The economic slowdown is a major driver behind the European banks’ increased propensity to outsource IT. The healthy budgets allocated to outsourcing make the banks ideal targets for vendors. However, as well as being able to offer a rapid ROI, IT vendors must also have scale and experience. Only the larger players are likely to benefit much from this trend.
New Datamonitor research reveals that retail banks are outsourcing more of their IT operations.
As the economic slowdown continues and banks increasingly look towards cutting costs, expenditure on outsourcing IT services is one of the few areas that will hold up firmly.
According to a new Datamonitor report, European retail banking technology spending, retail banks’ spend on outside technology services will increase by a compound annual growth rate of 8%, far above the technology market average of just 2.8%, between 2000-2005. This presents lucrative opportunities for IT vendors to secure significant revenues, particularly at a time when growth in IT expenditure is seriously slowing down.
Signals such as decelerating loan growth, deterioration of credit quality and weakening fund flows will lead to diminishing revenue growth for Europe’s retail banks. Their most important short-term priority therefore is to control costs and gain rapid return on investment. Indeed, cost control is now becoming the key driver for IT outsourcing in the retail banking space. Other major factors include a focus on core competencies, organizational changes, quality of service, rapid access to technology and key IT skills.
The counter-cyclical nature of outsourcing makes it the growth segment in the European retail banking technology market to 2005. Datamonitor predicts that European retail banks’ spend on outsourcing will increase from $2.6 billion in 2000 to $3.8 billion in 2005, when almost 11% of their IT budgets will go towards outsourcing. Within outsourcing, the areas of transaction processing and business process outsourcing will present the most lucrative opportunities to IT vendors.
The IT vendors best suited to benefit are those with scale and experience, understanding of business issues facing retail banks, ability to deliver strategic advantages and flexibility in banks’ evolving requirements. Not only must IT vendors be able to demonstrate rapid ROI, more importantly they need to build trust and goodwill. This therefore places leading players in a strong position, provided there are no significant publicized failures.