Deutsche, Merrill Reveal Recession-Proofing IT Strategies
Although the first quarter was rough on Wall Street -- an estimated 40,000 people were laid off, and Citigroup, for instance, announced that it would cut 20 percent of its operating costs after recording a $2 billion loss -- at least a few technology leaders at major financial institutions are finding that, so far, IT organizations and their respective budgets are weathering the storm. According to experts, technology has become too important to the business to eviscerate (or so IT professionals hope).
"Technology is a lifeblood now," explains Sean Kelley, CIO, group technology and operations, at Deutsche Asset Management. At the end of April, Deutsche announced its first loss ($220.4 million) in five years as the result of a write-down on loans for leveraged buyouts -- bad news that was modest compared to the fallout from the credit crisis at many other firms. "The last thing people want to go after during challenging times is IT. Where people might have turned to IT cuts in the past, today I'm finding people are looking last at IT due to its strategic importance."
Although Merrill Lynch reported a $1.97 billion net loss for the first quarter of this year, "IT is critical in any market environment," says Alok Kapoor, the firm's head of global technology services. "Even in this cycle, volumes and volatility are at all-time highs, and capacity and performance are especially critical. And while we are focused on running the plant, we can't lose sight of making prudent investments that will ensure our competitive position. Further, our businesses continue to demand higher productivity returns from their technology investments."
After all, notes Tom Price, a senior analyst in the securities and capital markets research service at TowerGroup, at some point, the markets are going to take a turn for the better. Those firms that haven't ravaged their IT departments, he says, will recover soonest and have a competitive advantage.
But the CTO of a large Wall Street firm that had a demoralizing first quarter (who spoke off the record) is more pragmatic. Offered the notion that firms that maintain IT investments will have an advantage when markets recover, he notes that that depends on two things: first, whether they survive to the end of this cycle; and second, whether their investments are being made in the right places. "You shouldn't cut strategic programs, which we haven't done," he says. "On the other hand, there are a lot of things you look at and say, 'You know, that looked like a great idea a year ago but today it's not so interesting.' "
These firms and others are making smart, recession-proofing moves to keep their IT organizations trim and ready for potentially worse economic weather while remaining prepared for sunnier days. Among other strategies, they're consolidating platforms, allocating IT dollars more judiciously, shifting more IT work to cheaper locations, leveraging computing-on-demand resources and tapping hosted software solutions.
A common thread among Wall Street recession-proofing/IT efficiency initiatives is platform consolidation. "Over the years, a lot of the investments that large Wall Street firms have made have been based on speed to market: 'I'm launching a new financial product, I'm opening a new location -- let me optimize to get that product or location up and running quickly,'" relates Bob Gach, global managing director, capital markets, at Accenture. For these reasons, and through mergers and acquisitions, many firms have acquired a plethora of trading platforms, customer databases and even e-mail systems, for which the costs of operation and maintenance alone eat into the IT budget.
"The problem is that that suboptimizes for the longer term," Gach continues. "Decisions have been made that were truly market relevant for an individual department, but the net result is that the total cost of ownership and the cost of feeding the monster year in and year out are far greater than if you had one trading platform, one customer database, one reconciliation system."
Gach says firms should be spending at least 50 percent of their technology budgets on new development. "If it's lower than that, you're maintaining too much and unable to invest in the future," he contends. "If you have too many platforms and overlapping technologies, the costs for just keeping the lights on get to be so high that you don't have any money left over for innovation."
Deutsche's Kelley compares his recession-proof IT strategy to investment portfolio management. "We manage a portfolio -- a rather large one -- and we have to constantly optimize it against the market," he explains.
"A portfolio manager streamlines the beta in a portfolio -- in other words, that which tracks the market but doesn't outperform it," Kelley continues. "You always have to have some of that in your portfolio. We've streamlined our IT beta to make it simpler, more global and more efficient. Then, as it's become more efficient, we've moved the returns from that efficiency gain into the alpha side of our portfolio -- activities where we can beat the benchmark."
Beta Fuels Alpha
The beta period began when Kelley arrived at Deutsche in December 2004. The asset management division had been cobbled together through a series of acquisitions -- Scudder, Zurich and Bankers Trust, among others -- that hadn't been truly merged. "We had this complex labyrinth of technology," Kelley says, noting that there were 15 different equity trading systems, for example. "At one point in time, there was one application for every 10 people [roughly 650 applications and 4,100 staff], and asset management is not a complex process," he adds.
