Merrill Lynch Takes Aim at Maximizing IT Return

January 1, 2003
by Steven Marlin
This coverage originally appeared on Bank Systems & Technology Online:

In November, Merrill Lynch announced one of its biggest IT initiatives to date: the replacement of 28,000 workstations used by its retail brokers, or financial advisers, with a new Wealth Management Workstation built by Thomson Financial. The new workstations feature quick and easy access to market data, news and account information; online collaboration with clients and between financial advisers; and CRM and portfolio management tools.

The deal shapes up as one of the largest outsourcing projects ever undertaken by the financial services giant.

"The existing environment is Merrill-owned desktops, servers, networks and content," said Marvin Balliet, chief financial officer at Merrill Lynch's global technology and services group. "The new environment is a Thomson desktop that's owned by Thomson, running a Thomson application."

Based on Microsoft's Windows XP enterprise computing platform, the new workstations are also faster and more reliable than the current ones, which are based on Windows NT and Windows 2000. "The jump from NT to XP is huge in terms of reliability and capability," said John McKinley, chief technology officer at Merrill Lynch.

To help ensure a smooth transition, Merrill has turned to VMware, a Palo Alto, Calif.-based manufacturer of "virtual machine" software, which enables multiple copies of an operating system to run on the same hardware platform.

"Seventy percent of our initial use of VMware is to support a graceful transition within our retail base," McKinley said.

By creating a stable, uniform platform for managing operating system and application updates, VMware is projected to save Merrill millions in hardware and software costs.

"VMware enables us to solve a variety of challenging IT issues in a quick, cost-effective manner," said McKinley.

"By embracing virtualization technology and standardizing on VMware, Merrill Lynch has seen a 40-50% cost savings," he added.

During the transition, financial advisers are being provided with dual-system access, enabling them to toggle between the older and newer systems. "We're using VMware to manage risk in transition," said McKinley. "VMware is running on each financial adviser's desktop."

Once the transition is completed, VMware will play an even larger role at Merrill.

"Once we go to full deployment [of the Wealth Management Workstation], we'll focus on using VMware more as a server-side infrastructure rather than a desktop," said McKinley. "The more strategic role is in reengineering our server infrastructure."

By consolidating the workloads of multiple servers, VMware is expected to save Merrill $2 million in hardware costs alone over the next five years. "We're looking to take out a couple of hundred servers through more effective utilization," said McKinley.

The product will also streamline development and testing, he said. "[VMware] will enable better utilization of our disparate software development and quality assurance environment."

By harnessing large farms of Intel servers, Merrill is aiming to hike utilization.

"Our goal," said McKinley, "is to knit together commodity four-and eight-way Intel boxes into a single logical metaserver." The idea is analogous to storage-area networks, or SANs, he added. "Storage was running at 15 to 20 percent utilization. After SANs, they're running at 55 to 60 percent."

A Better Image

The concept of running multiple images of an operating system on a single platform dates from the mainframe era.

"IBM championed the virtual machine concept two decades ago with its VM operating system," said McKinley. "They continued on that path with Linux on the zSeries."

VMware applies the same concept to today's smaller Windows-based machines. "The approach that's compelling to us, instead of relying on a large metaserver, is knitting together a fabric of cheaper Intel boxes into a logical mainframe," said McKinley.

For Merrill, the server consolidation project is part of a larger movement to improve IT efficiency. "In aggregate, we've reached the era of austerity," said McKinley.

The successful project also provides a welcome respite in a year in which Merrill has been hit from all sides with bad publicity. In May, it agreed to pay $100 million to settle charges by the New York State attorney general that it had pressured analysts into issuing rosy projections about Internet companies in order to win their investment banking business. As part of the agreement, Merrill had to issue a public apology in which it promised to keep its investment banking and research divisions separate.

In June, two Merrill employees-Peter Bacanovic, a financial adviser, and Douglas Faneuil, a client associate-were placed on administrative leave after an internal investigation turned up irregularities in stock transactions performed on behalf of Martha Stewart. And in September, Merrill fired two executives-Thomas Davis, vice chairman, and Schuyler Tilney, a managing director in investment banking-after they had refused to testify in an investigation by the Securities and Exchange Commission and the U.S. Department of Justice into financial transactions initiated by Enron in 1999.

