September 2008 will certainly go down as one of the blackest months in Wall Street history. Venerable financial institutions such as Lehman Brothers, Merrill Lynch, and AIG abruptly vanished or were radically overhauled. Investors lost loads of money — in some cases, fortunes — and ordinary US taxpayers could find themselves funding an industry bailout costing a staggering US$700 billion (NZ$1.05 billion) — Congress permitting..
Also hit hard by the financial services industry meltdown are the tech vendors that depended on high-flying investment banks, brokerages, insurance companies, and related firms for revenue — as well as to popularise and mainstream a variety of cutting-edge products and services.
Now that most of the major investment banks and sundry financial services firms have either evaporated, transformed, or been absorbed by other companies, an untold number of vendors in fields ranging from business intelligence to cloud computing are sadly waving good-bye to many of their prime customers.
"For some vendors it's undoubtedly going to be very painful," concludes Andrew Bartels, a research analyst at Forrester Research.
As October dawns, vendors that once served a seemingly reliable and stable market are now awakening to a starkly altered reality. "It may not be a new world, but it's certainly going to be a different one," says Jeanne Capachin, research vice president at Financial Insights, a research firm that serves the financial services industry.
With many vendors reliant on financial industry sales now struggling to navigate a radically transformed business landscape, customers in fields far removed from Wall Street will begin noticing market changes, primarily in the amount and types of available products and services, but perhaps also in the number of vendors they can turn to for solutions.
"Given the important role the financial services industry played in the tech market, changes are bound to happen," Bartels says.
"This will mean, for many vendors, a need to refocus on customers in fields outside of financial services," says Vivek Mehra, head of the financial services practice at IT services company Keane.
Which technologies — and providers — are at risk?
The most obvious technology at risk from the financial services firms' meltdown is analytics, including business intelligence. Fewer customers with cutting-edge needs, combined with slowing revenue, may have the long-term effect of stifling innovation.
"It's the chicken-and-egg scenario," Mehra says. "Without the financial services vendors around to drive advancements, innovation could suffer."
But a silver lining to this cloud may be that analytics developers will refocus on mainstream market needs while downplaying exotic and esoteric offerings, Mehra suggests.
And even BI and analytics vendors may be able to mount a near-term strategic comeback, Bartels says. However, to do so, they will have to work hard to make their offerings relevant to surviving financial services firms as well as to enterprises at large. Vendors will have to focus "on providing software that's seen as a 'must have' as opposed to a 'nice to have.'" Over the long run, such a trend could lead to BI and analytics software geared more toward real-world needs than the arcane requirements of investment traders. "For many vendors, it will mark a return to the real world," he says.
Beyond BI and risk analytics, vendors active in such diverse fields as SOA, SANs, and cloud computing can also expect to feel at least some of the effects of a collapsed financial services industry.
SOA infrastructure, for instance, is widely used by financial services firms for transaction integrity and scalability. Therefore, SOA vendors who targetted financial services firms can expect to experience many of the same customer pullback and revenue issues as their BI and risk analytic counterparts. On the other hand, since financial services firms didn't play as big a role in driving SOA innovation as they did in the BI and analytics markets, enterprise customers shouldn't see any serious impact on long-term product development.
The same calculation generally holds true for the SAN market, says Mehra, where vendors over the years sold financial services firms an impressive number of systems for managing and protecting vast data repositories. But, as is the case with SOA vendors, SAN innovation isn't heavily dependent on financial services firms, so the damage shouldn't significantly extend beyond vendors' bottom lines, he notes.
For cloud computing vendors, however, the outlook appears somewhat darker. In fact, next to BI and risk analytics, cloud computing vendors may stand to lose the most from an eroded financial services market. Forrester's Bartels notes that some financial services firms led the way in using cloud computing's vast resources to test novel investment strategies and alternative model scenarios.
