Case Description
In 2009, when he was State Street Corp.’s (SSC) president and chief operating officer, Jay Hooley was trying to help a major institutional client with a significant blind spot. The customer wanted to calculate its exposure in a particular market. Getting the numbers turned into a painful exercise as SSC’s middle- and front-office staffers reconciled disparate data sets housed in different client systems and in nine of the firm’s 29 global locations. It took “several hours to get that answer,” says Hooley.
“I knew we were on common accounting, cash and security systems,” he says, but having such siloed information meant that the global custodian couldn’t fulfill one of the most pressing needs to come out of the financial crisis: giving people in risk management a real-time answer on their exposure and possible options.
Like the famed road construction project that reshaped Boston’s central freeway artery, SSC is in the midst of a “Big Dig” of its own – a project that remaps the routes to a custom-built data warehouse. It is along these new roadways that the firm will be able to transport real-time, proprietary market analysis to clients, who in turn will be invited to shift their accounting, security and database systems onto SSC’s private cloud.
It’s a massively expensive initiative-estimated at $100 million a year for three years-but Hooley, now the firm’s chairman and CEO, projects the bank eventually will reap $575 million to $625 million in cost savings by automating tasks such as software development. The company currently writes nearly all of its own software for asset management, trading and transaction services. Everyone knows that the cloud, whether public or private, is good for reducing capital expenses. It’s an environment built out of off-the-shelf parts instead of best-of-breed systems; virtualization drives up the utilization rate of the equipment; and automated processes reduce personnel overhead.
Chris Perretta, Executive Vice President and CIO of SSC Corporation, believes there is another rarely discussed–but potentially huge–source of savings from using private cloud computing: more efficient, lower-cost software development. At SSC, the savings could be hundreds of millions of dollars.
One source of development savings is that with a private cloud, both the development environment and production environment are standardized clusters of x86 servers. They frequently rely on Linux and other open source code, and they’re managed as a pool of resources. That means a developer can spin up multiple servers and try out code in various iterations and configurations, without needing IT to procure and set up servers.
But even bigger savings at SSC could come from standardizing development on the private cloud. If everyone is writing software for the same cloud-based development platform, code sharing becomes easier, which could mean SSC has to write dramatically less code.
“The cloud represents significant savings in our overall operating environment,” Perretta says. “Internally, our goal is to drastically reduce the amount of code we have to write by 30-40%. We want to reduce test time 30%. These are conservative, achievable goals. We are starting to see the benefits as we start to write for the cloud.”
Understand, SSC writes a lot of software. It manages money accumulated in hedge funds, mutual funds, tax-free investment funds, pension funds, and other sources. It has $2 trillion in funds under direct management and $23.2 trillion in assets under custody and administration. It doesn’t buy off-the-shelf software to perform the specifics of managing these sprawling assets. It builds its own, highly customized software, and previously development has constituted 20%-25% of its annual IT budget.
“We write and construct much of our own software. We follow the sun with our clients in trading exchanges around the world,” noted Perretta in an interview. To do that, the company needs a customized software stack that does all the things its clients need it to do, while remaining in compliance with financial services regulations.
Like many other large companies, SSC used to have heterogeneous data centers with many best-of-breed systems. As it moved to a private cloud architecture August 2011, its leadership has understood that the key to lowering costs in the long run was to simplify and standardize the environment.
SSC’s IT units have used the model of the x86-based public cloud to establish its private cloud data centers and laid down 10 rules that govern future software development, Perretta said in an interview. He didn’t share the full list, but they include using certain pieces of vetted open source code and implementing a standard, parallelizable method of accessing database systems. That’s a good approach when your future environment is a clustered server, private cloud.
Financial services firms are loath to say more than they have to about their internal environments. But maybe the important point is SSC expects to achieve $600 million in savings by moving to private cloud by the end of 2014. Some of these savings are achieved by changes in business processes and operations as well as IT, but a significant chunk comes from the reduced cost of developing software, he said.
SSC officials described the savings as consisting of some one-time savings and some recurring savings, as in the case of software development. But over the identified 2011-2014 period, they will amount to $600 million.
