Chicago-based Northern Trust Corp. is having a very good year indeed. Its three business lines -- private banking, investment management and global custody -- produced record profits of $163.0 million in the first quarter, up from $139.1 million for the same period a year earlier, as total assets under custody rose 19 percent, to $3.1 trillion; assets under management rose 11 percent, to $652.8 billion. With 84 offices in 18 U.S. states and in 12 locations elsewhere in North America and in Europe and Asia, Northern expects 40 percent of the company’s revenue to come from international operations in the next few years, says CEO William Osborn. That’s up from about a third today.
Helping to deliver that growth is Timothy Theriault, 45, president of Northern’s worldwide operations and technology since 2002. Theriault, who started at the bank in 1982 as a programmer after graduating from Illinois State University in Normal with a BS in business administration, says his career “grew right along with the PC.”
After a series of promotions into technology management, Theriault left the bank in 1990 to take a senior tech post at Racine, Wisconsinbased S.C. Johnson & Son. There he saw how a nonbanking company was using distributed technology to transform its business. He returned to Northern Trust in 1991 and began developing the open-architecture desktop platform known as Passport that has become the backbone of the bank’s global technology effort.
The transition from mainframes wasn’t easy. “We were throwing out technology that was a huge success at the time, but we were producing 25,000 custom reports written in Fortran, which wasn’t sustainable,” Theriault says, explaining that the new technology, which is easier to maintain, permits the bank to employ many third-party software packages. This flexibility has helped Northern increase assets under custody at an 18 percent compounded annual rate since 2001, compared with peer growth of 13 to 16 percent, according to research from securities firm Janney Montgomery Scott.
Theriault, who was chief technology officer for six years before being promoted to his current post, discussed the role of technology in Northern Trust’s future in a recent interview with Institutional Investor Contributor Julie Segal.
Institutional Investor: Northern is still using an open-architecture platform developed in the early ‘90s. Is it time for a change?
Theriault: The development of Passport, our desktop technology brand, was a milestone. It repositioned Northern as a tech leader and innovator; we were using Internet technology five years ahead of the competition. While we planned for obsolescence in the architecture, it has endured and allowed our technology spending to go directly into client capabilities. We’re set architecturally.
How is technology shaping Northern’s business?
We remain committed to open architecture and open standards, and we try to manage the cost of hardware, software and services as aggressively as possible. Today, 250 people, about 20 percent of our 1,250 total staffers in IT, work for us offshore through third parties. We believe the point at which it makes sense to switch and employ these people directly is when the workforce reaches about 400. We’re planning on that happening, and we’re building an operations center in Bangalore, India, to complement our centers in London and Dublin.
In our global operations model, Chicago supports North America, London and Dublin support Europe, and India will support Asia. Clients prefer that we have our own workforce offshore rather than rely on third parties, and we think that’s better as well. Currently, we have 95 employees in India. In five years we will have 1,000 employees offshore.
Aside from costs, what are the reasons to be in India?
The India center is strategically important to Northern Trust because it supports our clients’ growth in Asian markets. The location also serves as a backup to London and Chicago. It provided a test of our business continuity system earlier this year when there were riots in Bangalore over the death of film star Rajkumar that prevented staff from getting to the office and shut down work at most software firms in the region. The Indian team passed work to Chicago, and Chicago passed it back seamlessly once Bangalore had quieted.
The India center is also about having the talent necessary to support our growing global business. London and Dublin are competitive markets and we need resources.
What kind of technology budget does it take to accommodate your global business effort?
We’re spending $300 million a year on technology to support business growth of about 10 to 15 percent a year. With growing demand, our budget has to go up. But our spending has not gotten out of hand, because we’ve been able to hold down costs through the use of open-source software and advanced server technologies, such as Linux. Our budget grew through the 1990s into the early 2000s and then came down -- not because of the burst tech bubble, but because we were able to take advantage of cheaper technology. Now it’s starting to go up incrementally because of increased demand.
How do you manage Northern’s technology when it is decentralized around the world?
The biggest challenge is that the business operates 24/7. When you’re sleeping, another part of the world is working. That forces you to use asynchronous communication like e-mail or synchronous communications like conference calls in the middle of the night. Since we run our systems at night and make them available to clients during the day, one challenge is the timing of upgrades: We have to squeeze them into a small window -- early on Sundays, Chicago time.
Are you currently working on any unusual applications?
We just developed a virtual family office. We’re seeing family offices being asked to do more with less, and they have asked us for help. They wanted a Web-based general ledger system, so we acquired one and integrated it with our technology. Next they wanted us to aggregate data on assets held outside the bank so they could use our reporting tools and do performance analytics on those assets.
To do that we’ve aligned with Private Client Resources, a database publishing firm in Wilton, Connecticut, and integrated our technology with theirs so they can provide services such as tax-lot detail reporting. Clients are currently beta testing the offering, which, we believe, raises the bar in servicing the very-high-net-worth. We spent less than $10 million on this project, whereas one competitor has announced that it made a $100 million investment in a family office solution.
Anything else that puts you ahead of the competition?
We’re looking into enabling every employee to work from home through a desktop. If there’s an Avian flu pandemic, for instance, that capability would give us added resiliency. We’re also looking into the capability of routing calls over the Internet from an employee’s extension to his or her home computer. Because we have a reputation for strong client service, we would like to give our people all the tools necessary to work with a client, wherever either of them may be. It even opens up the issue of how much office space we need if our people can do their job from anywhere in the world.
How much of Northern Trust’s systems are proprietary?
Most of our banking systems are outsourced, and our investment systems are mostly from third-party vendors. Our global asset servicing platform, however, is mostly proprietary because there is just a handful of competitors in our space, making it uneconomic for vendors to serve it; we just can’t buy the necessary systems in that area. Passport is proprietary and ties everything together. The derivatives and alternatives areas present tech challenges because there aren’t great solutions there yet.
How do the demands and habits of Northern’s wealthy clients shape the technology you offer?
Many of our clients are deeply interested in the investment process and want to be involved in it. They also want advice from attorneys, estate planners and others. So if the client approves, we are able to give any of their advisers access to their account information. This lets us use technology in a way that’s especially meaningful to clients.
