InformationWeek

Wall Street Deals
Many giants of the securities industry are preparing to outsource their IS operations

By Bruce Caldwell
Issue date: Oct. 9, 1995

host of major Wall Street firms are preparing to outsource their computer operations, overcoming the securities ind ustry's longtime resistance to ceding control of vital information systems to outsiders. The deals being considered could reach the multibillion-dollar range, dwarfing outsourcing contracts in other industries. Only Merrill Lynch and PaineWebber would comment officially on their interest in outsourcing. But sources say the brokerages and investment banks nearing decisions to outsource include several other industry giants: J.P. Morgan, Goldman Sachs, Salomon Bros., and Lehman Bros.

That securities firms are even looking at outsourcing signals a major shift in thinking on Wall Street. Until now, the Street was reluctant to rely on outside vendors to support traders who need to have system breakdowns fixed in five to 15 minutes, as opposed to the two-hour or next-day service expected by other industries.

But now Wall Street apparently believes that outside vendors can deliver timely and reliable service, freeing management to focus on core business activities while expediting delivery of the lat est technologies. Though some of the firms hope to save money by outsourcing, cutting costs isn't the driving force.

The biggest deal could be signed by J.P. Morgan early next year. Computer Sciences, EDS, and IBM's Integrated Systems Solutions Corp. (ISSC) are vying to provide services for mainframe, midrange, and some desktop computing as well as some applications, both in the United States and Europe, says an industry source. The seven-year contract could affect 1,500 IS employees and be worth $400 million a year, more than half Morgan's annual information technology budget. That would exceed on a per-year basis the record-breaking 10-year, $3.2 billion Xerox awarded last year to EDS. Over the past year, J.P. Morgan has signed smaller outsourcing deals with Bell Atlantic Network Integration to manage desktops and networks in Delaware, and with ISSC for a small desktop installation in Tokyo.

Tighter Focus
For J.P. Morgan, one of the most aggr essive users of information technology on Wall Street, a major goal of outsourcing is a tighter management focus. The firm's IS operations "consume so much management attention, they fall behind on strategic initiatives," an industry source says.

Merrill Lynch also views outsourcing as a way to use its managers more efficiently. The firm expects to decide in three to six months whether or not to outsource some or all of the new desktop computing operations that are being developed as part of a massive reengineering effort, says William Bridy, director of finance for operations, systems, and telecommunications for Merrill Lynch. The reengineering project will replace 25,000 286 PCs with Pentium and PowerPC multimedia desktop PCs and laptops.

"Cost is important, but quality is more important," says Bridy. Merrill Lynch's interest in outsourcing "deals with allocation of limited financial, technical, and intellectual resources," he says.

Sources at Merrill Lynch say MCI, its longtime telecom carrier, is on the inside track to manage the firm's routers and network connectivity, while EDS and Xerox have teamed up to bid on the desktop contract.

At Salomon, where studies on what can be outsourced are under way, "cost savings are not the issue so much as management focus," says a source in the firm's IS organization. There's even a willingness to pay a bit of a premium for services that will free up management and skilled personnel, the source adds. Under any outsourcing scenario, Salomon would keep certain IS functions, such as applications development, in house. "Writing software that will allow us to make money is where we add value, not the mechanistic stuff of hanging tapes or monitoring communications lines," the source says.

PaineWebber plans to decide next month whether to outsource its networks and 13,000 IBM PCs to EDS, IBM, or AT&T, says Robert McKinney, the securities firm's chief information officer. AT&T is the firm's long-distance provider.

Logical Extension
M cKinney says outsourcing data communications is a logical extension of the outsourcing relationships Wall Street firms have for their voice telecommunications. "We believe we can stay more on top of the technology curve by having a virtual network as opposed to buying and being locked in for years," he says.

Leading the way for securities firms to outsource is Swiss Bank Corp., which on Sept. 6 took a 24.9% equity stake in Perot Systems Corp. and awarded the privately held Dallas firm a 25-year, $6.25 billion contract for management of its investment banking unit's data centers and distributed computing.

Vendors, meanwhile, are gearing up for the deals. Perot Systems established a global financial services unit with the 700 client-server specialists it acquired from Swiss Bank. Both EDS and Andersen Consulting recently acquired firms specializing in information technology for the securities industry.

Robert Cassiliano, who left Salomon's IS organization this year to become CEO of Exchange Resource s Inc., a Minneapolis firm that provides disaster-recovery services to the securities industry, says customers have asked the firm to extend its offerings into the outsourcing arena. "Everybody's asking about it--in small ways, like putting a server at our site, to big ways, like outsourcing major components of the IS organization," he says.

For Wall Street's IS managers, talk of outsourcing stirs fears of job losses and creates what a member of Salomon's IS operation calls "turmoil in the environment."

While those concerns are legitimate, IS employees are often transferred to work for the outsourcing vendor. In a cyclical industry like Wall Street, where thousands of jobs depend on the swings of the marketplace, that could mean more job security, not less.

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