For someone that makes a living producing and selling technology, I should probably not be writing this but ever since I took up my first job, I have been fascinated by the amount of money the financial world spends on software. What is even more fascinating is that all this money goes into building arcane software that the financial institutions love and the rest of the software world loves to hate. Billions of dollars are spent every year by wall street firms on their information technology needs, when millions would probably suffice. All because the smart sales guys over at some International BeheMoth consulting corporation convinced the financial institutions that security of their clients’ data can only be achieved through either software so badly written that a hacker won’t be able to follow it, or software so unnecessarily bulky that a hacker would never be able to get through it in order to make any sense of it. Jokes aside, let’s just say that the financial services software is hardly cutting edge.
Lehman Brothers announced bankruptcy over the weekend, laid off employees (some of my friends included), and triggered a selloff on the stock markets around the world. So I am shocked to learn that they upped their spend on IT, right through the credit crunch and into the bankruptcy! The subprime mortgage mess and the associated credit crunch first became news in mid-2007. According to Computer World, Lehman’s IT spend for the whole of 2007 was $1.145 billion, an 18% increase over 2006! Since then, there have been bad news after bad news for wall street, and especially Lehman Brothers. In March 08, Bear Stearns, a firm that is similar to Lehman in many ways, had to be rescued by the Fed. Many were quick to point out that Lehman might be next. What does Lehman Brothers management do? They go spend another $309 million on IT in Q2 08, up from $282 million in Q2 07!
Certainly, the Lehman Brothers executive team is responsible for this, but I’m sure they were worried about finding billions of dollars to cover their losses and decided that a few hundred million dollars would be immaterial. Either that, or the left hand at Lehman didn’t know what the right hand was doing 
The result is that a billion dollars of revenue is at risk for the software industry. Assuming that wall street will tighten its belt now by stopping large investments in newer arcane technology and, hopefully, start shifting to cheaper software services, there will be ripple effects across the financial services industry. We should expect most financial software companies to issue downward guidance in their next investor call, even if they don’t miss their targets this quarter, thanks to the generosity of firms such as Lehman.
I hope, for my savings and investments and not so much for my friends in the financial services sector, that the days of outrageous IT spending by financial firms are behind us.
