2008 IT Spending: Companies Are Cautiously Optimistic

Despite recent uncertainty in the market about the economic outlook for 2008, solution providers are finding companies have money to spend -- and in some cases are anxious to get IT projects underway. However, the eagerness to unleash money to tackle new revenue-generating projects is in some cases being thwarted by familiar old woes -- shortage of IT workers, old equipment and compliance issues.

"From about 2001 until pretty recently, IT departments were being told 'No!' to all sorts of different projects," says Trevor Mather, CEO of ThoughtWorks, a $130-million global consultancy. "Well, you can only say no for so long."

That's why, in Mather's view, there is a large backlog of IT projects that just now are getting pushed to the fore. Case in point: Cognizant recently conducted a survey to assess clients' budget plans and spending priorities for 2008. More than 150 senior decision-makers responded to the survey, representing a cross-section of clients in Banking, Financial Services & Insurance, Healthcare & Life Sciences, Retail & Manufacturing, and Telecommunications vertical businesses. More than 90 percent of Cognizant's customers said they do not expect their overall IT budgets to decline going into 2008.

Tight budgets not only limit the scope of projects, but also whether the project will see the light of day. But with companies saying they have the money to spend on IT, old foes are rearing their ugly heads.

"Financial firms and companies in general are finding it so difficult to find resources, to find good personnel; the supply of resources in the West is down. Recruiting companies are down with supply of qualified candidates," said Mather.

In response, some institutions have turned to outsourcing firms such as Cognizant and Tata Consultancy for help.

"We have felt no impact of the subprime issues, or an overall slowdown across the banking sector. Where we see good demand is in midtier banks, asset managers, and continued strong demand for new technology and services that help them compete. There's demand in corporate actions processing, security processing, wealth management, development of new client facing tools especially in capital markets technology. In particular, midtier banks are looking to provide a more holistic view to all customers," said Terence Donnelly, Vice President and General Manager, North America, TCS Financial Solutions. "Further, we continue to see strength in large banks, and brokerages with financial advisors. We don't believe there will be a slowdown. Across large and small banks, there is a continued focus on processing, both in securities and transactions."

All that growth has a flip side, particularly for smaller outsourcing firms, Mather notes. "Services companies are full. Vendors are prioritizing their customers. Many firms have got nowhere to go, and Indian companies have experienced a combination of churn and bad press, so some companies won't risk outsourcing projects overseas."

Secondly, companies are faced with older equipment and technology that they must update in order to remain competitive. The way in which that is accomplished can be the difference between being around in five years or not, Mather said. "A lot of financial companies in particular are moving from older, legacy systems to better, newer technology. On the back of that, what happens is that revenue-generated projects are not getting done," he said. "The biggest mistake is to replace legacy systems leg for leg and build on top of those. There are different ways to keep legacy going while simultaneously replacing pieces of it. You need to build in parallel, shutting off bits of the legacy system at a time. So many are trying to replace with Indian companies, but what often comes back is same stuff on newer code. And then they can't put new stuff on that, because it's too much of a risk."

But for large, mature outsourcing firms, such as Tata, the reality is that business is booming. Companies can't put their best people on both legacy replacement and on revenue-generating projects. And, since there is a shortage of qualified IT workers, they can't hire enough people for the burgeoning workload.

"Our customers are increasingly buying high value services from us, such as BPO [business process outsourcing]," Donnelly said. "We offer far higher-level services than application development."

Cognizant, too, sees opportunity ahead. In its survey, respondents were asked to provide a view of the likely impact to their offshoring budgets in the event of a decline in overall IT budgets. Only 19 percent of the respondents said that an overall IT budget reduction would "meaningfully impact their offshore spending plans for 2008." In addition, outsourcing budget growth is expected to outpace overall IT budget growth in 2008, with 90 percent of respondents citing continued growth in offshore development spending. Further, among the financial services customers that completed the survey, roughly 90 percent did not expect their IT outsourcing budgets to decline in 2008.

Third, compliance issues consume time and resources for financial institutions -- and they are mandatory.

"Businesses have to do the regulatory stuff. But Accenture, EDS, those big firms have huge armies of people that focus on regulatory. Don't take your best resources and put them on that. Outsource to those guys. Use their experts and skills, don't tie your people up with that."