In a new development to its outsourcing strategy, Lehman Brothers has entered into a 10-year agreement with AIG Technologies (AIGT) to hand off the operations of its mainframe environment to the service provider and rent space in AIGT's facility for Lehman's operations. Lehman previously ran its mainframe operations in-house from a data center in Jersey City, N.J., but it has opted to outsource rather than update its existing facility.
"What actually drove the decision was [that] we needed to replace the Jersey City data center," says Jon Beyman, CIO and global head of operations and technology at Lehman Brothers. "Once you do that, you can either build a new data center, which is expensive and takes a long time; you can outsource the whole data center, which had certain cost advantages and certain disadvantages; or [you can] do what we ultimately decided, which is outsource a part of the environment, and do a co-location deal for the rest."
The agreement will see AIGT take on Lehman's mainframe operations, as well as provide business-continuity services using a backup data facility in Fort Worth, Texas. In addition, AIGT will rent space within its Livingston, N.J., data-center complex to Lehman for the investment bank's new data center for its distributed environment.
"We made the decision not to outsource our distributed environment, because there we felt we would have had significant disadvantages," Beyman says. "It's characterized by more change, by us doing lots of things in a real-time way from the support standpoint, and we did not feel comfortable giving that responsibility to a vendor."
As a result, Lehman needed a facility within 50 miles of New York City. "The mainframes can be anywhere, but the distributed environment has to be within a certain proximity to the trading floors to be able to support them in a real-time way," Beyman explains.
Meanwhile, outsourcing the mainframe operations is expected to result in several advantages. The financials were, of course, an important factor, and Lehman expects to benefit from both a lower and more variable cost base, according to Beyman. While he declines to put a figure on the savings, he says they will be significant.
Headcount reductions are also part of the equation. According to Beyman, of the approximately 50 positions Lehman previously staffed to support its mainframe operations, roughly 35 have been taken on by AIGT, and the rest have been eliminated.
Capacity flexibility will be another benefit; Lehman will be able to align costs more closely with its mainframe processing requirements. "We were doing mainframe upgrades probably every 18 months," notes Beyman. "So the day we did the upgrade we had enough capacity for 18 months, but you don't actually need it until some time during the course of that period. With this deal, we have capacity as we need it, and we don't have to do big, expensive upgrades anymore."
"The advantage of this deal is that Lehman Brothers is getting access to world-class technology that otherwise they probably would not be easily able to afford," says Virginia Garcia, senior analyst with Needham, Mass.-based consultancy TowerGroup. And the co-location aspect of the contract is especially attractive to a company like Lehman Brothers, she notes. "When you're talking about space in that part of the country, there is enormous expense associated with establishing a data center."
In addition, the deal allows Lehman to lower its IT-maintenance spending, enabling it to free up capital, which in turn can be invested in more strategic projects, says Garcia - a vital flexibility given that most brokerage firms have been constrained in recent years by budget cuts.