IT Outsourcing: Merrill Lynch's Billion Dollar Bet

Even though many companies have put the kibosh on big technology investments these past few years, some, like financial services giant Merrill Lynch, have sucked in their corporate stomachs and taken the plunge in the quest for competitive advantage. For the past nine months or so, more than 400 people from Merrill’s Global Private Client (GPC) and Global Technology and Services groups, Thomson Financial, and a number of other vendors have been working feverishly on Merrill’s biggest outsourcing initiative ever, a highly complex $1 billion makeover of its wealth management workstation platform designed to improve the efficiency of Merrill’s financial advisers (FAs). In the lingua franca of financial services, that means Merrill’s FAs are getting new, more powerful desktops geared toward capturing more of the assets of their high-net-worth customers.

The new platform also represents a major shift in the way Merrill approaches IT initiatives. In the 1990s, Merrill developed its previous platform, Trusted Global Advisor (TGA), as it did any other major system: in-house. The thought of outsourcing a critical business system to a vendor would have been deemed madness by any financial services organization and perhaps a confession that its IT department was not up to snuff. But last year, Merrill inked a contract that outsources much of the responsibility for its new platform to Thomson Financial, a large market data vendor with no previous experience managing an integration project of this size.

In this hybrid outsourcing model, Thomson, which serves as general contractor, is responsible for the desktop and is managing a number of subcontractors—a veritable who’s who of vendor all-stars including AT&T, Cap Gemini Ernst & Young, Dell, HP, IBM and Microsoft. Merrill retains control of the integration layer, which connects its proprietary databases, and manages Siebel, the platform’s CRM component.

Merrill and Thomson are working in a tight partnership, the bedrock of which is a voluminous contract containing lots of service-level agreements spelling out bonuses and penalties. And Merrill has not only outsourced much of the project, it has also shed itself of the responsibility of dealing with the subcontractors. "Thomson is on the hook for some SLAs, so it’s in their interests that the subcontractors are successful," says Byron Vielehr, cohead and CTO for the GPC.

Although the use of a general contractor and subcontractors is not uncommon in large outsourcing deals, what gives this one a different twist is Thomson’s role. "I’d say it’s unusual in a deal of that size for the supplier of a proprietary system to be general contractor for the rollout," says Michael Murphy, a partner in the technology group at the legal firm Shaw Pittman who specializes in IT outsourcing deals. (Shaw Pittman worked on the Merrill-Thomson deal and could not comment on the contract’s specifics.) "More common would be using more of a generalist outsourcer, such as IBM, EDS or CSC, that focuses on managing implementation projects from an infrastructure perspective," Murphy says.

So far, according to Merrill, the rollout, which begins next month, is right on schedule. If it’s successful, Thomson won’t be shy about hawking its general contracting services to the rest of Wall Street, and Merrill will likely continue marching down the outsourcing path, complementing its in-house expertise with best-of-breed providers. "There’s no stigma attached to being really good integrators of commercially available products and building where you need to," says John Cummings, senior vice president and chief information and services officer of Merrill Lynch. "We’ll look back and probably say this project was one of the turning points for that."

Dennis Ceru, director of retail brokerage and investing at research and advisory company TowerGroup, notes that "just the fact Merrill is outsourcing such a critical system at all is being watched closely by the financial services industry. It’s huge," he says. "It’s a major Wall Street firm with the largest number of registered brokers making a decision to partner with external providers to create its lifeblood system."

Merrill’s Outsourcing Strategy

The platform Merrill is replacing, TGA, was a giant, monolithic application that required tons of bandwidth and demanded an incredible amount of testing before every new application was added. "It was brittle technology, old technology, that was expensive to maintain and support," says the GPC’s Vielehr. Plus, the world was moving away from client/server to the Internet. And TGA didn’t have any CRM capabilities.

In addition, it was difficult to integrate Merrill’s online sites (where clients could do transactions) with TGA. That led to a mismatch between the information clients saw on the websites and what FAs saw on their screens.

So Merrill began exploring options as the mind-set among Merrill executives, led by Chairman and CEO Stan O’Neal (then head of the GPC), shifted from the IT macho of "build everything yourself" to the more conservative "build whatever can differentiate you from your competitors, but buy the rest."

"Our core competence is helping people manage their financial affairs," not CRM or trading systems or networks, says James Gorman, executive vice president of the GPC.

Or, as Mark Greenberg, first vice president and program manager for the wealth management technology platform project, says, "I’d rather be working on some really neat analytical tool and understanding the mind of an analyst than banging out some account maintenance type of thing."

According to Vielehr, this shift in the GPC’s thinking "was probably the largest transformation of a technology shop in the United States." And a big shop it is, with an IT staff of 1,800 that supports 35,000 desktops. The GPC itself is the leading issuer of debit cards in the world, the seventh largest bank, and it has major insurance, mortgage and 401(k) businesses. With all those silos, a lot of uncoordinated IT activity was going on.

Looking for Mr. Good Vendor

At first, GPC’s execs leaned toward having one vendor manage the whole project. But, given its size and complexity, they concluded that no one could do it all—manage the desktop, the networks, the hardware and the integration issues. So they decided to hire one vendor to help with the integration and act as a general contractor. "We wanted someone to have responsibility for the [desktop] all the way back, manage the subcontractors and have responsibility for the SLAs," Vielehr says.

