The Right Mix

Managing internal technology projects as if they were investments in a portfolio of assets undoubtedly is a growing trend on Wall Street. But the portfolio approach hasn't stopped there. Now, Wall Street firms are applying portfolio management techniques to IT hardware and software.

It should come as little surprise that firms are focusing on managing IT equipment efficiently and creatively, as information technology often is the second largest chunk of their budgets (after the people they employ). Chief information and technology officers are reexamining their IT options, including decisions to buy or lease, to lease for three years or four years, and to install new or used equipment. Additionally, firms now are considering the disposal of IT assets to comply with privacy and environmental regulations, often negotiating to include the costs in vendor contracts.

"IT portfolio management means looking at financing options and technology upgrades on a regular basis to maximize their return," explains Mike Ross, vice president of IT portfolio management at Relational, a Rolling Meadows, Ill.-based IT-asset portfolio management company.

IT decisions usually have two components, according to Jim Matteoni, chief technology officer with Kansas City, Mo.-based UMB Bank, the principal affiliate bank of $7.8 billion UMB Financial Corp. First, there is the obvious technology component, which involves understanding the firm's needs and going into the marketplace to find the right solution - a duty that is right up the CTO's alley. The second component, after selecting a vendor, is determining how to structure a deal (e.g., buy versus lease) most cost-effectively, a process that can include weighing the costs of the hardware/software, maintenance and disposal. Such duties are more in line with the expertise of a chief financial officer, Matteoni suggests.

It Takes Two

A close collaborative working relationship between the two executives often is the key to structuring a deal in the best interests of the firm, Matteoni continues. However, the responsibilities of each executive can create tension between the CFO and CTO, he notes. Often, the CTO is most concerned with making sure the firm has cutting-edge technology, while the CFO is responsible for getting the most bang for the firm's buck.

As CTO, "My goal was to continually get fresh equipment out there around every three years - four years at the worst," Matteoni relates, adding that a three-year upgrade cycle allows a firm to keep its technology fairly fresh. Though he declines to offer specifics about the technology arrangement at UMB, Matteoni says, "I always did lease when I was with other companies. There is a shelf life to hardware, and it becomes obsolete because the software you are going to run on it requires bigger and faster machines. If you buy it and try to keep it too long, you are going to wind up with some problems."

No matter how tight budgets are, holding on to technology too long is not the answer, Matteoni stresses. "If you are looking to save pennies by saying you can keep something for one more year, then you will wind up paying more later on," he says.

Still, according to Robert Schafer, senior program director of technology research services with Stamford, Conn.-based Meta Group, more and more firms are opting to keep their IT hardware - specifically PCs - for a fourth year. "There is a clear tendency to extend life cycles of hardware assets," he says. However, Schafer concedes, "Increased maintenance costs as the years wear on mean holding assets longer than four years is not practicable."

If a firm is intent on keeping its hardware for an extra year, Schafer says, it's important to have the maintenance agreement mirror the anticipated life of the assets. In other words, if a CTO plans on leasing equipment for four years, the firm shouldn't arrange a three-year maintenance plan. "If you don't [extend the maintenance agreement], you are faced with whatever the vendor wants to charge you during that last year," he warns.

According to Bill Roch, research director of leasing services with Framingham, Mass.-based IDC, leasing doesn't mean that life is going to be simple. He points out that large financial institutions can have thousands of lease schedules to manage and, though there are software tools available to help, "It's a big job." Nonetheless, Roch says, leasing makes it more likely that a firm will take advantage of the latest equipment. "It's easier for a company that leases to stay ahead of the technology curve," he says.

However, if the majority of a firm's IT equipment is leased, Roch cautions, it's critical that the leases cover different time periods. "If you have 10 storage subsystems, you don't want all those expiring in a six-month period, because you are not going to be in a position to swap all those out at the same time," he explains. Further, when it comes to buy-versus-lease decisions, Roch says, it's smart for firms to do both - determining when each makes sense on a case-by-case basis.

Take Out the Trash

Acquiring technology isn't the only challenge a CTO faces. Disposal of IT assets, and the charges that come with it, has become a huge aspect of managing technology, UMB's Matteoni says. No longer can CTOs put off disposal considerations until the assets' life has come to an end, because the cost and effort required to dispose of technology assets are too significant to ignore. Rather, disposal costs must be discussed during the initial vendor agreement and factored in as part of the total cost of ownership.

"The last thing you want is to have one of your old PCs with Social Security numbers on it and things like that surface," Matteoni says, noting the advent of regulations such as Gramm-Leach-Bliley. "Today, you have to figure out not just how to get rid of the hardware, but how to get rid of the information on it, so you have to look at disposal costs when making a purchase."

Meta's Schafer points out that disposal considerations transcend the privacy concerns of acts such as Gramm-Leach-Bliley to cover environmental considerations. "The fundamental issue on the environmental side is that there are toxic elements in monitors especially. The legal counsels of large firms are saying, 'As a global company, we don't want 20 years from now for the EPA [Environmental Protection Agency] to discover our IT assets in the bottom of a toxic dump,'" Schafer relates.

With such considerations in mind, he says, many companies are figuring that the lease option is the safer way to go. But assuming that if the firm doesn't own it, then the firm can't be liable for its disposal might be a mistake.

"Leasing doesn't mean you don't have to do due diligence about disposal," Schafer contends. "Many lessors are mom-and-pop shops, so I lease X number of servers or PCs and in three or four years wash my hands. Ten years from now, in a toxic dump, the EPA tracks them down and Mom and Pop have gone out of business. The rest will be history," Schafer says, suggesting that the firm ultimately could be liable.

Relational's Ross says disposal is just another cost on which IT executives are being challenged to make every dollar count. "You can't stick [IT assets] in a closet or throw them in a dumpster," he says. In addition to other IT services, Relational provides clients with a "Death Certificate" for their IT assets, assuring a firm that its equipment, and the information stored on it, is gone - in an environmentally friendly way - for good.

Also gone for good are the high-flying days of the late '90s when scrutinizing costs was the last thing on anyone's mind. With the millions of dollars financial institutions spend on IT today, saving 5 percent to 10 percent by managing and structuring technology deals better is no small matter. "That's why it's getting a higher focus at this point than in the past," says UMB's Matteoni.

And with IT eating up larger-than-ever portions of firms' overall budgets, scrutiny will continue to intensify, according to Ross. Technology executives "are being evaluated on how they manage the mix of IT assets and projects, and whether those bring value to the business," he says.