by Todd Datz

IT Outsourcing: Merrill Lynch’s Billion Dollar Bet

Sep 15, 200316 mins

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.

The workstation connects 18 legacy back ends (running applications such as HR, various accounting systems and the TGA database) to the new platform. The IF is Web services-based, using Microsoft’s .Net, and Vielehr asserts that it’s one of the largest Web services implementations ever. “The volume of data that will blow through is substantial,” he says. Vielehr allows that going with Web services was a big decision, but not that hard. The TGA platform, which involved lots of point-to-point connections, was hard to scale and had very little standardization. Using Web services to build the middle tier allowed the back end to integrate smoothly with the desktop and also made it easier to integrate the network, hardware and applications. “If we had done this from a proprietary perspective, we would have perpetuated a lot of the problems we had in the past,” says Vielehr.

The development schedule has been nothing short of hellacious. After the contract was signed in December 2002, the project team was given six months to bring the new platform to life in order to get the FAs out from under the clunky TGA platform as soon as possible. (The compressed schedule also saved Merrill money.) Teams formed in January, then Greenberg—who refers to himself as the hired gun—was brought over from Merrill’s investment management group to manage the project. Greenberg also serves as the Thomson relationship manager, a two-headed role that basically means he eats, breathes and dreams about the new workstation. His umbilical cord to the project extends to happy hour: Greenberg recently took some of his team out for margaritas, but, while sitting with his cohorts at the table, had to phone in from the bar for a conference call.

Ramping Up to the Rollout

Throughout spring and early summer of 2003, the integration of the workstation and the online sites proceeded. Piloting in Merrill’s Hopewell, N.J., campus began in August, to be followed by select branches in October. A full production rollout will begin shortly after piloting is completed.

The hope is that the new workstations will make life easier for the company’s 14,000 FAs. The new Siebel CRM system, the client management part of the platform that sits on one of the station’s two screens, provides a 360-degree financial view of clients: their assets, performance profiles and transaction history. Unlike the TGA system, where client or prospect information continually needed to be rekeyed into different applications, the new system is supposed to have information pre-fill into all forms. Also, where previously an FA might have needed to bounce between as many as 18 screens to get information from TGA, now client information integrates seamlessly among applications. So, for example, an FA could instantly create a client list for all those holding DaimlerChrysler stock and alert them when the share price dropped or rose a predetermined amount.

While client information fills the first screen, the other runs Thomson’s Thomson One application. That app contains market data, news feeds, portfolio management tools and calculators, providing the information and functionality an FA needs to do his job. Another key feature of the platform is that the new online sites are fully integrated with the FAs’ desktops and the FAs can mouse between the Siebel screen and Thomson screen. “You talk to any adviser at any firm and they’ll tell you that the lack of integration between applications is their single biggest impediment to efficient practice management,” says Jaime Punishill, a senior analyst who follows wealth management at Forrester Research.

Merrill hopes that FAs will be able to compete more effectively for high-net-worth customers (see “The Quest for the High-Margin Customer,” Page 52)—and maintain existing ones—by giving FAs better, faster information, while giving clients the same, real-time view that their FAs see on their desktops. Theoretically, the FAs will also be able to spend more time with these customers, and not just because of the new platform—all calls from less profitable clients (those with less than $100,000 in assets) will be routed elsewhere. As happy as the bigwigs at the GPC are for their FAs, they’re downright giddy at the prospect of the money they’ll save with the new system. According to Vielehr, annual operating cost savings will be in the tens of millions.

Ahead of the Competition, but for How Long?

It remains to be seen whether Merrill’s billion- dollar investment will produce the competitive advantage it’s hoping for. Unsurprisingly, its executives predict that it will. “[The platform] raises the cost of entry of being a financial advisory firm. There’s increasing consolidation in the industry because the cost of equipping financial advisers is prohibitively expensive for all but a handful of firms,” says the GPC’s Gorman.

“I think we’ll be a couple of years ahead of most competitors,” says Vielehr. “Most [other] players have point solutions that operate in silos; none are as integrated.” And that integration, Vielehr believes, comes with a side benefit: It will help sell new recruits on working at Merrill.

Some analysts are reserving judgment. “Merrill typically does this stuff earlier than others, but it’s a short window [of advantage],” says Forrester’s Punishill. “We’re not talking about new analytics or different stuff than what others are doing. It’s a better way of putting something together. If it does a better job, FAs are more productive. If they’re more productive, will they generate more business or play more golf?”

Punishill also points out that if the workstation succeeds, Thomson certainly will market it to the rest of the industry, thereby ensuring that Merrill’s putative competitive advantage will immediately begin to spring leaks.

For now Merrill is hoping to improve the lives of its 14,000 FAs by giving them a speedy, more intuitive, hassle-free desktop. And, with Thomson riding shotgun on the project, and all the subcontractors in the backseat, it’s making sure its vendor partners feel—in their pocketbooks—as much responsibility for the success of the platform as it does.