The current climate of lowered investor confidence and the reduced risk appetite of financial end users present opportunities for business intelligence vendors. While direct opportunities lie in the banking sector, other financial services sectors could be attractive targets given the scale and spread of the subprime crisis.
In May 2008, the Bank of Ireland purchased Business Objects' solution XI combined with SAP's banking suite and enterprise resource planning application for enhanced risk insight into the bank's performance.
Notably, the bank has managed to maintain a low direct subprime loan exposure resulting in a 3% year-over-year hike in its fiscal 2008 profits despite the global crisis and credit crunch. The bank attributes this to its rigorous risk-management processes and hopes to extend this with the SAP-Business Objects' solution.
Other banks may soon follow suit. Finance ministers in the European Union are expected to soon consider stringent risk monitoring and management standards for banks.
In its bi-annual assessment of global financial markets, the International Monetary Fund estimated the US subprime meltdown would result in losses of about $945bn globally.
The banking sector was only the first to be affected. Subprime losses have now touched insurance companies, pensions/savings funds, government, and hedge funds, and the dominoes are still falling.
What is threatening to the rest of IT could well prove accretive to BI vendors that possess a risk-modelling portfolio in tune with current demand.
SAS reported exponential growth in 2007 over 2006 of its OpRisk Management solution that deals with operational governance, risk, and compliance management. SPSS, on the other hand, reported 11,3% growth in its fiscal 2007 revenue compared to 2006, which is greater than its growth in fiscal 2006 compared to 2005.
Vendors in the performance-management area are also aiming to profit from the crisis. Cognos launched a new performance-management application targeted at the FS sector with in-built risk-based pricing models that evaluate new business pricing scenarios and measure profitability. Other vendors are also expected to bolster their risk offerings.
Risk-management offerings were in existence long before the subprime debacle, but combining realtime performance and risk information is now critical to investment decisions.
Two things make risk offerings more compelling in the current environment: first, an urgent need for financial end users to scrutinise risks more closely through process-and-strategy integrated applications, and second, the expanded capabilities of BI vendors to offer industry bundles that combine the strengths of pure-play vendors and conglomerates.
Examples of such bundles include IBM Compliance Warehouse for Legal Control that combines IBM's offerings with Cognos's monitoring and reporting technology, and SAP-Business Objects' Financial Performance Management and Governance, Risk, and Compliance modules.
BI vendors should now change focus from revenue-expansion BI to BI targeted at protecting shareholder value, improving margins, and reducing risk. Areas that could witness high growth in the future include credit risk management, operational risk management, fraud detection and prevention, and in general, performance management.
Is BI really counter-cyclical? Results of public BI companies and their acquirers during the so-called tech bubble period validate this argument. In 2001, the average revenue growth rate of five prominent pure-play BI vendors (Business Objects, Hyperion, Cognos, SAS, and SPSS) was about 10% year-on-year, which fell to about 7% in 2002. On the other hand, the current conglomerates of the BI segment (IBM, Microsoft, Oracle, and SAP) that did not have prominent BI offerings in 2001 recorded growth rates of about 8%, which fell to -0,2% in 2002.
Although pure-play BI vendors were affected by market turbulence, they outperformed the current BI conglomerates in the tech bubble period. The BI market will probably feel the pinch of subprime, but not as badly as other IT sectors.