How Will Wall Street’s Woes Affect IT?

IT and the downturn

The financial services market, already reeling from a year that has seen the collapse of Bear Stearns, Countrywide and the quasi-government mortgage lenders Fannie Mae and Freddie Mac, was dealt another blow over the weekend with the bankruptcy filing of Lehman Bros., the nation’s fourth-largest securities firm.

Add to that the news that Bank of America is acquiring troubled Merrill Lynch (NYSE: MER) and other key financial giants such as AIG (NYSE: AIG) are on the ropes and you’re left with a ripple effect that could spread across a host of related industries, especially IT.

Research firms providing IT spending forecasts have had mixed opinions on how the industry will hold up through this dark economic climate.

In August, Gartner released a report predicting that IT budgets would continue on pace for brisk growth regardless of the Wall Street setbacks. That report contrasts with the findings of a survey by ChangeWave Research where nearly one third of respondents said they planned to cut or freeze IT spending.

Meanwhile, Forrester Research recently released its own report finding that many major firms have been cutting their IT budgets. But that’s a macroeconomic symptom, according to Forrester senior analyst Ellen Carney, who believes that the recent news from Lehman (NYSE: LEH) and Merrill isn’t likely to send IT into a tailspin.

“You’d think it would be gloomy, but I don’t think it’s going to be too bad,” Carney told Amid growing uncertainty, banking firms are likely going to be looking to cut nonessential projects and double-down on applications that automate tasks and improve operating efficiencies, she said.

“It’s great news if you can supply a managed service or a software-as-a-service to a bank.”

Then, too, Wall Street firms can expect to submit to a new wave of regulatory scrutiny that could create an opportunity within the IT industry.

“It’s great if you’re security, it’s great if you’re doing anything around compliance and management, because you know regulators are going to be beating these guys to death,” Carney said.

The likely losers? Niche IT shops, particularly those in New York. Carney expects banks to abandon the pet projects that boutique companies tend to provide, but the larger firms whose fortunes aren’t tethered to the U.S. market are well positioned to come through this latest panic with fewer scars.

[cob:Special_Report]”If you’re a consultancy in New York, it’s going to be rougher. It’s going to have more impact on the real specialists,” Carney said. “Someone like IBM or HP — diversified companies that aren’t relying on the U.S. market, that are global — it’s going to be great.”

In the near term, the exodus of IT workers in New York is likely to flood the labor market, which in turn can be expected to drive down wages. But the IT workers outside that area or those who are willing to relocate could become a boon to other firms looking to scoop up highly skilled employees.

In the case of Merrill, a considerable opportunity will arise for the company tasked with integrating its systems with Bank of America (NYSE: BAC) and consolidating their datacenters and eliminating IT redundancies.

Carney also expects the banks left standing to redouble their efforts at maintaining their existing customer base in this jittery investment climate. In that vein she sees an opportunity for companies that offer top-tier business-intelligence services, such as IBM (NYSE: IBM) and Oracle (NASDAQ: ORCL).

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