Wall Street turmoil unlikely to KO IT industry

Demand for IT services likely to remain strong in financial industry, but mergers could mean layoffs in IT shops

While the high-profile troubles of major financial institutions such as Lehman Brothers, Merrill Lynch and AIG have stoked recession fears, many analysts say that IT spending will continue to grow.

Financial services institutions have traditionally been among the biggest drivers for the IT industry, as major investment banks and insurance companies spend hundreds of billions of dollars annually to maintain and upgrade their IT networks. Because of this, many tech vendors might be wondering whether the avalanche of bad news in the financial sector that struck yesterday -- from Bank of America's purchase of Merrill Lynch to Lehman Brothers' bankruptcy filing to AIG's scramble to secure tens of billions of dollars in emergency capital -- could spell doom for their business.

The answer to that, many analysts say, is no. Looking at the broader picture, Gartner Research has predicted that while spending on IT will slow in 2009, it is unlikely to experience negative growth. Gartner analyst Ken McGee said that demand for IT services and products for major financial institutions is fairly inelastic because investment in technology is so crucial for remaining competitive and for keeping sensitive data secure. For instance, it seems that Lehman Brothers has continued to invest heavily in IT even as it has been hurtling toward bankruptcy.

"There are more toys on trading desks per person than on any other industry," McGee said. "Our position has been [that] despite the problems in the economy, we would not have an IT recession in America, and that has proven to be the case so far."

Forrester Research analyst Ellen Carney expressed a similar view, and noted that procurement departments at major financial firms have likely known for two years that their companies could be in trouble due to the meltdown of the subprime loan market. Because of this, she expects that many of them have budgeted their IT expenses accordingly and are unlikely to make any further drastic cuts, despite the recent spate of bad news.

If anything, Carney said, IT vendors could see some expanded opportunities as a result of the financial meltdown on Wall Street. Because the federal government is likely to create a host of new regulations in the aftermath of the crisis, Carney said firms specializing in helping companies comply with reporting requirements could get a particular boost.

"Going forward, firms are going to continue to spend heavily on things like compliance," Carney said. "This is going to be a new opportunity for many IT vendors to help these firms manage risk."

Paul Polishuk, president of the research group at Information Gatekeepers Inc., said that the increasing number of mergers and acquisitions will boost the market for IT firms that specialize in integrating networks.

"Because Merrill Lynch is going to be bought by Bank of America, their assets are going to have to be upgraded," he said. "And since Bank of America and Merrill Lynch are two very different businesses, a good deal of work will have to be done to get them integrated."

The one area where both Polishuk and Carney see a big negative impact in the short term is for IT workers. Since all mergers and bankruptcies inevitably result in layoffs, they say, IT workers employed in the financial services industry should worry about feeling the pinch.

"There could be a lot of IT people in Manhattan out of work," Carney said. "Any way you slice it, there are going to be redundancies."

This story, "Wall Street turmoil unlikely to KO IT industry" was originally published by Network World.

Copyright © 2008 IDG Communications, Inc.

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