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Deutsche, Merrill Reveal Recession-Proofing IT Strategies

Deutsche Bank, Merrill Lynch and other Wall Street firms are using smart IT strategies to weather both bust and boom cycles.

Although the first quarter was rough on Wall Street -- an estimated 40,000 people were laid off, and Citigroup, for instance, announced that it would cut 20 percent of its operating costs after recording a $2 billion loss -- at least a few technology leaders at major financial institutions are finding that, so far, IT organizations and their respective budgets are weathering the storm. According to experts, technology has become too important to the business to eviscerate (or so IT professionals hope).

"Technology is a lifeblood now," explains Sean Kelley, CIO, group technology and operations, at Deutsche Asset Management. At the end of April, Deutsche announced its first loss ($220.4 million) in five years as the result of a write-down on loans for leveraged buyouts -- bad news that was modest compared to the fallout from the credit crisis at many other firms. "The last thing people want to go after during challenging times is IT. Where people might have turned to IT cuts in the past, today I'm finding people are looking last at IT due to its strategic importance."

Although Merrill Lynch reported a $1.97 billion net loss for the first quarter of this year, "IT is critical in any market environment," says Alok Kapoor, the firm's head of global technology services. "Even in this cycle, volumes and volatility are at all-time highs, and capacity and performance are especially critical. And while we are focused on running the plant, we can't lose sight of making prudent investments that will ensure our competitive position. Further, our businesses continue to demand higher productivity returns from their technology investments."

After all, notes Tom Price, a senior analyst in the securities and capital markets research service at TowerGroup, at some point, the markets are going to take a turn for the better. Those firms that haven't ravaged their IT departments, he says, will recover soonest and have a competitive advantage.

But the CTO of a large Wall Street firm that had a demoralizing first quarter (who spoke off the record) is more pragmatic. Offered the notion that firms that maintain IT investments will have an advantage when markets recover, he notes that that depends on two things: first, whether they survive to the end of this cycle; and second, whether their investments are being made in the right places. "You shouldn't cut strategic programs, which we haven't done," he says. "On the other hand, there are a lot of things you look at and say, 'You know, that looked like a great idea a year ago but today it's not so interesting.' "

These firms and others are making smart, recession-proofing moves to keep their IT organizations trim and ready for potentially worse economic weather while remaining prepared for sunnier days. Among other strategies, they're consolidating platforms, allocating IT dollars more judiciously, shifting more IT work to cheaper locations, leveraging computing-on-demand resources and tapping hosted software solutions.

Platform Consolidation

A common thread among Wall Street recession-proofing/IT efficiency initiatives is platform consolidation. "Over the years, a lot of the investments that large Wall Street firms have made have been based on speed to market: 'I'm launching a new financial product, I'm opening a new location -- let me optimize to get that product or location up and running quickly,'" relates Bob Gach, global managing director, capital markets, at Accenture. For these reasons, and through mergers and acquisitions, many firms have acquired a plethora of trading platforms, customer databases and even e-mail systems, for which the costs of operation and maintenance alone eat into the IT budget.

"The problem is that that suboptimizes for the longer term," Gach continues. "Decisions have been made that were truly market relevant for an individual department, but the net result is that the total cost of ownership and the cost of feeding the monster year in and year out are far greater than if you had one trading platform, one customer database, one reconciliation system."

Gach says firms should be spending at least 50 percent of their technology budgets on new development. "If it's lower than that, you're maintaining too much and unable to invest in the future," he contends. "If you have too many platforms and overlapping technologies, the costs for just keeping the lights on get to be so high that you don't have any money left over for innovation."

Deutsche's Kelley compares his recession-proof IT strategy to investment portfolio management. "We manage a portfolio -- a rather large one -- and we have to constantly optimize it against the market," he explains.

"A portfolio manager streamlines the beta in a portfolio -- in other words, that which tracks the market but doesn't outperform it," Kelley continues. "You always have to have some of that in your portfolio. We've streamlined our IT beta to make it simpler, more global and more efficient. Then, as it's become more efficient, we've moved the returns from that efficiency gain into the alpha side of our portfolio -- activities where we can beat the benchmark."

Beta Fuels Alpha

The beta period began when Kelley arrived at Deutsche in December 2004. The asset management division had been cobbled together through a series of acquisitions -- Scudder, Zurich and Bankers Trust, among others -- that hadn't been truly merged. "We had this complex labyrinth of technology," Kelley says, noting that there were 15 different equity trading systems, for example. "At one point in time, there was one application for every 10 people [roughly 650 applications and 4,100 staff], and asset management is not a complex process," he adds.

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