Q&A - Joseph Antonellis, executive vice president and chief information officer at State Street Corporation

WS&T: What percentage of your annual sales revenue did you spend on technology tools, products and services this year?

ANTONELLIS: We've stated 20-25 percent of operating revenue per year. That's a variable number based on revenues and figure, but that's been our history, and will continue to be the case.

In terms of run the bank as usual, and new development and opportunities, we're at about 75/25 percent split now, which is about consistent with the rest of the industry. For all the money we save on production and maintenance, the more we can spend on new products.

WS&T: What are some large categories of spending?

ANTONELLIS: Because of who we are in volume, there is cost in spend on infrastructure: making sure we maintain and that we're upgraded, that we remain scalable, and reliable for all of our business because we gets hundreds of millions of transactions. Upgrades and data centers " that is a large piece. Then 25 to 30 percent of budget is on new products, innovation, and new functions, both development and purchasing.

WS&T: What is your perspective on outsourcing versus staying in house?

ANTONELLIS: We don't, as a firm, outsource a lot of our core functions, but we do, as a firm, use professional-services fees in development (such as) global-enterprise providers to do development.

We run our projects, and we don't typically farm out development for a complete project, but will use off shoring, for example, in a staff adjunct mode. We break up pieces of our project and give a vendor an opportunity to run that piece of it, but it still ties into our whole system. From that perspective, we do off shoring like everyone else.

If you consider development (to be outsourcing), we have a joint venture with Zhejiang University Innovation Technology Co., Ltd, a publicly held company owned in part by Zhejiang University in China. They have 80 or 90 PhDs who work exclusively for us on our development, our code and our R&D. There are probably 14 projects with global-enterprise providers where there is a combination of onshore and offshore developers. So we've always spent money using external parties to help us develop, but now we're moving more of that to off shoring vendors because of better value, and the quality is quite good.

We haven't taken our infrastructure and said, "I'm going to outsource data centers or networks." We don't do that — maybe bits and pieces along the way, but not in entirety. We don't foresee taking an EBS or IBM and outsourcing our IT infrastructure.

WS&T: What is your project-prioritization process?

ANTONELLIS: In the last few years we've put in place a new governance process. It starts with David Spina's (CEO of State Street) strategy development process. We, the top 10 to 12 people in the bank, meet every month for an all day strategy session, whether it's entering new markets, new products, new lines of business. In there we talk about the diff strategy initiatives. It's there that we set the high-level priorities, in terms of pace and spend. Then I go on an executive committee that goes across the bank to make sure that we understand the tradeoffs and where the spending will come from. Ultimately it breaks down into business line.

You need to stay close to market so you can't do everything centrally, but we do set spend levels based on our strategic initiatives at the corporate level.

WS&T: How do you determine what projects to take on?

ANTONELLIS: We do a business case for all the major investments, a demand-management process. It starts from the ground up as well as the top down. From the top down, we're looking at major strategic initiatives and the major funding for the businesses. From the ground up, we'll do business cases project by project. Those are evaluated against each other - What is a higher or quicker payback? Which sets into strategic initiative at the top level better? Then we rank those against each other.

WS&T: What applications are more suited for buying from a third party? What is more suited for building?

ANTONELLIS: We do a business case in ROI (return on investment) for every one of our major initiatives. If the software carries with it a distinguishing characteristic that sets us apart, we build our own. If it's software that would fill a gap, and time to market and doesn't give us a distinct advantage, then we would think about buying.

Scales is major piece. Everything we do has to be large, and needs to scale very quickly. This typically eliminates many buy options.

WS&T: Can you give me an example of a buy as well as a build application?

ANTONELLIS: An example of a buy: In the asset-management arena, State Street Global Advisor needs a new compliance engine. There is no reason for us to build a unique compliance engine. It gave them no competitive advantage in the marketplace. This is really a function that they need to provide within their current compliance. So they have gone off and the technologists have purchased or acquired software to install in their organization. In our whole Deutsche Bank conversion process, there's no need to build or buy. We're putting it on our global architecture. Because we were in the German marketplace, we thought there was an opportunity to buy and plug in and use, or build. But because we're already 50 percent of that marketplace, and we expect to grow dramatically there, we decided to build that functionality right in our core application rather than buy it. That's because of the scale and how integrated it will be with our platform. That will give us a competitive advantage because we'll now have the first scalable depot bank component versus the competition.

WS&T: How do you evaluate third-party solutions when going to market for an application?

ANTONELLIS: We have a due-diligence process. We put together a team of people, starting with the purchasing department, as well as our core business-application specialists. My enterprise architect makes sure it abides by IT and security standards.

We first do feature function and as it gets down to final ones, then (we check) architecture scale, credit worthiness of partner, whether it is a good fit in culture between our company and theirs. And, of course, a financial analysis is done based on our requirements.

WS&T: What are some emerging technologies that might get some play time in your firm in the next year?

ANTONELLIS: We're doing a lot with Web services. (We've) standardized on WebSphere (IBM's Web-server product). We've made significant inroads in redeveloping our whole web delivery to our clients. We were the first custodian to have a Web-based online delivery for forex, so now we're going to new architecture there. In terms of SSGA: the Global Link Web product is the foremost equity execution in money-market trading execution. We will continue to make it multi-asset - fixed income to be added.Web services has been a major push for us. We're well down that road and pretty excited about it.

Voice Over Internet Protocol: We've moved part of metropolitan network to it.

Linux: We haven't moved as quickly as others on Linux because we need to worry about its scale and it hasn't been proven yet. A lot of what people have been doing is Web services to Linux on blade servers, which we're pursuing. Our technicians in China are working on this so that we can move large-scale production systems to an open-source environment and still have scale and speed. We are proceeding in Linux but not for our core or mainstream business.

Wireless networking: We're doing something for WiFi, but have not gone (into it) whole-heartedly. It's a nice to have, but its (value is) still to be proven. You need to think about it in terms of your budget. It's always one of those budget items you'd like to spend money on to continue to advance, but we just don't see a business case to fully load it into the budget. Some people still concerned with security issues also.

WS&T: How much emphasis is placed on customer- relationship management?

ANTONELLIS: There is a new program coming out of chairman's office with a new twist on relationship management. We selected Onyx (Software, based in Bellevue, Wash.) for CRM, and we're in the process of rolling that out. SSGA is fully rolled out, and the bank probably has another 10 months, so it will be finished sometime mid-next year. (SSGA) selected it and we liked it and decided to make it corporate.

One of the nice things about Onyx is that it's not a big, heavy, major system to implement, and its not a major spend. It serves our needs, so we're happy.

WS&T: What major IT projects are on the table for next year?

ANTONELLIS: To continue with GSS/Deutsche Bank conversion (expected for completion in late 2004-2005). We'll continue on Global (Link) too make it multi-asset class " (increase) robustness in equity and begin in fixed income.

There is big growth opportunity in Europe, so we'll continue to develop our collective fund-accounting capability in Europe. We've taken the market by storm there because of who we are and the fact that we can price daily.

Two major initiatives are on the investment-manager-outsourcing and wealth-management-outsourcing side. We're continuing to build our enterprise solutions and build clients.

WS&T: What are your biggest challenges are for 2004?

ANTONELLIS: Budget will remain a challenge because people aren't sure how quickly the market will turn and pick up, or how robust it will be, so you need to be cautious where your spend is.

Another challenge we have is our two areas to spend on, and we always have to balance them: Business continuity and information security. There's always that balance between how much you spend to be sure that you remain a safe and trusted partner.