Morgan Stanley's New York headquarters overlooking Times Square houses CTO Chiarello and other C-level executives. Chiarello also has an office on Seventh Avenue, where developers write the code that helps set Morgan Stanley's services apart. Photo by Bloomberg News

After two years of budget cuts and technology consolidation, Morgan Stanley chief technology officer Guy Chiarello could teach a class on the new rules of IT. In fact, he does. Given their front-line experience, Chiarello and his colleagues have become a popular draw for Morgan Stanley clients looking to understand where the tech industry is headed. The company's IT team has made more than 100 presentations to outsiders. "Demand far exceeds our ability to supply information," Chiarello says.

The brokerage firm's IT department has learned to cope with supply and demand of a different kind, too. It has fewer dollars to spend but more business activity to support. Amid declines in companywide net revenue and net income during the last two years, Morgan Stanley's IT budget has been cut two years in a row--about 10% last year and another 7% to 10% this year. A disproportionate amount of the cuts came from spending on new equipment, with 40% fewer dollars going to purchases during that same two-year period. In the process, the company has consolidated tech spending among fewer suppliers.

At the same time, many measures of the firm's IT workload have risen. Trading volume on mainframes, terabytes of data storage, the number of remote workers with network access, and network traffic such as E-mail all are up sharply. "Every single measure of business volume is up," says Chiarello, who, in addition to being CTO of Morgan Stanley, is CIO of Morgan Stanley Institutional Securities Group, one of the company's main lines of business. (His counterparts are Steve Van Wyk, CIO of Morgan Stanley's Individual Investor Group; Marianne Bachynski, CIO of Investment Management; Diane Offereins, CIO of Discover Financial Services; and Shelley Leibowitz, CIO of corporate functions.)

How has the Wall Street firm done it? To be sure, its technology budget, at nearly $2.5 billion a year, still goes a long way. But there's no escaping the fact that demands are increasing while funds are shrinking, and that has required rethinking processes. "You can't save your way out of a multiyear downturn," Chiarello says. "To affect your bottom line and manage significant upticks in demand, you need to innovate."

In an overhaul that began more than two years ago, everything from infrastructure platforms to staffing has come under review. The company replaced expensive servers with 1,200 Linux-on-Intel servers. It created a "logical" desktop environment capable of following a user from one place to another, and it uses storage area networks and network-attached storage appliances to make its "storage plant" more efficient. The goal, Chiarello says, is "virtualization of the technology infrastructure."

Morgan Stanley also has turned over portions of its IT work to offshore outsourcers, relying on roughly 1,000 contract workers in Canada, India, the Philippines, and other locations. "Offshore labor and outsourcing are a critical part of our overall resource-management portfolio," Chiarello says. The company employs 5,000 of its own IT personnel.

In addition, Morgan Stanley has continued to aggressively roll out new software capabilities, prepare for the real-time requirement of straight-through processing, and beef up its business-continuity preparedness. "The most difficult challenge has been: How do you cut costs, increase business value, and maintain stability at the same time?" Chiarello says. "That's difficult. We've introduced more change into our user community in the past 18 months than in the previous 36 months."

It has worked because Morgan Stanley has created tight alignment between IT resources and its major divisions, Chiarello says. To facilitate that, the CTO has an office on the same floor of Morgan Stanley's New York headquarters building, on Broadway overlooking Times Square, as the company's other C-level executives. But he spends only part of his time there. He's also got a spot in the Seventh Avenue office that's home to Morgan Stanley Institutional Securities' IT staff. There, developers crank out code that sets the company's services apart. One example is a so-called global-access portal that helps clients trade multiple products, manage transaction costs, and monitor their holdings, using a graphical interface of their choice.

Morgan Stanley has done a good job determining when to build its own software and when to buy commercial applications, says Dushyant Shahrawat, senior analyst at TowerGroup, a financial-industry research firm. Shahrawat also credits the company with being a leader on Wall Street in moving to open-source software.

Over the years, Morgan Stanley has become a voracious consumer of technology, so much so that it has hundreds of suppliers. To consolidate, the firm is giving more business to fewer vendors. Three years ago, 70% of its IT dollars went to 20% of its tech providers. Now, 80% of the business goes to 10% of its vendors. "There's been a flight to quality," Chiarello explains.

That doesn't mean Morgan Stanley is no longer open to emerging companies. Last year, it evaluated products--ranging from spam filters to business-to-business firewalls--from 125 private companies. Chiarello says he expects to do business with 15% to 20% of them.

As a 19-year veteran of Morgan Stanley, Chiarello has been around long enough to have participated in several major waves of business-technology change. The economic downturn, he says, affords CIOs a chance to make long-lasting improvements in the way technology is bought, deployed, and managed. "Anybody who bet two years ago that this was a short-lived downturn most likely got themselves into trouble," he says.

On the other hand, those who bet on permanent change stand to keep reaping the benefits. Cost cutting aside, Chiarello estimates Morgan Stanley will net $200 million in savings, some of which has yet to be realized, as a result of infrastructure changes and other innovation. Says Chiarello, "I call it the gift that keeps giving."