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9/8/2010
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Chris Murphy
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.



How do you get to work on the most interesting tech projects at Vanguard, the mutual fund giant? You volunteer.

Like most companies, Vanguard has wrestled with how to make innovation a part of its everyday culture, without chasing every gee-whiz idea people come up with. Under CIO Paul Heller, volunteering has become one key piece of its innovation strategy. It's not a Google-like program, where engineers can set aside 20% of their time to pursue new ideas. Vanguard volunteers keep all their day-job responsibilities and log extra hours to work on more cutting-edge projects.

The strategy has several advantages. One is keeping the cost down to pursue prototype-stage ideas. An example is Vanguard's first iPhone app, which it launched last year. No single business unit could justify building an iPhone app based on short-term ROI. While smartphones are commonplace, the number of people using the new app in a week is less than the number using the Web site in an hour. So a volunteer team created a first version, which the retail investor division got without spending any of its budget. "The first release was kind of on the house," says Jeff Dowds, who leads IT systems for the retail group and championed the mobile project.

For employees, the volunteer plan lets them work on something they're passionate about, with the blessing and support of their bosses, and get credit for it if it works. For Vanguard, it also serves as an informal vetting mechanism--almost like a startup trying to raise venture capital. People are betting their time and reputations on volunteer projects, something they'll risk only if they think those projects will pay off for the business. Vanguard has more-formal channels for funding innovative IT projects that can pay their way. The volunteer effort tackles projects whose benefits likely are further out.

CIO Heller doesn't hold the iPhone up as a mind-blowing innovation--hundreds of thousands of iPhone apps were out when Vanguard came out with its own. But very few were in financial services, and Vanguard customers weren't clamoring for them. Vanguard wants to have mobile development skills and experience well ahead of customer demand, and well before an operating group can make a business case for such apps.

"It's applied R&D," Heller says. "We can look two, three years out and say, 'Rich Internet apps are going to happen. We already see it on The New York Times or Amazon.com. Don't we want to do it?' We want to pave the way on the technology, so the first businessperson up who wants to do a rich Internet app doesn't have to figure it out on their project."

Paul Heller, CIO, Vanguard
(click image to go to InformationWeek 500 Top 10 slideshow)
CIO Heller wants IT with "wow" and relevance
Vanguard has tried other approaches to IT innovation. For decades, it was a fast follower. Then it created a formal innovation lab, with marching orders to spot the latest emerging tech that could give an edge to the company. But that work was too far removed from current business needs, Heller says.

Now Vanguard has just a five-person IT innovation group. Its job is to organize those ad hoc volunteer teams around a project and coach them through techniques such as agile software development sprints. But the ad hoc teams do the work.

"This isn't innovation as in 'Let's be cool to show stuff off to our external clients,' like doing retina scans," Heller says. "We try to be really connected to our business and clients."

Keeping IT in touch with business needs is easier at Vanguard than at a lot of other companies, since it regularly moves people in and out of IT. Heller held multiple business positions, then worked a multiyear stint as an IT manager, then led key business operations, and has been CIO since 2006. Tim Buckley started in a business unit, helped shape Vanguard's early Web strategy, became CIO, and now leads the company's retail division.

But until the volunteer effort was launched, something was missing. "We had a little bit of a lull on the innovation side," Vanguard CEO Bill McNabb says. McNabb says he and Heller talk about always having some IT in the works that has a "wow" factor.



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 Vanguard.com 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.



What's Ahead

Vanguard's IT teams have a lot of innovation in the pipeline. One area is internal collaboration. The IT organization has been using what it calls the IT hub, SharePoint-based sites for informal collaboration. Rob Lake, who leads the five-person innovation group, says the challenges include meeting regulations such as record retention, but also getting the tools adopted. For that, he isn't wasting time trying to convince anyone they need a collaboration tool. Instead, he's looking around Vanguard to "find passionate communities where they're struggling to collaborate," Lake says. "Find the collaborative groups that need tools."

Social media is another looming challenge. While its Web site is a huge success, "the one gap we have found is the personality, the culture of Vanguard is really hard to come through on Vanguard.com," says Amy Dobra, who leads the social media effort. Yet Vanguard's wrestling with how to meet demand for quick, personable interaction within the strict regulatory environment financial companies face.

In mobility, it has a Dig team working on a "build once" mobile strategy, so it doesn't have to build apps for every platform from iPhone to Android to BlackBerry. It's building a prototype for a rich, interactive mobile Web site. And it's experimenting with a mobile Web site in what's essentially a mobile app container, with minimal programming for each specific platform. But the retail group's Dowds thinks they face another five years of developing for multiple platforms.

For now, Vanguard thinks it has the right formula and practices for taking on these emerging technologies. But count on this: If this system doesn't deliver the tech the company needs, Vanguard will again be ready to evolve its IT innovation strategy.

Return to the 2010 InformationWeek 500 homepage

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