To cut down expenses, Merrill Lynch & Co. has turned to International Business Machines Corp. to support its administrative functions.
The two companies announced Wednesday that they have been working together for several months under an outsourcing deal that is initially valued in the range of $40 million to $50 million over the next five years and could eventually grow beyond that.
"This is an example of a financial institution trying to manage itself with a lot of discipline," said Lee Spirer, the financial markets industry leader for the Americas with IBM's business consulting services group. "It's a business trying to put its management talent in revenue-generating activities."
The agreement calls for IBM to take over the development and support for Merrill's human resources, accounting, marketing, and other administrative departments.
Susan Cournoyer, a principal analyst with Gartner Inc. in Stamford, Conn., said these tasks do not sound exciting but typically eat up about 10% of a large company's information technology budget.
IBM bought the unit that will take the point on this project in mid-2002 from PriceWaterhouseCoopers for $3.5 billion, she said. "PWC did a lot of this kind of work, and now that IBM has acquired them, it is wedding them with the systems integration skills of IBM."
With so many different types of systems and applications required for different types of administrative functions, internal networks are often "a real hybrid, a real mix of systems" that can be both inefficient and difficult to maintain, Ms. Cournoyer said.
Jaime Punishill, a principal analyst with Forrester Research Inc. in Cambridge, Mass., said the IBM deal is "a cost-savings event for Merrill, and I know they are very happy with it."
Merrill has been running various administrative applications on 11 separate customized versions of an Oracle Corp. database product for financial services companies, and it's very hard to get them "to synch really well."
IBM says it will integrate those applications into a single, unified version that will be easier to maintain and use. The technology giant will also run the applications from one of its data centers and will be able to offer 24-hour support, something that Merrill does not currently offer.
Big Blue has "scale that even a global firm like Merrill can't match," Mr. Punishill said.
Mr. Spirer said Merrill's internal support team was often unable to offer employees help with the applications, because there were so many different versions of it running within the company.
Once these suites have been consolidated into one system, the IBM help desk should be able to offer better support, he said. "This is a huge step up in service from where they are today."
IBM began moving the Merrill applications to its facilities in September, and much of the switch was done by December, in time for the investment firm to use the systems to close its yearend accounting. The systems will be integrated over the next 18 months, and much of the maintenance and help desk functions will be transferred to IBM facilities in India.
By shifting these responsibilities to IBM, Merrill's IT staff will be free to focus on more valuable operations, such as maintaining the company's wealth management services and trading operations, Mr. Punishill said.
IBM should be able to do a better job with the software at lower costs, he said. "This is what happens when you take a noncore function and outsource it to someone who specializes in that. Merrill is not in the business of running Oracle" software. "That adds no value to the Merrill business."
