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The First Priority—Risk Assessment
Even if Bank of America were ready to start the integration process, it would likely have other priorities in mind with the Merrill Lynch takeover. Its first task will be to figure out exactly what the brokerage firm's exposure is to the credit crisis, and how best to unwind some of the riskier transactions, said Rod Nelsestuen, a research director in the financial service practice at TowerGroup, a Needham, Mass.-based research firm.
In other words, risk management and business intelligence is Job 1.
"Bank of America's first job is to stabilize operations, and in order to do that they're going to need to apply some business intelligence technologies and do a thorough risk analysis," says Nelsestuen. "Once they've completed that task, then they can start to look at the IT integration side of the business."
Some analysts have theorized that part of the reason risk management systems failed to realize the extent of the risk of mortgage securities held by the likes of Bear Stearns, Lehman Brothers and Merrill Lynch, was due to the creative and non-standard ways many of the deals were structured. The sophisticated risk management systems employed by the investment banks couldn't properly understand the deals and in turn couldn't fully calculate the risk.
This is perhaps too simple an answer for the meltdown that took place, but it does highlight the need for ever more sophisticated risk management models, business intelligence tools and controls, said Nelsestuen.
When the Merrill Lynch integration project does get underway, Nelsestuen speculated that Bank of America will likely take a thorough inventory of the systems in place at Merrill Lynch before making a decision on whether to do a wholesale migration over to its own platforms, or whether to run the two businesses separately and perhaps use middleware to exchange information.
"All of these integration projects are different," he said, "but it would surprise me if they were to just say (to the IT staff at Merrill Lynch), 'we don't need you folks—we're going to pull everything in.'"
The basis of Bank of America's operations is its custom-developed model bank platform. Developed in the 1990s, it serves as a central warehouse for all information related to customer accounts. Using the model bank platform, a teller in any branch can access all of a customer's accounts, and cross-sell products, such as credit cards and investments. The model bank represented a massive software development effort, more than a decade in the making.
It will likely takes some time before Bank of America can extend the model bank platform to include information from Merrill Lynch accounts—as Lewis stated, no integration work would likely begin before 2010.
Customers don't always understand that these are massive integration efforts and take time to be completed, says Rachel Chalmers, a research director with New York-based 451 Group, which specializes in enterprise systems, and that can lead to dissatisfaction.
"There is bound to be a certain degree of overlap with customers and that can cause a certain amount of frustration," says Chalmers. "They don't understand why it's not possible to access all of their accounts."
Whereas Bank of America is known for having a conservative IT culture, Merrill Lynch has been more of an innovator. It was an early adopter of service oriented architecture (SOA) technology, using it as a means to reuse and repurpose existing legacy applications. Chalmers also notes that Merrill Lynch has been an aggressive adopter of virtualization technology and has moved forward with developing a cloud computing environment.
Prior to the Bank of America sale, Merrill Lynch Chief Technology Architect Jeffrey Birnbaum had outlined plans to virtualize as many as half of the company's desktops within the next five years.
"The integration will be very difficult, obviously," adds Chalmers. "But it will also be a challenge culturally. Merrill was much more aggressive [than the banks] in terms of its adoption of new technologies."
Coming tomorrow: The CIOZone's examination of the Merrill Lynch integration continues with a look at the likely technology winners and losers.
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