To streamline, Kelley's group methodically eliminated redundant applications, choosing one platform, or "backbone," for each of the eight basic functions of asset management (e.g., client acquisition, trading, research, accounting). Kelley calls this initiative "oneness," or "getting to one," and says it took three years to accomplish. To continue making these basic, beta applications more efficient, Kelley relates, his group now is looking at how to best wrap each application in a Web services framework so that it can be called and recombined with other applications.
On the alpha side, the group has begun working on more-advanced projects, such as creating new decision-support tools, incorporating sell-side trading techniques into execution management systems, crafting better portfolio construction tools and making more extensive use of Web 2.0 techniques to reach clients.
Kelley says the investment portfolio approach has enabled these projects to be self-funding. "We didn't go to the bank and say, 'Please give us 250 million euros because we want to blow the place up and put it back together,'" he says. "But we said, if we do this more efficiently, get rid of useless assets and better integrate the assets that are useful, we can squeak out tens of millions of euros that we'll then invest in trading, risk and research technology. We've sizably reduced what it takes to run the place and put it back into things that change the place."
According to Kelley, in the past four years, although transaction volumes have risen 50 percent to 70 percent in the asset management division, the IT infrastructure has remained consistent and, in some cases, even shrunk. "Now that our use of OTC derivatives, structured products and alternatives has grown over 250 percent, we are looking to further enhance the beta platform to handle these often low-STP processing needs," he relates.
"It's recession-proofing by good discipline, being consistent and sticking with the plan," Kelley adds. "If we hadn't done the beta work, there's no way we could be doing the alpha."
Rethinking IT Supply and Demand
Another way firms are recession-proofing is by reexamining IT demand and capacity. "We're seeing a higher level of scrutiny of discretionary spend," says Christopher Connors, director of business development at Citisoft. "We're seeing a lot less willingness to spend, and firms are looking for more of a return on smaller spend."
In the past on Wall Street, successful business units, such as star trading desks, have been able to pretty much get whatever IT resources they asked for. Today, IT spending decisions are becoming more centralized.
"We look more closely at actual business demand rather than looking toward a spending limit -- the spending will come out of the demand for capacity," says the CTO who spoke off the record. "If we need 8,000 PCs, we need 8,000 PCs; we may wish for them to cost $12 each. We try to be as transparent as we can with the businesses about the financial implications of the decision, so they can then adjust their demand if they have specific targets they'd like to achieve."
A sophisticated cost-allocation model provides information on unit costs and demands at all levels, he explains, enabling the IT organization to do two things at once -- one, help businesses that are not managing their demand well to improve; and two, go through unit costs and find opportunities to improve productivity in delivering that service. As part of this process, the firm, like most, continually reviews vendor contracts and pricing to see where a better deal may be sought, the CTO adds.
Firms such as Deutsche, Wachovia, Merrill Lynch and others also are managing demand by taking the idea of virtualization and grid computing (which, in large-scale mode, boils down to running applications across a pool of servers, rather than running one or two applications per server) to the next level: on-demand, just-in-time or "anticipatory" computing. "Our central infrastructure team is monitoring capacity enough that we can deploy blades and servers on the fly," relates Deutsche's Kelley. "In the old model there was a long time between needing capacity for new applications and providing that capacity. We've cut provisioning time by about 20 times, from two weeks to about two hours."
By optimizing this on-demand model, Deutsche avoids having extra servers sitting around the data center taking up space, cooling and power, Kelley notes. "We've gotten a bit smarter in reading the signals, being able to bring more hardware online when we need it," he says.
In a variation on the same theme, at the end of May, Merrill Lynch will start rolling out what it calls a "stateless infrastructure." In this new data center architecture, stateless servers (servers that have no operating system or applications installed on them) will boot and load operating systems over the network and access applications on an as-needed basis from a network enterprise file system, according to the firm.
"It's more like the way the Web works rather than the traditional way applications are aligned with physical or virtual servers," says Jeffrey M. Birnbaum, chief architect at Merrill Lynch, adding that this will eliminate the software-installation process. "There's a tremendous efficiency around operating expense because you're not building environments and then sticking them into data centers; you're loading them when you need them and getting absolute consistency across each system," Birnbaum says."
Merrill first will take its grid software stateless, then will progressively roll out other applications throughout the rest of the year, according to Birnbaum, who declines to name the vendors with which the firm is working. IBM, however, recently rolled out a stateless server solution, and many blade vendors offer stateless versions of their servers as well.
