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Joseph Antonellis of State Street Corp.: The joys of specialization

The Boston bank's concentration on investment services differentiates it from other custodians. That doesn't make technology management any easier.

In January 2003, State Street Corp. plunked down $1.1 billion for Deutsche Bank's global custody business and said it would take no more than two years to complete the integration. It was the biggest deal ever in that low-margin, fiercely competitive sector of the financial industry.

Today, reports Joseph Antonellis, Boston-based State Street's executive vice president and chief information officer, "we're basically done." Done, that is, except for a German operation that the bank decided to phase in more slowly because of what Antonellis terms its "very different functionality." Those final stages will be finished by next fall.

There's no need for excuses. State Street has deftly managed its rise to the top of the global custody league table, with Deutsche's $2 trillion in custodial assets helping to push State Street's total to $9 trillion, ahead of Bank of New York Co.'s $8.9 trillion and J.P. Morgan Chase & Co.'s $8.3 trillion. In the process, information technology spending has declined: Systems and communications expenses through September were $396 million, 3 percent lower than in the year-earlier period. And State Street has pared all of the 1,000 employee positions acquired in the Deutsche deal.

Antonellis, however, is not wanting for other huge projects. As hard as the Deutsche Bank acquisition was on his operations and technology staff -- now numbering 6,500, or roughly one third of State Street's total -- Antonellis says that it was, in a sense, easier than what is currently on his plate. Moving Deutsche's systems onto State Street's infrastructure was "a straight conversion," he explains. Elsewhere, for all major business lines, "we're building out or enhancing entire platforms. It's a pretty intense focus across the breadth of our organization."

Among those efforts: gearing up to provide outsourcing support to major asset managers, including units of ABN Amro Bank and Investec Group; moving the State Street Global Advisors unit onto that same asset-servicing platform; and extending the Global Link electronic trading system, now handling foreign exchange and equities, into fixed-income products. In addition, State Street CEO Ronald Logue recently put Antonellis in charge of the firm's wealth manager services business, supplying technology to financial advisers.

Logue, CEO since David Spina retired in June, wasn't pleased with State Street's third-quarter earnings -- a 12 percent decline, to $177 million -- which he blamed on a fall in trading- and market-related revenues and insufficient cost-cutting. "We're certainly feeling pressure [to reduce costs]," says Antonellis.

The 49-year-old, who has a BA in economics from Harvard University and an MBA from Bentley College, spent 15 years with Bank of Boston Corp., where he was deputy corporate auditor and head of mutual fund custody. He left in 1991 to join State Street's mutual fund services group, then headed by Logue. Antonellis became head of global financial technology services in 1994 and gradually assumed additional responsibilities, including institutional investor services, strategy development and master trust. He became CIO in 2002.

He recently discussed his priorities with Institutional Investor Assistant Managing Editor Jeffrey Kutler.

Institutional Investor: How do you coordinate technology management?

Antonellis: Part of my mandate is to make sure that IT and the businesses work side by side and collaboratively come up with strategic solutions. To be truly strategic, my project managers have to be in meetings with their business colleagues and know their issues and problems. IT has to be part of an integrated business framework; it's not a fiefdom. So the business-line managers have an IT manager who reports to them -- but who is on my budget.

How much have you outsourced?

Well, what do you call outsourcing? We are a global company, with people around the world, and we've always used contract help to keep fixed costs down. It's not about laying people off. These arrangements enable us to augment available staff on a project basis.

What's an example?

In 2003 we set up a joint venture with Zhejiang University in China, where more than 200 people are doing software development for us. We haven't shifted U.S. resources offshore; we are improving our overall productivity.

How do you measure the benefit?

We consistently spend $60 million a year on professional services; now we are getting a lot more for that money. Using offshore resources, we are doing projects on a 24-hour clock. They're finished in half the time. Beyond that, we are rolling out the IBM Rational Suite, which will put all our development operations on a single framework, with common code, configuration, testing and control processes. It's a big up-front investment, and we're just getting started. Other companies that have done this report 50 to 100 percent productivity gains.

How has the technology head count changed in recent years?

We're divided into three areas, one of which, wealth manager services, is a new business that has ramped up over the past three years, from about 50 to 600 people. With that development work coming to an end, we'll shift our attention to marketing efforts. Global securities services is flat -- in other words, we absorbed the Deutsche Bank business without a net head count increase. The IT front is also just about flat, but there has been some turnover within because we moved 600 people into development jobs and we have about 700 in offshore positions.

Has the overall technology budget stayed pretty steady?

As a percentage of the operating budget, IT generally stays in the 20 to 25 percent range. This year it's closer to 25 percent because we built a new data center.

In dollar terms, then, you must have ups and downs.

Yes, the budget varies with revenues. Our core spending has come down 10 or 15 percent over the past two years. While development staff is up significantly, we've taken a lot of costs out through server consolidation and storage area networks -- which lower our unit costs and improve capacity utilization -- and by renegotiating contracts with vendors. These savings are a big reason we were able to build a data center, which opened in October, without breaking through 25 percent of the operating budget.

What was the rationale for building a data center?

It was to replace the older of our two primary data centers, which had become obsolescent. We needed a new, state-of-the-art facility with the highest possible level of resiliency. Given our growth and investment in technology, we had to upgrade, and it would have been too risky to try to reengineer the old building while keeping all systems running.

Does your company's narrow business focus simplify tech management?

Our focus is on the investment business, and our clients tend to be large entities with a similar range of needs. Being specialized gives us great leverage because our business units don't compete for resources against commercial lending or retail banking, whereas many of our competitors at times have to balance those conflicting needs.

You focus, yet you also say you have scale advantages.

Yes. One reason that our acquisition of Deutsche Bank's custody business was successful was that we were able to consolidate its seven accounting systems onto our single multicurrency platform.

Has anything else you've done approached the magnitude of the Deutsche deal?

We have other big things going on. Currently, we are building out a middle-office outsourcing platform, which includes institutionalizing the core recordkeeping system of our Princeton Financial Systems subsidiary. This is significant because there are lift-outs involved. For example, we are servicing ABN Amro Asset Management and Investec Asset Management on their platforms with their people. We will be converting them to our platforms -- including accounting, recordkeeping, corporate actions -- to get added synergies.

Does your systems architecture need more streamlining?

You always have to streamline and get to the next generation in an evolutionary way at a reasonable cost. We are moving toward a service-oriented architecture, where, for example, trade processing or corporate actions becomes an application that any of our businesses can draw on. We're looking at blade servers and open-source software. A couple of applications do quite well running on Linux, but it's not ready for the high volumes of many of our other systems.

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