Outsourcing: Tech Management Headaches

By Maria Trombly | Securities Industry News | June 7, 2004

June 7, 2004 - For some firms, using technology is like using an elevator. Without it, business stops. But do you really want to know how all the pulleys and motors work?

That's why an increasing number of securities firms are outsourcing the management of their non-core technologies. The arrangements run the gamut from multiyear, multimillion-dollar outsourcing deals to month-by-month small-scale agreements.

For example, Elaine Johnson, a commodities futures broker with Pagosa Springs, Colo.-based Devo Capital Management, runs a one-person branch office in Denver and was trying to take care of her computer needs herself. After fighting with her software, computer, peripherals and wireless network, she decided to outsource her headaches to CM IT Solutions, a chain specializing in IT support for small and mid-sized businesses.

As a result, for the past six months, the technology has been managed by trained technicians. "Doing it myself wasn't very efficient," she admits. "Now, I have a mini-contract, where I'm signed up for a couple of hours a month, but I can add more if there are special problems."

When Johnson bought a new computer, for example, CM IT moved everything from the old machine to the new machine. "It's always easier said than done," she said.

In addition to the hardware and the standard office productivity software like Outlook, Word and Excel, Johnson also uses specialized software from the companies she clears trades through trading software and other proprietary applications specific to her business.

She said that the CM IT technicians took the initiative in learning about the software she used in order to meet her needs. "If they don't know the answer, they find it," she said. "I found it to be money well spent. It's better for me to spend my time on what I know about, and for them to do what they know about."

CM IT Solutions, which is headquartered in Austin, Tex., is a national franchise with 120 franchisees in 30 states that has worked with Merrill Lynch, Edward Jones and other securities firms, said CEO Linda Burzynski. Customers are usually businesses or offices of one to 100 people, with 20 to 50 being a typical size.

"We've been amazed to learn that a lot of brokers, even though they have decent IT skills, when they need help to get to the next step, they really don't have anyone to turn to," Burzynski said.

Even if a broker has an IT department to utilize for help, the staff often doesn't have the time or expertise to help with particular problems.

For example, some brokers turn to CM IT to get one-on-one computer training. In other cases, a brokerage office may have someone on staff for day-to-day IT management, but can't afford to hire specialists to handle problems that only come up infrequently.

"We can keep switching our talent to make sure we fill all their needs-for networking, training and so on," said Burzynski. "That makes it very affordable. Even if they wanted to add employees, they could never add one employee that would have all the talent of all the people we switch in and out."

Johnson's arrangement with CM IT, albeit on a very small scale, demonstrates several hallmarks of a typical technology management outsourcing deal. One common trait is that Johnson continues to own the equipment and software, and the outside firm uses a combination of on-site and remote support to manage the technology infrastructure.

The fact that her outsourcing company was willing to invest in the relationship-by learning about her particular software-is also a good sign. Too often, outsourcing agreements descend to a level where the vendor does the minimum necessary to fulfill the contract and neglects to make any long-term investments, said Tristan Hoag, VP of IT solutions for SEI Information Technology.

Hoag, who's been on both sides of the outsourcing divide, said that it's important for both parties to have a proactive approach to the relationship.

"Very simply, what it means is that both sides have to do the right thing," he said, adding that both parties benefit in the long term from such a partnership.

Otherwise, as the infrastructure degrades, the outsourcing firm has to scramble to stay under budget while meeting minimal levels of service. For example, he said, outsourcing vendors usually charge extra to upgrade software and operating systems.

SEI customer Stein Roe Investment Counsel LLC, a Chicago-based independent investment counseling firm, needed support for a number of desktops. With more than 150 employees in four cities, it was seeing about 400 help desk calls a month.

SEI took over the management of the desktops, network and some key servers. "We upgraded all of the desktops to Windows XP and we packaged up a little under 100 applications and rolled them out on a nationwide basis, which created a common footprint," Hoag said. "It created standards out in the field and made it easier to manage and support."

Stein Roe paid for the upgrades, but SEI did all the actual work at no extra charge, Hoag said, using a combination of on-site staff and remote workers based in Fargo, N.D.

