A. G. Edwards is in the midst of a three-year, $186-million project to strengthen and streamline the firm's technology and business operations. This fall it put the largest piece so far in place when it inked a seven-year agreement with Thomson Financial to transition much of the full-service brokerage firm's back-office processing from an in-house, fixed-cost model to a variable-cost, hosted platform.
The deal to use Thomson's BETAHost back-office processing platform forms the initial stage of St. Louis-based A.G. Edwards' broader "Gateway Initiative," which was launched in April 2003. "We have been trying to focus on simplifying our technology infrastructure and improving our cost position," says John Parker, executive vice president and CIO of A.G. Edwards & Sons, the brokerage subsidiary of A.G. Edwards. "The Thomson deal sits inside that." The BETAHost implementation is scheduled for completion in the first half of 2005, and the entire Gateway program should be finished by February 2006, Parker relates.
A.G. Edwards will use BETAHost primarily on an application service provider (ASP) basis to support most of its U.S.-based business - including for U.S. equities and derivatives processing - and for its limited international operations. And it will use some of BETA's interface tools, such as BETALink, to transmit data back and forth, Parker says. The firm will keep its fixed-income operations in-house - using a combination of proprietary and third-party technology - and will continue to use the A.G. Edwards broker desktop, ClientOne, although some of the order entry and communication functions will be linked in through various Beta components, he adds.
A.G. Edwards will embed some BETA front-end components within its operating environment - mainly the financial adviser front end - to access account information and trading abilities, says Ken Wagner, chief operating officer for global transactions services at Thomson Financial.
BETAHost will replace a mainframe system that A.G. Edwards built in-house and has run for about 30 years. The firm considered three alternatives when looking at a replacement: build another platform, buy a vendor system to run in-house or use an ASP model. "Rather than trying to rewrite that ourselves, which is incredibly costly and probably would not add much competitive value, we went looking for BETA," says Parker, who adds that the company looked at other top vendors.
The biggest direct competitors to Thomson's BETA are ADP and SunGard, but several smaller vendors have notable market share, says Bob Iati, research director, securities and capital markets, with Needham, Mass.-based TowerGroup, in an e-mail interview.
The deal to use BETA will free up money and people for A.G. Edwards to pursue other aspects of its Gateway Initiative. "We want to focus on more of the value-added solutions and our internal clients, and let BETA focus on commodity-level services," Parker says. A key area for A.G. Edwards staff will be looking at the interaction between the firm's branches and the functions at headquarters - for example, in providing alert systems and real-time decision support for the branch environment, he explains.
Parker also hopes that an ASP approach will provide some relief in keeping up with regulatory changes. "A large percentage of our budgets are going to compliance-type activities, for example, for Sarbanes-Oxley, the USA PATRIOT Act and any NASD and SEC regulations," he notes. A.G. Edwards expects BETA either to support such regulatory changes as part of its basic offering or, where the regulation has more of a discretionary impact, the firms sharing the platform can divide up the cost, Parker adds.
A.G. Edwards doesn't expect cost savings - and might even face higher costs - just from moving from a fixed-cost model that comes from running the operations platform in-house to a variable-cost model based on trade volumes. "When you look at the broader Gateway Initiative, beyond just the BETA deal, we do see some substantial savings in lower cost processing, fewer technology licenses and so on than we would otherwise have," Parker says.
TowerGroup's Iati notes that having such a long-term, high-profile contract should give A.G. Edwards more predictability around processing costs. "Further, and more important, their stature within Thomson will likely get them quality service and enable them to have more influence on the future enhancements of its BETA product," he notes. "There is a downside if they become displeased with the service, or if A.G. Edwards has a change in management or culture within that time frame that goes contrary to this contract."
To guard against service problems, A.G. Edwards has a governance process in place - as it does with all of its service providers - detailing Thomson's responsibilities and penalties for service failure. It also has contingency plans in place in case of any third-party failure.
On an industry level, the agreement further supports the trend toward brokers outsourcing their processing functions and making an active choice to migrate to a variable-cost model. "The industry is steadily moving to a variable-cost model to help match expenses with revenues, which makes their investors sleep easier," Iati says.