It’s retrenchment time on Wall Street, and nowhere is the pressure to perform greater than in the technology departments of top investment banks.
That’s business as usual for Merrill Lynch & Co. executive vice president and chief technology officer John McKinley Jr. He’s been living in a hothouse since October 1998, when Merrill lured him away from the CTO job at General Electric Capital Corp.
McKinley, 43, came in as part of a crash campaign by Merrill chairman and CEO David Komansky to modernize the back office and get the company up to Internet speed. Merrill had lost ground - and face - by allowing discounters such as Charles Schwab & Co. and E*Trade Group to grab the early online initiative. After McKinley’s arrival Merrill struck back.
“What has happened to the online competition since the downturn began in the spring of 2000 is a validation of our approach,” he says. The Merrill Lynch Direct offering, he proudly adds, “received top ratings from Money and Forbes magazines for seamlessly integrating everything from our research offerings to customer service in our call centers. That had an immediate impact in our battle with online brokers.”
There is, of course, much more to technology at Merrill Lynch than online products. A 6,000-person information technology group is responsible for both retail and institutional trading and client-service infrastructures, as well as investments in future developments such as Internet trading platforms and wireless data delivery. And all of that is now exposed to downturns and cutbacks.
“A financial services firm’s information system is its circulatory system,” says McKinley, whose job is to keep the heart pumping in a time of great stress. Merrill’s earnings declined 41 percent in the second quarter, to $541 million. In a round of 900 job cuts in May, 150 were in IT. Merrill shaved technology spending in the first half by 0.2 percent, to $1.17 billion.
Yet McKinley insists that the firm is more committed than ever to using technology to sharpen its competitive edge. “Senior management and the board have been unwavering,” he says.
Even while sweating the details of a planned upgrade to the workstations of Merrill’s 15,000 U.S. financial advisers, McKinley wrestles with bigger, longer-term issues. He is, for example, studying the ups and downs of such companies as Cisco Systems and Yahoo! for ideas and practices he can use to pump up Merrill’s IT effort. McKinley recently discussed his strategic outlook with Institutional Investor Contributing Editor Scott McMurray.
Institutional Investor: How has the industry slowdown affected your budget?
McKinley: Merrill’s technology investment was growing at roughly 10 percent a year for the past several years to ramp up staffing and infrastructure as volumes surged. Now we have a budget that is down a couple percent for 2001. That may not sound like much, but it’s a significant change in slope. We’ve been helped by technology price deflation, especially on the bandwidth side, which is spreading to personal computers and servers. But there are certain categories of spending where we are down on an absolute basis. We are at equilibrium now in terms of IT head count [at 6,000]. Going forward, we don’t want IT spending to grow faster than revenues.
What are some of the lessons you learned from the boom years?
We accomplished some great things. We crammed five years of innovation into two. The race to the Web challenged large organizations like Merrill to innovate. We produced what we think is a best-in-class Web offering, which is one of several service channels our customers can tap into on their terms. The downside was that our success measures and metrics got lost in the bubble economy, in the tech-exuberance phase.
What are you doing today to gauge the value of your IT investments?
No one metric paints the complete picture. We’re using a second generation of metrics that we launched this spring. We measure things like how technology lowers the cost per trade or per account, and the IT dollars invested versus assets under management. We can point to implementations with 20-plus percent productivity improvements at call centers, for instance, measuring service events per day and cost per event.
Are you spending money on research and development?
We practice strategic vendor management. We focus on our top 20 vendors in commercial applications - the usual names like IBM, Microsoft and Cisco - and work to leverage their collective R&D. In a perfect world, you use OPM, other people’s money, wherever possible.
Do you make strategic investments to support R&D?
We make selected investments in technology companies that we feel can support our needs as well as those of the broader market. I can’t be more specific than that.
During lean times do you use fewer vendors?
We’re trying to be as vendor neutral as possible, especially in hardware. That’s not a function of good times or bad. The days of one-vendor sourcing are numbered. We want best of class in each subcategory, be it data storage, routers, operating systems, whatever.
Where will you be focusing IT spending over the next 18 months?
On the institutional side, we’re upgrading traders’ workstations. The goal is to be able to trade any security from anywhere in the world and get local execution in the [issuer’s] home market. We’ve implemented the initial phases and will do the subsequent steps over the next 18 months. There are some regional systems out there, but nobody has a great global program today.
On the retail side, we will be evolving our financial advisers’ workstations over the next 12 to 18 months to provide improved portfolio management tools and collaboration tools that will enable them to better tap the collective intelligence of Merrill Lynch. And we will integrate a customer relationship management system to give our advisers a real-time picture of all of a customer’s contacts and transactions with the firm.
What role has technology played in making Merrill more competitive?
Back in 1998 everybody was putting Ameritrade and E*Trade on a pedestal. We looked at their cost of customer acquisition and size of account and didn’t think their models were sustainable. Our view at the time was that the Web is an invaluable tool for 24-7 customer service. We wanted to provide customers with a variety of choices to do business with us - including a world-class Net offering. The advantages we offer are access to experts, an immense number of products and first-class service, including call centers typically used by customers with $50,000 to $75,000 in assets. We were well positioned when the flight to quality started in 2000. It took us six months to replicate the low-cost, no-frills brokers’ technological prowess on the Web. We think it will take them a lot longer to replicate our research and advisory businesses.
What companies do you admire - for benchmarking purposes?
There are two non-financial-services companies that we learn a lot from. From the customer’s point of view, Cisco is a model for being easy to do business with. They are always promoting their product as something you can use to create more value for your company. We also look at Yahoo! because we are impressed with their message that speed is the only sustainable competitive advantage. They are very good at quickly getting customer feedback to tweak their offerings.
How about other financial companies?
We think Merrill Lynch is best in class in technology in financial services. But we do have some world-class competition. I espouse the view of [former Intel Corp. CEO] Andrew Grove that paranoia is a good thing. We have to bring our A game to the table every day.
What’s the next big thing in financial technology?
We think wireless will be huge, but we won’t hit the sweet spot for 18 months or so. We don’t think trading will be the wireless killer app. We think customers will want to focus on evaluating information, getting a portfolio snapshot and being one click away from a financial adviser.
