wall Street and Technology to take an in-depth look at the financial-services vertical, which covers three areas altogether: securities and investments, retail banking and insurance. In this special report, we break down the hot technologies and spending forecasts for the financial-services market and present a case study of a VAR at work in the financial-services arena. We also help with some basic definitions and insights into this unique world. For example, while a VAR is a value-added reseller to VARBusiness readers, it doesn't translate the same way in the financial-services world, where the term "VAR" means Value at Risk. This is just one of many details that make the financial-services vertical a tricky, but lucrative, area for VARs, which we'll refer to from here on in as solution providers, systems integrators or professional services providers, as those are terms the financial-services industry recognizes.

Opportunity For All
While a lot of attention is paid to high-profile service engagements, like the billion-dollar mega outsourcing deals signed by the likes of Bank of America with EDS for its voice and data networks and help-desk support, or Zurich Financials' recent announcement that it will be handing off new application development and the management of existing applications to Computer Sciences (CSC), it's important to note that the majority of VARBusiness' readers are doing work with financial-services firms. According to our 2004 State of the Market research, more than half of the solution providers (55 percent) surveyed are targeting the services/banking/accounting industry.

Virginia Garcia, senior analyst in the financial-services strategies group at TowerGroup, says that while financial institutions have historically kept IT work in-house as a form of competitive advantage, solution providers are rallying to the call for more flexible solutions and are, thus, gaining a foothold. "It is getting easier for financial institutions to find the technology they are looking for," she adds.

Financial-services firms build their businesses on information. Thus, the integrity, availability and mobility of this information is vital, Garcia says. That is why financial institutions continue to struggle with an issue that is as old as time itself—data integration.

"There are so many major initiatives that are at the core very complicated by data integration," she explains. The complex, expensive task of data integration is just one reason many financial-services firms turn to third parties and solution providers. "I believe most are turning to third-party providers to help with this complicated matter," she says. Data-integration spending around Basel II, a regulatory initiative focused on managing operational risk, is expected to reach $1.5 billion alone globally in 2004, Garcia says.

Some other areas Garcia sees as hot technology prospects and possibilities for companies looking to solution providers include regulatory compliance, which is being driven by various government-led initiatives, including Sarbanes-Oxley, the Patriot Act and Basel II, plus service-oriented architectures and middleware. There are also opportunities in helping companies with their branch renewals on the retail side, including updating teller workstations and applications, outsourcing, and core-replacement projects and legacy-systems upgrades.

From a business perspective, solution providers also are securing new business by helping companies with their vertical strategic technology initiatives, such as cross-selling securities and insurance; commercial-lending applications in the wholesale banking area, as well as modernizing commercial loan and cash-management applications; fraud; and business-continuity planning.

In the case of outsourcing, which has been garnering more and more attention, Garcia says there are two main reasons that financial firms make the decision to outsource IT work. "Either large banks need to cut costs out of their IT budgets, or smaller ones can get access to things that they couldn't otherwise afford—sophisticated technology and regular updates—at a much lower cost," she explains. Regardless, outsourcing is increasingly popular in the financial world and putting more work in the hands of those solution providers that offer this type of service.

But providing technology for the financial-services arena should have a twofold purpose: It should meet technology needs or regulatory requirements, and take into account business processes to help provide a more efficient way of doing things, Garcia adds.

VARs Weigh In
David Hall, senior vice president and CTO of Dallas-based integrator CompuCom Systems, says one thing to remember about financial-services clients is that they drive hard bargains. "I think you would expect that, but there's definitely pressure there from a pricing perspective," Hall says. "At the same time, though, they understand the value you're delivering, too." This, he says, is key—demonstrating the value you can deliver to a client while taking price into account.

What else is good to know? Hall says that prospective financial-services customers absolutely evaluate references and do their due diligence. From his perspective, Hall says that the outlook for the vertical is "optimistic but cautious." Priority projects are being worked on, but they are being carefully scheduled and managed.

ClearCube's Knotts agrees that financial-services firms are doing more with less, something important to remember when selling into the vertical. (For its part, ClearCube targets four main verticals, with financial services being one of the largest revenue generators.)