Six hundred million dollars is such a large figure that you need to remember the annual SSC IT budget was over $1 billion in 2010, when Perretta disclosed the figure in a previous InformationWeek interview. At that time, he described the IT staff as between 6,000 and 7,000 employees. Today, it’s 6,900, so the IT budget may still lie roughly in the $1 billion range.
Perretta’s goals, like cutting the amount of code that SSC writes by 30%, are longer-term metrics, not to be achieved in a day. But SSC has set targets to be achieved this year that put the bank on a path to reach those goals. It has standardized on a very limited number of operating systems and software development languages. Middleware interfaces between systems will be simplified and standardized, an overall security framework will be strictly enforced, and standards for web technologies used where appropriate – all to simplify and speed development.
In the past, a 7,000-member IT organization like SSC’s could produce applications of great complexity, some with best-of-breed technologies that only their development teams could understand.
The company’s standardization imposes fewer choices – fewer components to build, fewer types of software code to stay on top of, and even some use of open source code. Standardize your IT environment and you’ve simplified many of the choices for future development. You’ve narrowed down the set of development skills needed to build future systems and you can capitalize on those skills more frequently. In addition, reuse of technology components leads to fewer unique systems, greater ease of maintenance, and more rapid modification of financial services systems, said Perretta.
It’s not just a matter of weeding out complexity. Simplified and integrated enterprise IT architectures also encourage designers to incorporate analytics into their information systems to make use of the big data stored on financial transactions and other client interactions.
So far this cloud infrastructure push has seen the roll out of more than 70 applications involving portfolio or transaction analysis. One such app introduced last year, called Gold Copy, gives money managers the ability to track transactions from end to end, as they move through trading, compliance and reporting systems. Perretta says that Gold Copy addressed a common buy-siders’ problem, in that previously there was “no single view, no single system of record for a trade as it progressed through different stages of processing…If we could automate the process by which we created that single record, we could also automate the process by which everybody who needed to know something about a trade when it changed-and by everybody I mean every system-was able to be totally in synch,” he says.
The firm’s enterprise systems approach does not just mean reducing IT expenses (throwing a body check on the tendency of each new application to cost more than the last.); it’s also enabling the discovery of new insights and predictive analytics. The type of analysis clients value. Clients are especially hungry for risk analytics-information that can provide instant views of how a portfolio stacks up in different scenarios, like the black-swan events nobody expects. You don’t need especially fancy infrastructure to do this. Monte Carlo simulations, where quants calculate differing probabilities for an array of portfolio outcomes, have been around for decades. But the investments in newer technology bring new computing power to these tests.
What Hooley envisions is that information provided by SSC will become the basis of asset allocation models and other key functions clients, allowing them to do what Hooley calls the “what if scenarios.” The scenario analysis clients receive from SSC, he says, “could be populated with real time data to say if X and Y occurred, if the Euro dissolved, if Greece left the Euro, what would be the implication on my portfolio? “So to me,” Hooley says, “the cloud takes us back to the mainframe kind of world where everything is in one place and you have the ability to bring everything into one place.”
As financial services gain greater digital content, they also rely on more automated processes, a movement that leads to greater ease of compliance because information systems tend to create event logs that can be audited. The SSC IT architecture is a springboard to the types of systems the company needs in the future. SSC’s standardization approach imposes a new order and yields ongoing development dividends. The fact that it’s also taking expense out of the IT budget is the silver lining on the State Street cloud.
Sources
• Babcock, Charles, “State Street Private Cloud: $600 Million Savings Goal,“ InformationWeek, June, 22, 2012.
• Fest, Glen, “State Street Big (Data) Dig”, American Banker, December 2012.
Case questions
1. Describe three operational excellence-related information problems State Street faces as a global financial services company (one for each level of information processing).
2. Describe three business unit benefits of the enterprise IT architecture approach taken by State Street (use a course framework, not just your intuition).
3. Describe three IT unit benefits of the enterprise IT architecture approach taken by at State Street.
4. Compare and contrast State Street’s old versus new IT architecture approach using the phases of the Rapid Application Development framework (textbook, Chapter 10). Given your analysis, make one recommendation on how State Street could improve their application development and implementation approach.
