Amid continued macroeconomic headwinds, enterprises across all sectors are taking a wait-and-see approach to new initiatives and investments. HFS Research’s tracking of expected annual budget changes has seen planned IT budgets, including technology and services spending, move from an 11% increase in 2022 to just 3% in 2023. While the declining investment trend is consistent across industries, the focus areas still garnering investment vary.
At the start of 2023, HFS surveyed 200 enterprises about their priorities for IT services spending—including 59 banking and financial services (BFS) enterprises. Using the banks’ plans to invest across different areas of IT services, we generated a simple two-by-two matrix mapping the planned degree of adoption with spending plans. Here are IT services’ investment priorities and our recommendations for banks during the wait-and-see economy. The data emphasizes a strong focus on all things cloud, but we question how much of the focus is on growth and extensibility versus cost savings.
- Evangelize or deprioritize. Areas of IT services with the lowest levels of adoption and investment landed in the lower-left quadrant. This quadrant includes services related to Workday and ServiceNow. IT services that landed in this quadrant are the lowest priorities for banks. Banking leaders focused on these initiatives either need fantastic business cases or they need to deprioritize these areas for the time being to make headway elsewhere. While Workday has a clear play in financial services, this is an unlikely time for net-new investment in technology and services in operations functions—aka finance and HR. The same goes for ServiceNow, which has been pushing its financial services enterprise operations narrative for a couple of years to get beyond its service desk focus of yore.
- Differentiate. IT services with low adoption but higher planned levels of investment landed in the upper-left quadrant, which includes SAP S/4HANA, Salesforce, cybersecurity, and quality assurance (QA). Banks investing in S/4HANA and Salesforce have an opportunity to lead their peers with industry-specific financial services domain expertise. QA and cybersecurity both complement the areas noted in the “double down” quadrant with expected ongoing investment that will propel one or both of them into “must have” territory, if not “double down.”
- Must have. The IT services with the highest levels of adoption, but lower investment, are the essentials—the must-have requirements for running effective banking technology operations. Of the array of IT services covered in the study, just one landed in the “must have” quadrant—infrastructure services. As banks pursue modernization, ensuring the infrastructure underpinning all change is up to snuff is essential. For banks, this is often couched as getting out of data centers, but the focus should perhaps be better placed on what can be achieved in the cloud.
- Double down. The coveted upper right quadrant, which in this case represents the magic mix of high levels of adoption and investment, is home to four critical areas of IT services investment—apps modernization, data modernization, software engineering, and cloud transformation. These all represent various riffs on cloud modernization. While mainframes still loom large in banking and no one is desperate to rip and replace on-prem core banking systems, there is loads of refactoring and middleware and microservices development afoot helping to extend and enhance aging systems and democratize data access and use. HFS routinely hears the business drivers behind this investment described as cost, cost, and cost. Banks need to ensure a cost focus is not short sighted, given the potential and need for modernization to drive new income opportunities.
The Bottom Line: The IT services priorities for banks today center around cloud modernization, with a specific focus on data and application modernization and software engineering to enable refactoring and creative connectivity. Banks need to ensure these investments impact both sides of cost-to-income ratio metrics. Cloud for cost benefit only misses the impact of creating new revenue and customer experience opportunities with clients and partners. IT service providers have critical and in-demand tech and industry skills needed to help banks make cloud progress, but they also need to be stewards of responsible cloud modernization with a clear focus on balancing cost and income value and outcomes.
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