InformationWeek 500 No. 1: Inside Vanguard's IT Innovation Strategy - InformationWeek

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Chris Murphy
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InformationWeek 500 No. 1: Inside Vanguard's IT Innovation Strategy

Getting employees to volunteer to work on projects is a key piece in driving its emerging tech innovation.

Vanguard's IT Evolution

Vanguard didn't always think technology leadership was important. In fact, not being a tech leader was one of its core principles, part of its philosophy of being a low-cost provider.

Then in the early 1990s, Vanguard CEO John Bogle, the company's founder and a legend in the mutual fund industry, gave a speech challenging employees to question the company's sacred cows--including its tech fast-follower principle. Bogle put the company on the path to embrace the latest IT to power its low-cost strategy.

As Vanguard became an IT leader and innovator, Bogle's successor as CEO, John Brennan, set the expectation that IT was inseparable from "the business." He made clear that business unit leaders couldn't fob off IT failure--they were responsible for getting the needed technology. "Gately gets fired" became something of a catchphrase among the executive team, after Brennan explained that if, just as an example, the institutional investor group couldn't deliver because of an IT shortcoming, it was the head of that unit, Jim Gately, who'd be held accountable. (Gately had a long and successful Vanguard career. Now retired, he serves on the Vanguard Charitable Endowment board, with Brennan.)

And then there was CIO Bob DiStefano, whom Vanguard leaders credit with bringing the company into the Internet age, providing what current CEO McNabb calls "tech enlightenment training." DiStefano brought in Internet pioneers and futurists to preach the Web gospel, and he helped "shape a generation" of leaders' thinking about IT, McNabb says. He pounded home the idea that investors would judge based on their experiences on leading Web sites like Amazon's, not other financial sites. (DiStefano died unexpectedly at the age of 52, in 2002.)

Vanguard doesn't have branches, relying on the Web, phone, and mail to interact with customers. In 2000, Vanguard had about $500 billion in assets and 12,000 employees. Today, it manages $1.4 trillion in assets--and still has only about 12,000 employees. Thanks to the Web, it takes only 25,000 to 35,000 phone calls a day, instead of the 100,000 it did in 2000. But it has about 400,000 logons.

Yet neither McNabb nor Heller was convinced Vanguard was doing enough to stay ahead of emerging tech. "Disruptive technologies often manifest themselves first in a small way--and then they explode," McNabb says.

The CEO's answer is to set aside some budget for disruptive tech projects--the kind no one business unit can fund but that might make sense for everyone in the near future. For example, he allocated a couple of million dollars for an internal collaboration site that faced a tough battle in Vanguard's formal technology review group. McNabb says Brennan did the same thing back when "no one could really put an ROI on the Web that mattered."

Heller's answer, after some experimenting, has been the volunteering concept paired with the small innovation team that organizes ad hoc efforts, which Vanguard calls "Dig" teams--for Distributed Innovation Group.

Among the innovation group's key operating practices is that each Dig team needs a sponsor--a key manager to vouch for the project's business value and be something of a "spiritual leader" for the effort. Another is that every Dig project is different, depending on the goal and the people involved, so the organizers must be flexible. Usually, about 15 to 20 people answer a call for volunteers, and about 10 do the bulk of the work.

And this volunteer team won't take its project to full-scale implementation. "There's always an end state of when the innovation team will turn it over to IT for full support," CTO Carol Dow says. In addition to the ad hoc work, each of the innovation team members also is assigned one key area to research for opportunities: app dev, mobile, CRM, flexible infrastructure, security, marketing, contact center, Web 2.0, and enterprise 2.0.

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