"The idea was, where we found infrastructure that had problems, we would proactively go out there and upgrade, stabilize and streamline," Hoag said. "That reduced problems down the road."

According to Stein Roe CFO Ken Kozanda, SEI demonstrated a real commitment to the relationship.

"Not only did SEI's enhancements improve the performance of our network, they also reduced technology support calls by 50 percent in just six months," he said in a statement.

Boring But Important
Managing networks and desktops isn't the most glamorous work in the world, especially when there are more high-profile, sexier IT projects in a company. By outsourcing those often humdrum job functions outside a company, those jobs have the potential of turning into the customer-oriented, career-track jobs that good technology people want to have.

"I used to do a lot of work for Wall Street companies and if you were to mention a piece of technology less than six months old, you'd get people flocking to you," said Garry Bulmer, chief technology architect at outsourcing services provider Caritor. "But if you mentioned Cobol, people would look at you and say, We haven't heard of that Java package before.' People are very excited about something new, something that's in the press, that's not yet fully understood and hasn't hit the height of hype yet. But when you move back to some of the straightforward, bread-and-butter systems, that kind of stuff, it's harder to keep people interested. Also, as those applications stabilize over time, the number of people you need to have in-house shrinks until at some point the group actually

passes below critical mass. At that point, you either have to pay them astronomical salaries or give them huge benefits to get them to stay."

For a vendor that's dealing with not one, not two, but 20 or 30 legacy systems, however, retaining critical mass is less of a problem.

"And maintaining those bread-and-butter systems is actually a point of pride for people because those are the systems that bring in the money," said Bulmer.

The systems that make the best candidates for management outsourcing are those that don't have a lot of competitive advantage built in, said Caritor's marketing director, Surya Emani.

"For example, a system that embeds the latest pricing algorithm, that involves a lot of intellectual property and forms a proprietary and competitive advantage, that should not be outsourced," he said.

Instead, firms prefer to outsource the management of systems that provide corporate support functions and commodity business applications, he said. "Here, outsourcing can not only cut costs but provide productivity increases," Emani said.

Of course, when outsourcing technology functions, a securities firm has to be sure that the employees of the outsourcing vendor undergo the same kind of screening and vetting as they would if they worked for the user firm itself.

On the plus side, outsourcing to a large, solid vendor can reduce potential liability.

"Going after an employee is very difficult," said James Dow, CTO of CS Technology.

Individual employees who make mistakes rarely have the resources to cover the costs of those mistakes out of their own pockets.

"Going after, say, IBM for improperly allowing your data into the marketplace is a much more successful enterprise," Dow added.

Outsourcing Closer To the Core
But some firms are moving beyond outsourcing the old, the boring and the routine.

Legent Clearing Corp., instead of building its own client and broker Web solutions, has decided to go with products from Automated Financial Systems Corp.

Part of the reason is that AFS provides ongoing management and support, and keeps track of current regulatory demands.

"They has have a very sophisticated administrative technology that they've developed for creating rules and guidelines," said Bill Zelasko, a co-founder of Legent, a small clearing firm.

"We'd rather focus our resources on growing our business and servicing our clients," said Zelasko. "And one of the main benefits is that by outsourcing with a good partner, you know that you're staying on the technological curve without having to carry that expense internally. Both from a regulatory and technological perspective, the world changes radically. To internalize that is expensive."

Network the Next to Go?
If it makes sense to outsource the management of a network, why not outsource the network itself?

"The networking cables don't need to belong to you," said Dow.

In such a scenario, the vendor then becomes responsible for providing and maintaining equipment-and for taking it away when it's no longer needed, perhaps to be installed at another customer's site if it still has life left in it.

However, with the increased flexibility, there's also an added risk when the contract terminates, said Michael Garibaldi, executive managing director of CS Technology's strategic consulting practice. Will the hardware be turned over to the securities firm? To another vendor? Or just taken away, leaving the firm with the task of buying a whole new infrastructure all at once?

"Frequently, these types of transactions have a very significant financial exposure on the back side," said Garibaldi. "When you come out of a contract, you have to be very careful."