Now that the dust has started to clear — or so we hope — from the financial meltdown over the past few months, I’ve been asked how badly the enterprise Web 2.0 market will be hit. I’ll be putting together a detailed report for Forrester next week, but it is worth looking a bit more closely at the role finance and insurance firms play in the US technology market.

A couple of years ago my colleague Andy Bartels was nice enough to publish the US IT spend broken down by industry (the graphic design was mine; nice right?). The exact spend numbers are no longer 100% accurate — the IT industry has been growing between 5% to 7% the last two years — but the relative proportions are likely still quite close. What we find is that overall the finance and insurance industries account for 18% of US IT spend and the finance industry specifically accounts for 15%. As you can see from the graphic above, finance and insurance firms with 500-999 employees spend like crazy, accounting for nearly 25% of all money spent on IT in the US SMB market. In other words, its a big, important sector.

So what does this mean for the enterprise Web 2.0 market? First, a fair number of finance firms have gone under or been acquired. I would estimate 3% to 5% of spend just dropped out of the market. Second, those firms that are left will be a bit distracted over the next six months to a year dealing with major IT integration projects focusing on exchange, CRM, and major legacy systems. If you didn’t go out of business you likely got bought or rolled up other firms. Even the smaller firms are going to be busy, so the IT cycles thrown at Web 2.0 projects is likely to be low*.

While I don’t expect the external, customer-facing side of the enterprise Web 2.0 market to get hit any worse than the IT market as a whole, the internal, employee-facing Enterprise 2.0 market is going to get hit hard. If you examine the client roster of most Enterprise 2.0 firms you find an inordinate number of finance and insurance firms. It makes sense that they would have been the best customers, since Enterprise 2.0 holds the most value for knowledge workers and finance is fundamentally about knowledge. The problem is that the industry is getting inordinately hammered. I unfortunately don’t have a proper estimate on the percentage or revenue coming from the sector, but I would guess 30% to 40% of the Enterprise 2.0 spend comes from finance and insurance firms. Again, a good portion of that is going to drop out completely and the rest is likely to stagnate.

In other words: its going to get ugly. I would expect to see more than a handful of enterprise Web 2.0 firms to go out of business in 2009. I’ve got some predictions as to whom, but we’ll leave that for later.

If you are a vendor in this space I’d love to hear from you. What proportion of your revenue comes from finance and insurance firms, and how bad do you think it will get? Leave a comment below, or shoot me an email.

*Yes, I know there is a strong argument to be made that this would be the perfect time to invest in Web 2.0 tools. I do believe that these tools have big value for worker efficency and reducing redundancy, but I just don’t belive that the market is thinking this way yet. Right now Web 2.0 is a nice to have, not a need to have.

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