Lehman Brothers Holdings, parent of the fourth-largest U.S. securities firm, has been on a roll. Net revenues rose 40 percent in fiscal 2003, which ended November 30, and a further 52 percent in this year’s first fiscal half. Even more impressive, the firm’s earnings soared 74 percent last year, to $1.7 billion, and 73 percent year over year, to $1.3 billion, in 2004’s first half.
The bulging bottom line suggests there is more going on here than just an incipient recovery in the capital markets. Give due credit to Lehman’s chief of operations and technology, Jonathan Beyman, and his 3,000-strong staff, whose efficiencies have whittled away at operating costs. Compensation as a proportion of revenues, for example, fell to 49.8 percent in Lehman’s fiscal second quarter from 51 percent a year earlier. For four consecutive quarters, Lehman’s pretax margins have exceeded 30 percent.
Beyman, 48, shrugs off any suggestion that he deserves much of the credit. “Do I go around high-fiving myself?” he asks. “No, it’s done on the trading floors.” Nonetheless, those trading floors succeed in part because of sophisticated hardware and software that Beyman’s group helps to select, develop and maintain.
“We certainly feel like we contribute to making the businesses more productive,” he says. “In some measure that comes from keeping costs in line, in some measure that comes from controlling risk, and there are places where technology helps profitability.”
Beyman has to be much more than just an efficiency expert these days. He has to gear Lehman up for the make-or-break arms race in high-tech trading. Technology is now needed to free salespeople and traders to “move up the value chain -- talk to clients about a trading idea or about a market trend.” That, he says, “hopefully gets us more business.”
Beyman won’t discuss what Lehman spends on technology, though he allows that “we upscale budgets in good times and look to spend less in tighter times.”
Times must be good. One hard budget line that Lehman does disclose -- technology and communications spending -- rose 8 percent in fiscal 2003, to $598 million, or nearly 10 percent of noninterest expenditures. Such spending was up 22 percent year over year in the six months through May, to $355 million. Contrast that with Merrill Lynch & Co., which cut communications and tech spending (also about 10 percent of noninterest costs) by 16 percent in 2003, to $1.46 billion, and 8 percent in this year’s first half, to $698 million.
At its current pace, Lehman will “upscale” tech and telecom spending by 19 percent in 2004, still well below bubble-era proportions. Global securities industry tech spending grew at a compound 49 percent annual rate from 1996 through 2000, says research firm TowerGroup.
Beyman, who has an accounting degree from the University of Connecticut and an MBA from Cornell University, joined Lehman in 1986 as a vice president in fixed-income operations and rose to become head of systems development. In 1994 he left to join consumer services conglomerate Cendant Corp. as chief information officer. He returned to Lehman in 1999 as head of U.S. operations, becoming CIO the following year and head of the combined operations and technology function in 2002. Beyman recently discussed his technology outlook with Institutional Investor Assistant Managing Editor Jeffrey Kutler.
Institutional Investor: Is technology a support function or a competitive weapon?
Beyman: It’s some of both. There are clearly things we have to do that are basic support -- payroll and human resources, for example -- and that are clearly cost centers. The more interesting parts of it have to do with improving productivity and competitive advantage. The overall mission of technology is to help the firm generate superior returns.
How do you balance the competing demands of the business units?
It starts with budgeting, but knowing how much money we want to spend is just the beginning. Each business unit has its own prioritization process; their return on technology investments will be reflected in their bottom lines. My role is to make sure that the technology organization has the capacity and infrastructure to support those priorities. We also want to see that there are synergies wherever possible between the units so that, say, the fixed-income and equity businesses aren’t working on totally separate sets of technologies. Wherever possible, we try to standardize on sets of software and hardware.
How have the recent swings in the technology and investment cycle affected you?
During the downturn we stopped hiring, put projects on hold and spent less money.
Has your industry gone into reverse when it comes to making long-term technology investments?
If you go back to 2000, there were so many interesting new things that were easy to chase. The knock was, fair or not, that a lot of money was wasted. Lehman did less of that than anybody else. We have to be very pragmatic: We are not an R&D shop. We’re providing technology to support a very specific business purpose. I don’t do things because they’re cool.
That said, have you tightened the purse strings over the past few years?
Lehman has always had a cultural bias toward expense control. We explore certain technologies that we think we can deploy to our advantage, but in a very judicious way.
How rigorously do you measure ROI in technology?
That kind of calculation has limits. I know with certainty what the “I” is -- how much things cost. It’s much more difficult to attribute returns back to a given technology.
Would you call yourself an early adopter of hot technologies like open-source computing?
No, we are fast followers, not on the bleeding edge. We adopted Linux in early 2002 when we were convinced that real companies were getting behind it, including Intel Corp. and Red Hat. We aggressively implemented it, mainly for reasons of cost efficiency, but lots of our peers did the same thing.
You have Internet telephones on all the desks.
That may be an exception where we were early adopters. In January 2001 our technology organization moved into the World Trade Center and decided to test [Internet protocol] phones before deploying them widely. When we had to relocate after September 11, the technology was tremendously beneficial. The phones can be preprogrammed, so people who aren’t sitting in the same place from one day to the next can just plug the phone in and be in business. We had gotten so much experience that when we moved to our new headquarters, the firm adopted IP telephony.
How much do hedge funds influence technology priorities?
I don’t think a day goes by without my having at least one conversation about that business. Hedge funds are interesting because they are cross-asset and span the gamut of all the products we provide. That implies that a lot of legacy systems are in play, which were built long before anybody believed that customers would be peering into them in a real-time way. You have to address how to break down the silos and aggregate and disseminate information. Demands on us from hedge funds are greater than from just about any other market segment.
What new developments are you focusing on?
It’s the battlegrounds that seem most interesting. These days they include tying the Internet to internally developed pricing engines and competing on speed and function. An example is “direct to model,” which makes our algorithmic trading tools available for executions over the Bloomberg network. The concept is to push things that had been used internally out to customers and hopefully give them a reason to transact with us. Of course, that leads to margin compression. They pay us less, so we have to make sure everything is cleanly processed and costed and controlled. That just shows how technology changes the business and how the business is changing because of technology. That’s what makes all of this fun.