In addition to having its reputation sullied, Merrill has had to endure one of the worst downturns in the post-war economy, which has affected Wall Street no less than other industries. Here, though, the cloud has a silver lining: by shedding unproductive businesses and projects, firms will be in a stronger position once the economy rebounds.

The downturn has induced Merrill to curtail spending on "strategic" initiatives, noted Balliet. "In this market downturn, business people have taken an active interest in 'lights-on' applications, and have stopped a lot of enhancements."

"In a good marketplace," he continued, "business people can spend more on strategic opportunities. In a tight marketplace, you want to manage only what you need to do. A lot of the projects today are cost and expense reduction initiatives."

Some initiatives have to be continued whether they're profitable or not. "Some projects you have to do to stay in business because it's a regulatory requirement," said Balliet. An example is the USA PATRIOT Act. "All that reporting around anti-money laundering you have to do or you're not in business."

Trimming the Fat

To help manage its IT projects, Merrill has turned to Business Engine, a Web-based budgeting and project management tool from a San Francisco company by the same name.

Business Engine provides Merrill CTOs and CFOs with a real-time view of budget components, enabling them to balance IT assets between value, risk and cost.

The product, noted Balliet, provides a picture of all four major project components: cost to build, cost to maintain, benefits and risk.

"Business Engine is the place where everyone can view the technology status of their projects at the same time," said Balliet. "They can go into Business Engine and see all of their lights-on costs."

Business Engine is intended to track IT projects and subprojects, such as integrating the Thomson workstation into Merrill's clearing and settlement system.

"Where Business Engine is critical is during the implementation phase of developing a software interface to Nasdaq or clearing and settlement, or a data center upgrade," said Balliet.

Merrill has expanded the product to 8,000 users: developers, technology managers, project managers, business people, and members of Balliet's technology finance team.

By enabling managers to track projects, resources, budgets and actual expenses, Business Engine helps promote efficiency.

"Since we've put [Business Engine] in place, the number of projects that have run over budget has dropped from 35 percent to 10-15 percent," said Balliet.

More importantly, Business Engine gives managers insights into why a project is failing, and allows them to kill it off faster. "Projects fail for two reasons," said Balliet. "Either the deliverables aren't being met or the marketplace is changing."

Changing market conditions led to project cancellations at one business group, said Balliet.

"They canceled some projects in equity trading where margins had evaporated, and redirected their portfolio to other initiatives, where business was growing and margins were strong", he said.

Other evidence abounds of Business Engine's effectiveness. One CTO, who had been skeptical of the Business Engine initiative, discovered that he was able to redirect resources more quickly than in the past.

"He wasn't wasting time on initiatives that they'd already canceled," said Balliet. "A year before it would have taken two months to make [such] a decision. Now it takes two weeks."

Another group found that by scaling back unproductive activities it was able to free up resources for much-needed system improvements.

"They needed $6 million," said Balliet. "They went through all their lights-on activities, and found that $4 million a year was being spent pricing out enhancements to existing applications. Not coding. Not testing. Pricing. They took that $4 million and applied it toward the $6 million they were looking for."

Business Engine also enables projects to be charged back to Merrill's three major business lines: investment banking, retail brokerage and asset management.

"We're doing a better job of identifying costs charged to businesses," said Balliet. "[We've] isolated work between lights-on applications and new development."

That, in turn, is part of an effort to boost accountability. "When we started this organization [Global Technology and Services], we had one-third of the costs aligned with the business, and two-thirds in infrastructure," Balliet said. "Today, we have 80 percent aligned with the business, and 20 percent in infrastructure."

Greater accountability means, for example, taking advantage of lower costs for offshore testing and development work.

"You're going to own your own technology portfolio," said Balliet. "If the work's being done in India, you're going to pay less than if it's done in the U.S."

Another Business Engine user, Horizon Blue Cross Blue Shield of N.J., has installed Business Engine to support a wide range of business applications, including the processing of approximately 25 million health claims each year. "With Business Engine, we'll have real-time information about our return on investment, our information technology spending, and our resource conflicts," said Pamela Miller, vice president of enterprise strategy and quality at Horizon Blue Cross Blue Shield of N.J.