The company tried out three vendors—Bloomberg, Reuters and Thomson Financial—in a few branches. In November 2002, Merrill announced that Thomson had won the bidding. "The most important driver was the comfort level Merrill execs had with Thomson execs, and Merrill’s belief that Thomson’s senior management team would stay intimately involved in the project," says Vielehr, also citing the company’s strong background in retail, its financial market data feeds and its other wealth management applications. Merrill also valued Thomson’s e-learning expertise. During the pilots, Vielehr says, "it became obvious how critical training was." He liked the fact that Merrill’s FAs would have access to Thomson’s e-learning product on the new workstations.

Merrill hammered out a contract with Thomson that included SLAs, set out performance bonuses, established penalties and covered more than a few other details. "There’s a whole bunch of SLAs around network availability and latency," says Vielehr. There are others addressing response times on the client websites, and bonuses are attached to how well the websites score on user surveys. Similarly, there are SLAs in place for the FAs’ desktops—response times, uptime in branches and training satisfaction. Taking into account user feedback—such as website response times and training satisfaction—is a new wrinkle for Merrill, says CIO Cummings. "For us, that’s a unique series of SLAs that aren’t driven just by delivery times and metrics, but are also driven by the users’ end view of what’s being provided."

Jim Alberg, who works with Murphy as a partner in the technology group at Shaw Pittman, says that good outsourcing deals should measure customer satisfaction and tie it to compensation. "It’s something that should be done, but not everybody does it," he says.

Even though Merrill’s contract with Thomson eventually reached 1,500 pages and covers as much ground as possible, some flexibility is built in. For example, execs decided after the fact that it made more sense to have Thomson deliver alerts to FAs on the desktops rather than Merrill. So, without ruffling any feathers, they changed the contract.

Good Governance in a New Outsourcing Model

Merrill’s decision to put Thomson at the helm of this project over a variety of subcontractors has, according to both Merrill and Thomson and the other vendors, worked well so far. "It’s a very unique model," says Thomson Financial’s Lou Eccleston, president of the banking and brokerage group. "It combines the traditional vendor role and elevates it to a partnership role, includes consultant-type roles, and brings it all into one piece."

He asserts that the development and ongoing support costs turned out to be cheaper here than they would have been in a more traditional outsourcing model. "We’re not general contractors by profession," says Eccleston. "Merrill is getting that service at a far lower price because we’re part of the whole package, including content and applications."

TowerGroup’s Ceru notes that "in the past, I think a lot of outsourcing was done in an almost hands-off, or what I would call a delegate-and-abdicate mentality. It was delegated to a third party, then abdicated in the true sense of ownership. Today, the firm is saying to vendors, You’re in this with us. It’s almost as if you’re a division of our company."

In addition to Thomson, which is managing the online function, the players on this project all have stars on the IT walk of fame: AT&T, managing the network; Cap Gemini Ernst & Young, serving as the systems integrator for Siebel and helping to build the online sites; Dell, supplying the desktops; HP, providing network products and services; IBM, being responsible for the physical rollout of components and branch support; Microsoft, furnishing .Net for the integration framework; and Siebel, creating the CRM application.

The key to keeping the project on track has been the tight alignment between Merrill and Thomson. The two aren’t strangers (Merrill has used Thomson’s ILX market data product for the past five years), so they were already comfortable with each other. Merrill and Thomson each have executive steering committees dedicated to the project that meet monthly. Executives also regularly receive updates: A weekly executive dashboard highlights the status of the project’s many components. And the conversations reach all the way to the top: "Dick Harrington [president and CEO of Thomson Corp.] literally talks to Stan O’Neal," says Eccleston.

On the operational front, some 40 Thomson employees and vendor contractors work onsite with Merrill folks, under the guidance of Greenberg and Ed Berlin, Greenberg’s counterpart as project manager at Thomson. Organizationally, the goal has been to structure as flat as possible. So for the project’s three major areas—desktop, infrastructure and online—teams of peers (as they’re known) were put in place that include representatives from the vendors as well as Merrill and Thomson. "We want everyone to take ownership," Vielehr says.

With all those vendors and a condensed development schedule, "there are plenty of thorny issues on a day-to-day basis," says Vielehr. The main bones of contention revolve around scheduling. "A lot of it is where the mid-level of teams feel like they’re waiting for somebody, or somebody is late in their mind," says Cummings.

Soul of a New Platform

The 25,000 new workstations already rolled out to the U.S. branches and offices are 2.4GHz Dell desktops with a gigabyte of RAM and two 18-inch flat panel monitors: one has a Siebel screen with CRM client data, the other a Thomson screen with financial data, news and wealth management applications. (See "What $1 Billion Buys," Page 51.) But it’s the melding of some 130 old and new applications in an integration framework (IF) that’s the heart and soul of the workstation. Merrill began building the IF last year, before Thomson was chosen, knowing one would be necessary regardless of which vendor it selected. Merrill also wanted to keep control of the IF in-house. "We weren’t about to take all our mainframe systems and turn them over to a vendor and have them figure out how to deliver that data to the vendor applications," says Greenberg.

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