Shift to Hosted Apps
Some firms are choosing not to host certain applications at all, turning to hosted software to improve IT efficiency. With an application service provider (ASP) model, not only does a financial firm not have to develop and maintain its own software, but IT support and data center management (for the hosted application) become the ASP's burden. Hosted software on the Street started with small, generic programs, such as Salesforce.com's widely used CRM software. But many vendors of heavier-duty applications used on Wall Street -- including Broadridge, SunGard and Xignite -- now offer their software in hosted form.
In the course of Deutsche Asset Management's IT reformation, the firm's Kelley says, the last thing his group wants to do is build new software. "I try to use whatever is out there," he comments. "There are a lot of smart people out there."
Deutsche is a big believer in the Software-as-a-Service (SaaS) proposition, Kelley notes. The firm has more than 1,000 users on an SaaS CRM platform around the globe and is looking for ways to utilize the underlying applications framework to develop and deploy new applications, he relates. "The fact that I can build an app and never put it in any of my own data centers is really nice," Kelley says. "Our SaaS vendor worries about things like computing power and electricity and cooling."
Kelley notes that he also is considering adopting hosted office productivity software. "About 50 percent of our business workforce does not need all the functionality found in current shrink-wrapped offerings," Kelly says. "They need a word processor, presentation software and a spreadsheet. Why can't I use those commercially available in 'open form' on the Web [such as Google Docs and IBM's open series software] to satisfy these basic needs at a significantly lower price point that is far easier to deliver and support?"
Kelley adds that he is interested in combining Web 2.0-style tools and cloud computing (collaborative development) with hosted software. "What's available in the collective intelligence of the universe has got to be a lot more powerful than what's available within the four walls of a corporation," he opines. "This is one of our big alpha pushes -- if I can deliver an environment of externally and internally developed applications to the portfolio manager and his investor and make it easy enough for them to use, he can develop something 10 times better than I would by using mashup tools out there."
This is part of what Kelley refers to as the third phase of his IT strategy. "You've gotten down to a sensible number of applications; you've 'SOA-tized' them -- now present them in a way that wraps around the client, be it a portfolio manager or an external client, so that [he or she] can easily identify with [the applications] and then make them their own."
Kelley points out, however, that he doesn't envision financial firms all throwing applications into a hosted cloud and sharing with one another -- the industry is too competitive, he says. But he does see value in using the concepts and techniques of mashups and cloud computing within the firm. "If we can find the sweet spot between using what's available in the cloud and making it secure, but leaving people to do what they need to do above that, we would have a much better experience at the desktop," Kelley asserts.
Return to Outsourcing/Offshoring
In addition to these innovative approaches to improving IT efficiency, firms also are considering an old standby. Outsourcing usually is considered in any IT efficiency initiative -- if a company in India can do the work just as well for half the price, why keep it in-house? Although the industry started to move away from IT outsourcing a year ago, the tough first quarter may trigger a resurgence of the practice.
"We've seen from our clients more willingness to explore offshore locations for assorted functions, whether they be IT or operations," says Citisoft's Connors, who points to India, China and Eastern Europe as the current outsourcing hot spots among his Wall Street clients. Noting that firms have become more selective and more methodical about outsourcing decisions, Connors says development and support are the most commonly outsourced functions, as has been the trend for some time. Certain back-office tasks also are going overseas, he adds -- for instance, China seems to be a popular place to send reconciliations these days.
Deutsche Asset Management outsources "deeper back-office" functions, such as reconciliations and bookkeeping, to firms that focus and specialize on those tasks, according to the firm's Kelley. "Then we take the internal people who were doing those functions, retool them and move them up the food chain to help with performance and attribution reporting, client reporting, supporting next-generation trading strategies, or working with researchers," he explains, adding that constantly moving people up the stack reduces recruiting costs and keeps employees motivated. "We call that a 'move to alpha.'"
Recession-Proof Apps: Compliance
Few applications could be called "recession-proof." However, these days compliance software comes close to earning this label (see related sidebar, page 40). "You don't have a choice," notes TowerGroup's Price. "If you need to prove best execution, you need to prove best execution."
The anonymous CTO of a large global investment bank agrees. "For a vendor, the more recession-proof technologies are those that play to the regulatory environment," he says. "The regulators frankly don't give a damn about the [economic] environment -- they just care about doing their job. So the people who are providing products and services that help meet obligations seem to hold up better. Even there, though, there will probably be pressure."
With all the talk of recession-proofing IT, how do IT executives keep their careers on track? "I don't know -- I'm still trying to figure that one out," says Deutsche's Kelley. "If you focus on your work, deliver valuable products and work hard, people want to have you around."