Exclusive Online Only ContentFinancial Services Firms to Increase Risk Spending 6.6 Percent:
June 17, 2009
Global risk spending by financial institutions on governance, operational risk and compliance activities will grow at a compound annual rate of 6.6 percent, rising from $1.4 billion in 2008 to $1.7 billion in 2011, according to a just released report.
The June 16 study, from Boston-based financial research and consulting firm Celent, is based on surveys from outside sources as well as Celent/Oliver Wyman, with Celent analysis. Celent is a member of the Oliver Wyman Group, part of Marsh & McLennan Companies.
The survey says that while most financial institutions have gone into a cost-cutting mode, “with impending reforms and regulations in the financial sector expected to change drastically,” IT spending for risk management is expected to rise. Internal spending will continue to make up the largest share, Celent says, accounting for an average of 60 percent of total IT spending across the globe. The bulk of the growth will come from software and services, it adds.
In the risk management vendor space, “there is now a ‘get big or get out’ theme at play,” says Cublillas Ding, a senior analyst at Celent and author of the report: “Firms and vendors need to position themselves accordingly in terms of purchasing or developing solutions to satisfy an end user market that is increasingly sophisticated in its demands.” As a result, he says, “the forces of consolidation are by no means relenting, and the market will consolidate further.”
On the plus side for firms, Celent says, “The availability of mature and flexible third-party vendor solutions … is enabling firms to adopt an out-of-the-box approach to replacing and consolidating in-house tools.” The high degree of configuration associated with these solutions can help reduce technology customization, the report says, which in turn can “control the costs associated with risk review, audit, and risk management operations.”
Leading up to the financial crisis, Celent says that while risk managers were able to recognize established risks, they were ignoring “emerging risks or risks in tandem,” because risk management frameworks were focused on handling risk in separate business silos. “This resulted in gross oversight of enterprise-wide risk,” Celent says, “which failed to take into account the relationship between different risks and risks associated with various lines of business.”
As a result, “this massive blow … now presents an opportunity for a profound change,” it says. “As we step into a new phase of industry reforms, we expect governance and operational risk issues to take their seat at the table in terms of senior management scrutiny.”
Going forward, financial services firms need to institute a firm-wide operational risk and governance framework, Ding says, infusing “big picture” elements of strategy and industry analysis as part of a the risk management process: “The orientation of an organization should ultimately be towards incorporating risk intelligence into day-to-day decision making to become smarter about the way the business is run.”
