A professional profile on Kristine Pfeiler sent to eWorld before its brief chat with her is interesting. It has an element that you don't see in any analyst's profile, but is something that every analyst should list, in hindsight! It lists the “Top 3 trends I see in the market place”.
A Director with Gartner Research, Pfeiler sees: “Banks' increased focus on cross-sell and product penetration; Risk management increasingly more complex to get right; Speed to delivery/agility as a top priority decision factor.” Read on to go beyond these trends she sees as she surveys the financial services space in North America.
We continue to see IT spending returning, especially where there are integration opportunities from M&A (mergers and acquisitions among North American banks), compliance with new regulations. Clients are focusing on operational efficiency.
There is a slow return to growth, making banks and investment institutions more cautious as they return to (IT) spending. We are not seeing as many super-large contracts, and not for same duration as we did pre-2008, but we are seeing some return (to growth)…
Talking of few super-large deals, are there cyclical trends in unbundling and rebundling of deals by clients?
We aren't back to pre-2008 levels — (that may take) closer to mid-2012 for the banking industry in North America (to see such activity). Also, we see fewer contracts, no single contracts to single firms, but possibly looking at chunking that out at different levels.
Wouldn't that mean more IT vendors, especially for large spenders. Logically, mid-tier firms have a better chance now to penetrate these clients?
I am not sure we can draw that conclusion specifically. We are seeing a lot of renewals in the next couple of years. What we have seen in renewals is that for a majority, the deals go to the incumbents but not necessarily for the same duration or in the same scale.
Banks are spending for growth but also spending to lower overall infrastructure costs. They are cost-conscious, in committing to longer-term contracts.
Does this make them evaluate offshoring more seriously?
That's an interesting point. M&A activity within the banking industry is changing its structure. In the North American market, the larger companies, among the top four, are already very large, and not getting larger. At the next level down, companies are acquiring assets from others that are failing or are making strategic acquisitions, or spinning off companies, for things that are not core to their operations or which they think is non-strategic. The shift in that sense — mid-tier firms wanting to become a bit larger, to compete effectively on costs, are outsourcing a bit of that. Yes, but it might take some time for that shift (to become significant). The mid-tier companies have been slow to leverage, as much as their bigger competitors have, in the outsourcing market place.
Who, in your opinion, is the pick of vendors among Indian companies, best-placed in terms of growth in banking vertical?
First, the trend I am seeing is: 2009 was a holding pattern for spending; 2010 saw some growth in IT outsourcing more than in BPO; in 2011, vendors we talk to say (they see) strong pipelines and deals on the table. Specifically in BPO, there is more of a shift to industry domain knowledge. It is no more enough to provide resources from a labour perspective. As a vendor, you need to transfer knowledge — the banking and investment services community is starting to expect a more involved output provided by outsourcing firms, now more so than in the past. They expect more process improvements than just cost savings. Some interesting companies have shifted the way they approach the market. HCL Tech has done so with much more industry framework for given processes. It is easier for the banking institutions to understand this. Headstrong made some very active (inroads) in the Enterprise Data Management (EDM) council. (The council is a non-profit organisation that deals with a lot of regulatory and risk issues.) This puts them ahead in mind share in data management in the context of integration among merging banks. This is a very hot topic — banks need to get a handle on integration of data and aggregation on that data from a credit risk and market risk perspective.
Observers feel that Indian IT vendors, with the success of the disruptive offshoring, have become lax, while MNCs have become aggressive with alliances or acquisitions of niche players, especially in the Cloud Offerings space. Your view?
I think larger companies such as IBM, Oracle and Accenture have many years of experience in this industry — they were taken by surprise a little bit. IBM with its industry framework is looking to bring to market a complete solution from a service perspective as well as providing application level offerings — this might give them an advantage, especially when the solution comes with industry domain knowledge built in. This is a new area for IBM versus infrastructure and hardware. The shift in their revenue base is towards services. They have said it's part of their strategy. I would watch out for them, for sure.
Isn't this happening with smaller competitors like TCS, etc?
Not as much at this point. No…
Offshore companies are expanding their consulting offerings but the bigger players obviously have a big chunk of the market. Do you see Indian companies becoming more aggressive in consulting?
For the most part, I do not see that — they are still more services oriented. But consulting revenues tend to go to the more industry oriented thought leaders such as PWC, E&Y and Deloitte and I don't see the same coming from larger Indian providers. Still very much service oriented in terms of application development and maintenance and BPO and not so much on consulting.
Not expanding on consulting — would that be harmful to their existing business five years from now?
It depends — let's take the M&A trend right now in the banking space. There is a lot of work going on in the services-cum-consulting perspective in terms of helping a large institution through that integration process...from the very beginning, at planning, all the way to execution. On the planning side, the deals tend to go more to firms with a long standing relationship with the client and those that have that deep domain expertise and consulting experience. On the execution front, there is significant amount of work coming over the next couple of years – outsourcing component players also bring value to the table. Our survey shows that it is favourable to such players, possessing skill sets of doing different types of integration work and project work, which is still very development-focused but also having an offshore component from a cost perspective. That is a very good way to position yourself.
Long term, obviously, the outsourcing contract market is larger than the consulting market. One could look at the relationship between outsourcing provider and consulting provider. It depends on who gets the lion's share of consulting work – if it's IBM, then there won't be an opportunity for ripple-down effect for execution and integration for the other players. But if other, even large, consulting players get the consulting chunk, then these smaller firms could play on the core execution side.
In early January Indian IT companies said that the majority of client IT budgets have been decided. But are we still in a slowdown, considering that in good times, budgets are decided before Christmas?
We see modest growth. From a budget perspective, our survey in mid 2010 for 2011 budgets told us that a majority of those would be flat or down, with some budgets going up. On average, there may be a slight increase. You also have to look at competing priorities — risk and regulatory issues, for instance. You have to include process improvement needs. That is driving spend and seeing budget increases. There is a lot of interest around data integration and data management as well as around mobile banking, and integrating that with the regular channel.
How would a sovereign default crisis in Europe affect North American IT budgets?
It depends on how big and how serious it becomes. I would say that banks are somewhat cautious already in the US. They are exercising prudence. We see a rise in income in the banking industry in US and that is more due to reduction in loan-lost provisions rather than top-line growth.
That would have as big an impact on IT spending in the rest of 2011 and 2012.That is, when we don't have continuous loan-lost provisions that is having an impact on the banking industry.
BPOs, unlike expected earlier, did not lead recovery. What is your view among pure-play BPOs, captive BPOs and integrated IT-BPO players, given that BPO contract values have consistently risen?
We are definitely seeing very much IT outsourcing related work. We don't see many people (clients) offering integrated solutions. BPO itself is not a growth story this year. It's a slower market. It's not as top of mind as regulatory work or mobile application work is. But there are some interesting trends. A provider coming to market in data management and processes brings a platform to connect it all together. We are seeing interest there.
Is outcome-based spending gathering speed?
A majority of contracts are either transaction-based or are fixed. Interest is growing in outcome based pricing. As financial services institutions look more to get some value and not just reduced costs out of vendors, this may pick speed. The initial push may be around labour and costs. But as banks look at process improvement and value creation, that puts the vendors in a better place to offer outcome based pricing.
In sum, I do see interest in it. Some firms doing it, but not yet a majority.