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The Proof Is In The Project


Merrill Lynch has strict Return-On-Investment standards for technology

By Cristina Mceachern, Wall Street & Technology
InformationWeek
December 9, 2002 12:00 AM (From the December 9, 2002 issue)

As 2002 comes to a close and financial-services firms look to the coming year, one thing is certain: Budgets are tight, even for the relatively big-spending financial-services industry. More than a year after the Sept. 11 attacks and the disruption to the financial community, the economy continues to struggle. Firms are announcing more layoffs, setting cost-cutting strategies, and, of course, increasing scrutiny of spending, especially on business technology.

Demanding return-on-investment proof for technology projects is nothing new, although interest in it tends to ebb and flow. But firms looking very carefully at IT bud-gets are showing renewed interest in measuring ROI, and the technology to gauge ROI is gaining a foothold at major financial-services firms as part of increasingly complex and essential performance standards.

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Traditionally, the concept of ROI has implied looking at a cash-flow analysis when making a decision between two technology investment choices, says Bill Irving, president and partner at Capco, a consulting firm. In today's environ- ment, the term and the practice of measuring ROI for technology investments has changed. ROI has come to embody not just cash-flow analysis, but determining achievable benefits within the shortest possible time frame. Irving adds that, these days, short-term payback often means measurable ROI in no more than one year.

Whether it's forecasting the monetary return on an IT investment over a number of years, predicting whether an investment is feasible, or deciding when to cut losses and terminate projects, measurement of ROI is becoming critical to the financial-services industry. For proof, look no farther than Merrill Lynch, which is embarking on significant ROI initiatives that aim to streamline, improve, and manage the way it spends on business technology.

With more than 2,000 active IT projects at any given time, Merrill Lynch is using ROI measurements to control technology spending while remaining competitive with new products and services that keep it expanding into new markets. Approving and tracking project investments is a huge task, and ROI has taken on a new meaning for Merrill Lynch.


Marvin Balliet, CFO for the Global Technology and Services Group at Merrill Lynch.

An important change at Merrill Lynch is that business-people own their own tech portfolio, Balliet says.
It's not a matter of substituting numbers for judgment. When talking about ROI at a high level, the term is often overused and misused, says Marvin Balliet, CFO for the Global Technology and Services Group at Merrill Lynch. "People will forever look for the magical mathematical formula that will tell them whether or not they should approve a technological investment," he says. Unfortunately, there just isn't one, Balliet says.

Instead, Balliet believes in what he calls an "overall governance model" for determining whether technology projects should be started, continued, and finished. "We've changed the way we manage technology at Merrill over the last three years," he says. "The most important change is that the businesspeople own their entire technology portfolio."

The leaders of business units have been told to decide how much technology they can afford when formulating their overall profit and margin plans, Balliet says. During the budget process, each business-unit executive finds out from their technology counterparts what it costs to keep existing technology running as it is, what it costs to continue initiatives already started, and what that leaves to invest in new technology for the year in question.

Merrill Lynch also requires a business case examining four areas for any technology initiative over $2.5 million. The business-case report, a standard question-and-answer format, is filled out by business-unit heads. Most take two to three days to complete.

Balliet maps out four major components to determine ROI, all of which go at the same time. First is estimating a total cost of ownership over five years for the technology investment. This includes the cost of developing the application, whether it will change infrastructure or network costs, how it will affect distributed data-processing centers and mainframe data centers, and how much it costs to maintain, including the number of people needed to support it.


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