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SmartAdvice: Match IT Spending To Growth Areas

Overall levels of spending on IT are usually 4% to 7% of revenue, with key focus areas varying by industry, The Advisory Council says. Also, watch VoIP and other emerging telecommunications technologies for the next wave of innovation to transform your business; and clearly understand your company's business needs before determining IT's role.

Editor's Note: Welcome to SmartAdvice, a weekly column by The Advisory Council (TAC), an advisory service firm. The feature answers three questions of core interest to you, ranging from career advice to enterprise strategies to how to deal with vendors. Submit questions directly to

Question A: What level of IT spending is appropriate for a midsize to large financial organization?

Our advice: The financial-services industries have reduced most IT spending due to the economic downturn of the last few years. In general, they have focused on short-term investments, such as outsourcing of IT services and applications consolidation to save long-term costs. Operational spending for financial industries is usually well-aligned with business operations, since these industries have stringent oversight and regulatory requirements.

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Financial Organizations Overview
Typically, financial-services organizations are divided into three broad categories:

  • Banking and savings (credit intermediation)

  • Investments and securities trading

  • Insurance

The overall levels of spending on IT are typically 4% to 7% of revenue, with banking and savings on the high end, and insurance on the low end. The focus of IT spending in each of these institutions varies in detail, but the typical spending is in these general categories:

  • Telecommunications

  • Hardware

  • Software

  • Internal operations support

  • Consulting and professional services

  • Regulatory compliance

IT spending is usually aligned with the growth areas in each of the industries. Financial organizations use technology to save cost and to stay competitive. Because of regulatory oversight of financial institutions, the goals of cost savings are usually better scrutinized then other industries. Key focus areas for particular financial industries that seem to be attractive for IT spending these days include:

Banking and savings

  • ATM services

  • Workstations and branch support

  • Regulatory compliance

  • Mergers and acquisitions

  • Service quality

  • Investments and securities trading

  • Electronic trading and Web services

  • Wealth management systems

  • Regulatory compliance

  • Mergers and acquisitions

  • Expansion into other financial services

  • Insurance

  • Claims management

  • Web portals for customer self-service

  • Field sales systems

  • Service quality
  • Due to consolidation among financial services companies, large organizations are emerging that offer a full range of financial services. This has prompted a large investment in merger-related activities. In addition, a flurry of new privacy regulations, combined with Internet security issues, has necessitated investment in technology for compliance and protection. These trends will continue in the foreseeable future, and will continue to require additional funding.

    Contingency and risk management also have taken on unique importance since the threat of terrorism and other disasters has become a more public concern since Sept. 11, 2001. Investment in technology to maintain business continuity has emerged as a major focus area in the last few years.

    Investment in technology for financial institutions can bring a large payback in competitive advantage and increased efficiency. The focus of investment, however, has to be tightly aligned with business objectives and goals.

    -- Humayun Beg

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