James Oliverio, president and CEO of IdeaBox, a systems integrator and ClearCube partner in the financial-services arena, points out that experience and knowledge of the industry oftentimes wins out over price. A veteran of the investment-banking IT sector, Oliverio says that many of his accounts are won based on his expertise and IT background on the inside of the financial-services industry.

Knotts agrees. "Financial services, above any other market, is willing to pay a premium for the technology that enables them to do their jobs, and even more for the intelligence and experience," he says. He adds that when ClearCube approaches financial firms, it brings partners like Oliverio in with it because of his in-depth knowledge of the market and the specific needs of the CIOs in that marketplace.

Getting back to cost, Soumitro Ghosh, vice president of the banking, financial services and insurance division of Bangalore, India-based Wipro Technologies, the technology-services division of Wipro Ltd., says that financial-services customers demand flexibility and quality at ever-lower costs. "The financial-services industry is a 24/7 industry where the key differentiator is enabling people's ability to innovate and generate new revenue and reduce costs," Ghosh says.

With ongoing mergers and acquisitions throughout the financial industry, Ghosh adds that IT departments are left with multiple systems for the same functions that either need to be rationalized or integrated, which has led to the growing need for migration and enterprise application integration (EAI) technologies. He also points out some general differences between larger firms and smaller ones. The larger firms invested in earlier technologies and grew through consolidation, resulting in legacy, siloed systems, which means more maintenance. Newer, smaller firms, on the other hand, invested in more recent technology that tends to be more agile and open, while older, smaller firms have not invested much in IT systems and have depended on outsourced processing services. Vendors Step Up To the Plate On the vendor side, Microsoft takes great pains to understand the financial industry, says Bill Hartnett, general manager of financial-services strategy and solutions at Microsoft. "Our financial services group is made up of actual practitioners from the industry—former bankers, insurance executives, traders and security experts—people who can represent the needs of the industry within Microsoft and also represent Microsoft to the industry on its terms," he says.

Hartnett says that most financial-services clients look to Microsoft for a "rock-solid technology platform to run their businesses." To come through for them, Microsoft is increasing its focus on security by going out and talking with chief security officers in the industry and using their feedback to make improvements in the ways Microsoft handles patch management. Microsoft also is focusing on Web services, .Net and service-oriented architecture (SOA) approaches to developing new applications for the customer as well as the employee.

"A lot of bank employees are frustrated by the fact that the technology they use to provide customer service is old," Hartnett says. "We believe that through technology, SOAs and Web services, we can transform the employee experience and the operations of the bank, which translate into how the customers experience the bank."

Sun Microsystems recently made a big push into the financial-services market, making it a "top corporate priority," says Michael Bohlig, director of marketing for Sun Microsystems' capital markets organization.

"They continue to have large IT budgets, and, with information really their main product, IT is such a core part of what they do," he explains. The financial-services market is also a sort of "proving ground" on the forefront of the technology curve, where if you can satisfy them, you can satisfy any industry, he adds.

This fall, Sun announced it would be targeting one area in particular that is vital for financial-services firms: disaster recovery. Among other things, Sun has joined forces with its partners—AT&T, Nortel Networks and SunGard Availability Services—to offer a new suite of business-continuity services for financial-services customers. Managed Disaster Recovery Services provides protection for Sun servers and storage to help firms resume productivity following an interruption. "The offering is as turnkey as the customer wants it," Bohlig says. "We can work through their whole strategy for business continuity and customize a solution if necessary."

On the retail banking side, Cisco is taking on the branch with its "Branch of the Future" initiative. These solutions include Internet telephony via wide area networks, linking branches and call centers for improved customer care; IP ATMs and kiosks; a content-delivery network; as well as IP video surveillance and wireless networks within the branches.

The ultimate aim, says Jim Bright, U.S. financial services industry manager at Cisco, is to improve the way banks do business. "Our [offering] for a converged network for data, voice and video can save banks money and gives them better deployment and capabilities in general," he says.

While running to the ATM on the way to the dry cleaners or to go out for dinner is a convenience that's taken for granted these days, financial-services firms spend billions to make it happen. It's a market where downtime is not an option and technology drives the business, creating ongoing opportunities for solution providers and systems integrators to get in on the action.