The Real Deal?

John McKinley is banking on Web services to help Merrill Lynch save time and money and take the firm to the next level when building applications.

McKinley, chief technology officer at the firm, says, "Our pursuit and passion around Web services is due to our early-stage returns."

For the past few years, the firm has been at the forefront of embracing Web services and standards. "It's going to be a fundamental design tenet for us, for all of our major initiatives going forward," he says.

McKinley is not alone, as more and more firms embrace Web services in the coming year. The Web services-software market is expected to hit $1.7 billion in revenues in 2003, according to Gartner Group, while spending on enterprise integration will reach $50 billion, according to IDC.

In terms of the financial-services industry, TowerGroup says that spending on Web services in 2002 was "minor" compared to overall spending. However, that will start to ramp up this year and, by 2005, financial-services firms worldwide are expected to invest $8 billion in Web services.

One Step At A Time
Dushyant Shahrawat, an analyst at TowerGroup, says that brokerage firms will adopt Web services in stages. The past few years was spent in the first stage, gearing up by equipping systems with Simple-Object-Access-Protocol (SOAP) and Web-Services-Description-Language (WSDL) interfaces for better interoperability.

The second stage, he says in a report entitled Web Services Appeal for Securities Brokerage, will commence in 2003, as enhanced-software developments "help brokers loosely combine internal and commercial components to create complete applications. "That will last until late 2004, where the third stage kicks in to create a service-oriented architecture and functions, such as commission calculators and analytic routines."

Web services are expected to revolutionize the way that firms build applications and manage computers by allowing more integration among systems.

However, Andrew Bartels, research leader, industry perspectives on information technology at Giga Information group in Long Island, N.Y., says there are two issues slowing the adoption of Web services. They are developing common standards and building the appropriate business infrastructure.

He used to think that it would take "12-18 months for standards to gel and be specific enough to be usable." However, he's lowered his estimate to six to 12 months.

That's because standards groups that have been established, comprising vendors and users, are making headway through the Web Services Interoperability Organization (WS-I), the World Wide Web Consortium (W3C) and the Internet Engineering Task Force (IETF).

The WS-I is building basic profile specifications around standards like XML, SOAP, WSDL and UDDI that will smooth the flow of information across competing platforms.

However, "Standards are only half the issue." The "larger issue," he says, "is one of business infrastructure around Web services." By that he means the "terms and conditions, liabilities, responsibilities - all the contract language and procedures."

In order for Web services to reach their potential, interoperability among vendors and the ability of firms to share and rely on applications that sit outside their control must become a reality.

Bartels says the legal "stuff is necessary for firms to feel confident they can use Web services from someone else." They need to know that someone "stands behind it."

He likens it to the applications-service provider bubble from the dot-com era. The reason many ASPs "never gained traction," he says, is because they lacked processes and procedures, including the legal terms, which provided firms with comfort to use them.

He notes that many of the outsourcing agreements firms sign today are "complex" and include well-documented procedures to govern the relationship. None of that exists yet for Web services, and could take five years to develop. "There's an inevitable lag" between developing new technology and creating a business infrastructure to support it, says Bartels.

Web Services And You In 2003
"This is an appropriate time to be doing internal pilots and deployments around Web services within the enterprise," he says.

That's what Merrill's been up to and McKinley says that, at a time of austere tech budgets, firms will find Web services to be a welcome relief. He cites one example of an institutional application Merrill was building, which required the firm to tap into different applications running on its mainframe. Using "historical-interface designs," the project was estimated to cost $800,000, but applying a Web services approach to the design, the bill came in far below that. "That's what gets us so excited about it." He expects a two to three times productivity gain using Web services.

The challenge in 2003, he says, is trying to "figure out what emerging best practices exist."

Shahrawat says there are four major ways that Web services will benefit broker/dealers in the coming year. First, Web services will enhance the integration and connectivity to other firms through standards-based interfaces. Second, it will speed up and reduce the cost of software development. Third, it will facilitate the "delivery, access and consumption of software services on a remote basis, through either a proprietary network or the Internet, and also "breathe fresh life into the ASP model." Fourth, it will allow firms to leverage their legacy infrastructure and help them identify new revenue opportunities.

But it won't come all at once. The process will start in the back office and move to the middle and front offices. "Firms are testing Web services in the back office, because these systems have the most to gain."

Initially, Web services will be used as an integration mechanism and, eventually, to "isolate specific functions or routines and expose them to either internal departments or external parties." However, that's in the long term, he says.

Moving forward in 2003, the middle office will start to get more focus and firms will look to Web services to "better integrate the middle office with front- and back-office systems" and link to third parties, such as virtual-matching utilities.

Shahrawat says it will be two to three years before the front office sees wide-scale exposure to Web services.

When it comes to the vendors, the software-infrastructure makers, such as Microsoft, BEA, Sun Microsystems, Oracle and IBM are "going to pickup most of the candy" and "make most of the money on the vendor side," says Ted Schadler, a software analyst at Forrester Group in Cambridge Mass.

"Each of these guys has a strategy how to build out Web services, with IBM and Microsoft having "high visibility in the financial-services industry."

However, Shahrawat expect a "slew of smaller vendors will enter the Web services market, but more than half will fail or get acquired by year-end 2003."

Kenny McBride, global industry manager for capital markets at Microsoft, which is promoting its .NET solution for Web services, says that Web services will "very quickly make firms more efficient" and is a front runner to preparing for the eventuality of T+1.

"It's hard to get (the necessary) connectivity and communication between disparate systems" to meet the timetables for clearing and settling trades in a day. "With Web services the benefit is that you can create applications a lot more quickly and communicate across silos," says McBride.