"Not much of that is going to be happening for financial institutions in the near future," he says. The good news is that cloud computing is a nascent market with relatively few enterprise adopters heavily involved in the technology. As a result, any negative impact should be muted and limited mostly to the vendors' revenue streams.
Small vendors are the most at risk
Financial Insights' Capachin says that across all categories the biggest vendor losers will be the small, innovative firms that have "sold well into the capital markets industry." For at least some of these firms, the loss of one or more key customers could mark the end of the road as a viable business. "If it were me, I'd check with my vendors to see their exposure to the financial industry," she says.
"I just think it's going to be a tough market anyways for tech spending, but in particular if you're not a well-capitalised, well-known firm," she says. For survival, many smaller vendors will likely find themselves driven into partnerships with bigger players, Capachin says.
Conversely, while some small innovators with specialised products and a narrow market focus may be devastated by the meltdown, diversification and economies of scale should help larger vendors like IBM and Sun Microsystems withstand the collapse with only minimal damage.
"IBM, for example, says that 29% of its revenue comes from financial services — but only 6% of that comes out of the US," Bartels says. Sales in Europe — whose financial firms have also been hit by the financial crisis — adds another 5%. "So they're going to feel some pain, but it's only a small part of their overall business."
Life after death: Integration, compliance opportunities abound
Given the severity of the current crisis, it's comforting to know that there may actually be a faint silver lining on the horizon. As the financial services industry enters a new and — in all likelihood — very much downsized era, several fresh opportunities could arrive to benefit at least some vendors and their enterprise customers.
As banks and other institutions swallow each other up, industry consolidation may itself open new doors. "The need for integration software will be very high, because a lot of these [financial services] companies will want to change their business models," Keane's Mehra says. This trend could help spur the development of better integration software, leading to products and services designed to help merging businesses in industries beyond financial services.
Vendors with productivity-enhancing and cost-cutting technologies may also prosper. In the foreseeable future, sellers in a wide array of tech sectors — everything from call center automation to virtual meetings to environmental controls — should be able to take advantage of a financial services industry driven by a need to ruthlessly slash expenses.
"A vendor that sells software to help cut or reduce IT cost may still be in a good position," Bartels says. Furthermore, many of these solutions will likely appeal to a broad spectrum of enterprise customers.
Mehra expects that increased government oversight will power a growing market for compliance applications in the financial services industry, just as the Sarbanes-Oxley Act did several years ago for a variety of enterprises affected by the corporate corruption scandals.
"I think business intelligence will start to benefit right away because, from a regulatory standpoint, [there will be a need for] more transparency of information," he says. As a result, better and easier-to-use compliance tools could eventually become available to all enterprises.
Endace takes first hit as market tumbles
By Rob O'Neill
New Zealand-based network technology vendor Endace took its first hit on the London Stock Exchange after the US Congress failed to deliver the expected US$700 billion bailout package last week, with its shares dropping around 4%.
However, CEO Mike Riley says while the company has exposure to the financial services industry, the market turmoil could play to Endace's strengths.
"Some holders last night needed tio free up some liquidity," he told computerworld after the fall. "It held steady until last night."
Riley says it's hard to say what the impact, if any, of the financial services maltdown will be on Endace.
"There's no doubt part of our business does come from financial services, but so far we haven't seen and change in the market," he says. None of the high-profile recent failures were Endace customers, he says.
Riley says financial services is a broad term and some slices of the market are affected more than others. Endace's technology helps speed and analyse trading system performance, he says, and in volatile markets "speed of execution is everything".
"We've not seen any impact there," he says.
Riley says Endace is keeping a watching brief on the market consolidation on Wall Street and on its financial services business, but the biggest contributor to the company's revenue has been from government, rather than the finance sector.
"We're making sure we're not completely dependent," he says.
Riley says new rounds of compliance regulation are "inevitable" and could end up driving demand for Endace's network probes and other systems.
Endace showed its wares in Spetember at an event called "High Performance on Wall Street". It also recently won an American Chamber of Commerce export award.