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Innovative Institutions

These six Wall Street firms tapped into technology and let their inner innovation sing.

In the chorus line that makes up Wall Street, every firm is beginning to look and feel the same, each movement following the previous, each lyric mimicking the last. So how can a firm advance from being a background extra to moving front and center stage?

The answer is innovation, a word that some securities and investment firms have come to know intimately. A recent survey of securities and investment firms with revenue exceeding $1 billion, done by Wall Street & Technology's sister publication InformationWeek, found these firms to be stars in terms of innovation in business technology and IT operations: Mellon Financial Corporation, J.P. Morgan Chase & Co., State Street Corp., Vanguard Group, E*Trade Group and Northern Trust. Although the survey ranked institutions across all industries, these were the top six ranked firms in the securities and investment space.

Behind every innovative firm is an innovative leader, and these six Wall Street firms' heads of technology have taken on that role, positioning themselves as industry standouts. Yet, these leaders don't lead for the glory; instead, their goals are to cut costs, reside at the forefront of the industry, and, of course, lead their firms all the way to the bank.

Allan Woods, vice chairman and chief information officer at top-rated Mellon Financial, describes his firm's methodology on innovation. "We tend not to wait until something is proven to get involved. By then you are so far behind on the learning curve that it takes too long to get up to speed."

Innovation is not just about leading though, it is the key to survival in any competitive environment. "If you're not ahead, you're going to fall behind," explains John Schmidlin, managing director and technology executive at J.P. Morgan Chase & Co. "Clients won't want to come to you, you will not get the efficiencies, and you will not generate the revenues."

While every firm has its own unique secrets to success, some points were unanimous among the standouts: (1) Define a project-prioritization process and choose endeavors carefully; (2) Create and support a talented technology team, but outsource selectively; (3) Take advantage of emerging technologies such as Linux, and know the firm's business well enough to determine when to be leading edge and when to be bleeding edge; (4) Use programs such as Capability Maturity Model to quantify developmental success; (5) And above all, fight for a budget and use it wisely.

THE BLUEPRINT

Technology executives know that the measure of their power is directly proportional to their IT budget. According to the InformationWeek survey, IT spending within the financial-services industry averages 8.5 percent of annual-sales revenue. However, many of the firms leading the Street in innovation have been rewarded with percentages much higher than the median, after proving the value that can be achieved with technology.

Tim Buckley, managing director of information technology at Vanguard, says that his firm measures technology spend at about 40 percent of operating expenses. This large percentage, which includes everything from software development to running applications, is a result of Vanguard's virtual environment, he says. "Every interface the client has with Vanguard is through technology."

At the other end of the spectrum, Woods notes that his technology allotment is 12 percent of total revenue at Mellon. While smaller than Vanguard's piece of its pie, it is still larger than the average financial-services firm. Woods says that he has a tremendous amount of support from business lines on his budget. "Most of these individuals are looking at their businesses and understanding their need to invest in technology," he says. "We're a technology company in disguise."

THE FOUNDATION

This designated percentage becomes the foundation for the next logical question: What to do with that money? Vanguard's Buckley explains his firm's highly structured project-prioritization system: Each of Vanguard's four business lines creates a strategic-opportunity list, then creates a business case. Those projects are each given ratings of low, medium or high based on client impact and operating impact, he says.

Buckley says, "The firm looks at the IT portfolio as a whole, and we have to be able to balance it well. We don't have a hard-fast 50/50 (client-impact/operating-impact rule) though. We like about 65 to 70 percent to be high client."

Joshua S. Levine, the chief technology and administrative officer at E*Trade, describes a different project-prioritization process. While he identifies a rigid route from project inception through initiation, definition and specification, he stresses that it's really just a "nice process of businesses talking about what they'd like to do and technologists working as partners, figuring out what translates into projects and costs."

Communication, says Levine, is critical to the process. "Everything is articulated and discussed. It keeps dialogue between all of the stakeholders," he says.

THE BUILDERS

Yet projects themselves are not necessarily where the biggest chunks of the budget go. Alternatively, it is the staff that requires CIOs to show them the money. In fact, the InformationWeek survey notes that, when breaking down the technology budget, IT staff compensation gets the highest ration.

J.P. Morgan Chase's Schmidlin agrees that his staff is vital to the firm's development, making the case for the firm's talent-management program, called "Leadership at Morgan Chase." The framework of this program, he says, is to establish specific job descriptions, with standard movement levels and a clear designation of roles. In addition to evolving technologists' careers, it allows management to evaluate each individual's role in a team, and distinguish where additional training is necessary, he says.

Schmidlin's emphasis on staff development may be surprising, considering the firm's move to infrastructure outsourcing by IBM earlier this year. However, he says J.P. Morgan Chase counteracts negativity towards outsourcing by being honest with its employees. "From day one (of our outsourcing arrangement), we were very candid with our people," he says. "We provided almost 3,000 full-time J.P. Morgan Chase employees a career path from working in the infrastructure here over to IBM."

Schmidlin says a smart CIO will be able to combine the firm's employees' competencies with the benefits of outsourcing. Technology outsourcing and consulting, in fact, rank as one of the top five technology spends at securities and investment firms, the InformationWeek survey notes.

Like at J.P. Morgan Chase, outsourcing is a hot topic among all of these innovative firms. Unlike J.P. Morgan Chase, though, most of the others have not established a case for outsourcing to the same extent.

Levine confines E*Trade's outsourcing to encapsulated projects, such as help desks. He highlights the importance of knowing the customer's needs, which can be lost in outsourcing. "You could have the greatest network engineer build the greatest network of all time, but if juice cans and strings are what the customer asks for, they are going to miss that," Levine says.

Mellon's Woods explains that he reserves outsourcing for best-in-class applications, such as record-keeping for Dreyfus, the firm's mutual-fund division. In addition, he says that Mellon is halfway to its goal of outsourcing 25 percent of its development functions offshore by the end of next year. "There really aren't sufficient economic incentives for us to outsource our infrastructure," he adds. "But we'll look again in a few years."

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