Market turmoil is expected to result in IT budgets in the financial services industry taking a hammering. But many of those under the cosh will face additional pressures, as a result of some shotgun mergers.

Market research company TowerGroup is already predicting a fall in technology spending by the financial services industry, as firms move to save costs and readjust for lower demand.

Firms operating in the finance sector are preparing for a drop of between 14 and 16 per cent in the next 12 months, says the report, with Lehman Brothers’ liquidation and the buyouts of Merrill Lynch and Bear Stearns alone representing about four to five per cent of that decline.

Radical cost containment programmes have been initiated throughout the industry, Phillippe Robeyns, head of investment banking services at Société Générale told Computing, and IT is right in the firing line.

“The climate in the banking industry is of extreme caution and revaluation of IT strategies. It is quite legitimate to question the logic behind investing in projects that are not critical for the business and will only provide a payback in two to three years’ time,” said Robeyns.

“So it is time to cut down on expenses and focus on generating synergies with the technology resources we have available internally,” he said.

For merging banks, constraints may be even greater owing to the hasty fashion in which tie-ups have taken place. Some of the purchasers may find surprises hidden in the IT systems they have bought.

IT integration challenges in banking mergers and acquisitions (M&As) are colossal and lack of planning represents a major obstacle for the uniting businesses, said Deutsche Bank chief operating officer Daniel Marovitz.

“Many of the takeovers we have seen so far are put together in 72 hours, so you could say that none of the IT due diligence has happened nor has it been part of the consideration at all,” said Marovitz.

“The consequences are that the integration process will take a lot longer than normal and will create a huge demand for IT support and systems integration experts, therefore a massive ­ – and expensive – ­ undertaking for the company,” said Marovitz.

“And because the efforts of these businesses will be centred on reducing costs around the IT consolidation and systems to be shut down, they will experience a significant drop in new product development for the next two to three years.”

Given that many of the recent acquisitions were unplanned, integration of IT systems will be a juggling act between ensuring business continuity and generating cost savings, as well as identifying redundancies, said senior TowerGroup analyst Bob McDowall.

“In such situations, the institutions would need to quickly determine where their business lines overlap and decide how to integrate technology and staff as quickly as possible to continue doing business as usual,” he added.

Firms then need to decide which legacy systems should be moved to the consolidated group. “But one thing is sure: CIOs in charge of such projects need to be responsive and open to radical changes, because they simply cannot afford not to [be],” McDowall said.

Communication ­ – across the acquiring firm and the target ­ – is essential in a successful IT merger, said the chief information officer at consultancy KPMG Bryan Clark.

“When preparing your IT strategy for a merger, make sure that this is done at the same time – ­ preferably in the same room ­ – as the management team planning the group’s overall strategy going forward,” said Clark.

“But most importantly, ensure that there is a good flow of communication with staff. Keeping things secret makes it much harder to track progress against the plan and does not help at all when things do not happen as planned,” he said.