BlackRock Vice Chairman Rob Kapito describes how his firm stays on top of the fixed-income world by keeping its technology architecture simple.
In good times, when mergers and acquisitions abound and new product lines sprout like weeds, no one seems to worry about creating information silos with disparate technology. In tough times, however, these silos can create an IT nightmare that hampers a firm's ability to grow.
So says Rob Kapito, vice chairman of BlackRock, a provider of global investment-management and risk-management products with $294 billion under management. Kapito says that in 1998, when BlackRock was about 10 years old, the firm went looking for a fixed-income platform to call its own. However, after taking a look at the marketplace, the firm chose to build rather than buy. "Most of what we saw were just glorified spreadsheets," says Kapito.
With that, the firm began building what it would call the Aladdin system of trading and risk-management technologies. Today, that system not only supports all of BlackRock's investments but is also licensed out on an application-service-provider basis to other firms. That model makes it possible for BlackRock to continually reinvest in the system. "Why offer this externally?" he asks rhetorically. "To maintain state-of-the-art technology the cost is very high, so I can somewhat offset that by offering it externally."
Kapito says there are other benefits in offering the system to what are often competitors. In spreading the system around the industry, BlackRock often is able to enhance it by adopting improvements made by users. "This benefits everyone," he says. "We are then able to broaden our product line and risk-management and technology capabilities."
The endeavor became so large that the technology division was split off into a separate company called BlackRock solutions. "I am a client of that company," explains Kapito. "My clients have the same access to the tools I use internally."
Kapito's main lesson learned since the inception of the firm in 1988 is this - do not allow silos to grow within your organization, no matter how tempting the situation may be. By that, he means that often a lucrative product line is proposed to a business executive who may see the benefits of setting up a separate P&L, often with its own technology. However, what the executive does not realize is that the cost of separate technology can outweigh the benefits of the new business.
"Everyone thinks their silo is more important, but we don't take on a new product until we figure out what the technology is behind that process, and it has to fit into our platform," he says. That demand comes from the top of BlackRock which "learned the hard way when we had one outside of the system."
"If people have products which are just good for the mortgage desk, that will create a new silo because you have to back that up with specific technology. To me, that's a recipe for disaster," adds Kapito.
His advice is clear and easy to remember: "One database, one system and one process. That way everyone in the organization is looking at the same thing."
The homegrown Aladdin system used by BlackRock is an "exception-based-processing system" which operates in a consistent way "regardless of the broker or custodian" that an investment manager is doing business with.
Consistency of technology and process starts and ends at the top of an organization, says Kapito. Without executive support for an initiative, nothing can be completed successfully. "The CEO has to make it clear that all products must fit into one process," he says.
Though BlackRock wound up building the solution it needed, Kapito says that doesn't always have to be the case, and sometimes it shouldn't be the case. "Lose your ego and solve problems in different ways. You don't have to build everything in house, but you must have clean and high-quality data."
BlackRock Solutions' Stats
- Over 200 global professionals dedicated to risk management and technology.
- Risk management reporting on over $2.3 trillion.
- Over 500,000 positions maintained on Aladdin trading system.