As one of the founding fathers of the IT industry, IBM has previous experience of navigating turbulent market conditions (the dot com boom and bust era of the late 1990s and early 2000s being one such example). However, this is the first time that its main revenue steam – namely the global banking industry – has looked decidedly unhealthy. Given that more than a quarter of IBM’s total annual revenue is received from institutions operating in the financial services sector, it comes as no surprise that the company is employing numerous measures in an attempt to weather the financial storm and emerge relatively unscathed.
While it is inconceivable for IBM to spectacularly implode in the same manner as some of its former banking clientele, the organization has been significantly impacted by the global financial crisis, and has therefore been compelled to adapt accordingly.
In their double act keynote address, Likhit Wagle and Vikram Lund (IBM’s banking leaders in Northeast Europe) spoke openly of the protective measures that have been taken so far. Both were keen to stress that IBM saw the signs of the impending market crash, and, as such, was able to spend time preparing for the momentous events that occurred in the latter half of 2008.
Uppermost in this preparatory phase has been a careful structural reshaping of IBM’s internal resources to create the Integrated Banking Team (IBT), which is based around four distinct practice areas (underpinned by a data governance layer): core systems & payments, information management, customer care & insight and risk & compliance. Moreover, the IBT operates through three discrete teams, covering Northeast Europe (UK and Ireland, Germany, Austria and Switzerland, and the Nordics), Southwest Europe (France, Benelux, Italy, Spain, Greece and Israel) and CEEMA (Sub-Saharan Africa, the Middle East and North Africa, Russia and the CIS, and Central and Eastern Europe). In CEEMA specifically, IBM is actively mobilizing resources into these new markets in order to capitalize on the opportunities that exist, despite the ongoing uncertainty caused as a result of the global financial crisis.
Importantly, IBM’s activities extend far beyond a piecemeal shifting of names on an organizational chart. The company is certainly under no illusions as to the scale of challenges currently faced by institutions in the banking industry, especially those in the mature markets of Northeast and Southwest Europe, having recently conducted interviews with its leading clients in order to understand the inevitable shift in banks’ operational priorities.
On the one hand, the findings are unsurprisingly stark: IT budgets are being scrutinized like never before, and many banks are looking for an immediate reduction in operating expenditure of 15-25%. Datamonitor shares IBM’s view that this simply cannot be achieved in the short term. However, as a result of budgets going under the microscope, IBM’s clients are keen to get contracts signed quickly in Q3 and Q4, as IT executives believe that funding will not be readily available in the future. Consequently, banks are being compelled to spend now while the money still exists.
Although Likhit Wagle stressed that IMB had not experienced the cancellation of existing technology projects by banking customers in response to deteriorating trading conditions, it remains to be seen if this holds true in six month’s time (or less).
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During the break-out session on multi-channel interaction, IBM described how it is currently assisting ‘Bank X’ with a major program to radically transform its existing internet banking environment. Datamonitor is separately aware of Bank X’s planned M&A activities, and it is easy to envisage a scenario where the transformation program could be either disrupted or – more seriously for IBM – halted completely, as Bank X will inevitably look for technology synergies from any acquisition. Conversely, however, this threat could turn into an opportunity for IBM: ‘Bank Y’s’ internet banking architecture could possibly require similar life-saving surgery, thereby extending the scope of the transformation program, although Datamonitor doubts that this will be the case.
Interestingly, IBM has yet to be faced with a barrage of requests to adjust payment terms, but Wagle and Lund did report an increase in the number of engagements based on outcome-based pricing, which is fast replacing the traditional time and materials costing method as banks demand that technology vendors share project risk. Datamonitor expects this particular trend to continue into 2009 and beyond.
Going forward, IBM opined that seven clear banking segments are emerging: globally diversified financial institutions; national firms; risk mitigators (infrastructure); risk mitigators (advisors); mid-tier banks; boutique risk assumers; and small local banks. Datamonitor broadly agrees with this assessment, although some of the terminology, such as ’boutique risk assumer’, is not particularly penetrable to the casual observer.
The conference revealed a plethora of useful information with regards to IBM and the financial sector in general. After having assessed IBM’s overall view of the banking landscape, it will be interesting to watch for developments in each of the IBT practice areas.
