No Proof, No Project

Merrill Lynch and Citibank Global Securities Services are taking big steps to apply ROI strategies to technology investments.

As 2002 comes to a close and financial-services firms look to the coming year, one thing is certain: budgets are tight. More than a year after the Sept. 11 attacks and the disruption to the financial community, the economy continues to struggle. Firms are announcing more layoffs, cost-cutting strategies and, of course, increasing scrutiny on spending, especially on technology.

Firms looking very carefully at IT budgets are beginning to see a new, or at least renewed, trend in spending strategy. They are basing their decisions on a project's ROI. Return on investment, or ROI, is not a new concept. However the technology to measure ROI at major financial-services firms is gaining momentum, becoming highly complex, and is essential to getting a project approved.

Traditionally, the concept of ROI has implied looking at a cash-flow analysis when making a decision between two technology investment choices, says Bill Irving, president and partner at Capco, a consulting firm.

However in today's environoment, the term and the practice of measuring ROI for technology investments has changed. Irving explains that ROI has come to embody not just cash flow analysis, but determining achievable benefits within the shortest possible time frame. He adds that, these days, short-term payback often means measurable ROI within one year.

Whether it's forecasting the monetary return on an IT investment over a number of years, predicting whether an investment is feasible, or deciding when to cut losses and terminate projects, measurement of ROI is becoming critical to the financial-services industry.

Two firms in particular are making great strides in applying ROI within their IT departments. Merrill Lynch and Citibank Global Securities Services are both embarking on significant ROI initiatives that aim to streamline, improve and manage their technology spending.

Merrill Takes Tech ROI Enterprise-Wide
With over 2,000 active IT projects going on at any point in time, Merrill Lynch is using ROI to streamline technology spending while remaining competitive with new products, services and market areas. Managing, approving and tracking these project investments is a huge task and ROI has taken on a new meaning for Merrill.

Meaning is relative, though, when it comes to ROI. When talking about ROI on a high level, Marvin Balliet, chief financial officer for the Global Technology and Services Group at Merrill Lynch, says that the term ROI is often overused.

"People will forever look for the magical mathematical formula that will tell them whether or not they should approve a technological investment," he says. Unfortunately, Balliet says, there just isn't one out there.

Instead, Balliet believes in an "overall governance model" that determines whether technology projects should be started, continued or finished. "We've changed the way we manage technology at Merrill over the last three years, the most important change is that the business people own their entire technology portfolio," he explains.

Balliet says that the business heads have been told to decide how much technology they can afford when formulating their overall profit/margin plans.

During the budget process, each business head must go to their technology counter parts to find out: What does it cost to keep the lights on, or everything running as is; what does it cost to continue the initiatives I've already started and compare those to the number that I can invest in technology this year.

Furthering its ROI strategy and overall governance model, Merrill requires an appropriation request or a business case examining four areas for each technology initiative over $2.5 million. The business-case report is a standard format of questions and answers and the business heads must fill in the blanks. Balliet says that most business cases can be completed in two or three days.

If a project is approved after this process, the business head must report back about the initiative every quarter. This includes follow up on whether the project is on budget and on scope and if it still has the proper business involvement. In addition, this project health-check also asks if the business head wants to continue the project and, if they do continue, do they anticipate they will get the same value out of the project as originally proposed.

The reasoning behind these checks? "The markets change so rapidly in financial services," says Balliet. "For example, a project whose goal was to increase the capacity to process Nasdaq trades was a very viable project in 2000. While most of our projects are finished in a 12 to 18 month time frame, we would have to be asking ourselves whether we still wanted to do that project now, if we still needed that capacity."

With the changing markets and technology demands, bigger business lines within Merrill also are charged with rebalancing their technology portfolios every month, while smaller business lines probably rebalance quarterly, says Balliet. "They take a look at the portfolio throughout the year and ask themselves whether they're putting the money in the right places based upon what the marketplace indicates at that point in time."

As an example of the importance of rebalancing, Balliet says that in the years 2000 and 2001, most technology initiatives focused on the equities side, with little development on the debt-business side because the returns didn't warrant the investment. But this reasoning has now flip-flopped 180 degrees.

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