The Vanguard Group| Paul Heller

Paul Heller, CIO of The Vanguard Group – one of the world’s largest investment management companies, talks with ZDNet US Editor-in-Chief Dan Farber in a vision series interview about the complex challenges facing his business, and how technology will play a key role in delivering lower costs and a better service to Vanguard’s financial investors.

Dan Farber: Paul thanks for joining me. Now you've been at Vanguard for about 20 years, in a variety of positions, and how did you end up in the CIO chair?

Paul Heller: Well Dan, I've always had a great interest in the intersection of business and technology. Actually, long ago I studied and graduated with an engineering degree. And when I joined Vanguard, most of my career has really been in the business. I've had the great privilege of running several of Vanguard's businesses over the years. I actually spent three years in IT in the mid 90's, running our applications or software delivery group. Went back out to the business, I've been on the retail side, and recently emerged in the new role as CIO, and I think it's just an example of how Vanguard thinks about technology. And the intersection of business and technology it's really critical to us, and I'm not uncommon in that we do a lot of rotating of people from business to technology and vice versa.

DF: Now what do you see as some of your bigger challenges going forward, in terms of applying technology to stay ahead of the game?

PH: Dan, when I think about the applying technology, two things come to mind right off the bat. I mean, first off for a firm like Vanguard, it's really about leveraging technology appropriately. You really want to set off and do the right things, and that to me is partnership with the business. Are we thinking about the possibilities correctly, I mean technology is a precious, precious resource, and are we really using it appropriately. Are we doing things that matter to the clients; are we doing things to help reduce costs in the operations, etc. You know the second challenge of course, always in technology, is you first have to identify what you want to do, how to use the precious resource, and second, you have to actually go and deliver. And so the challenges there are always around are you doing it in the fastest possible way? Are you delivering at cost? Are you meeting the client's requirements? Again really, the delivery aspect is key. And we think-

DF: How do you - just to step back for a second - how do you measure the effectiveness of your IT investment?

PH: Dan we look at different dimensions. I'd say when we think about measuring the effectiveness, one is at the project level, we're a financial firm, we're very oriented about the metrics, so we look at traditional measures, like ROIs, MPVs. Also scorecards on projects, we want to hold ourselves accountable. We want to learn lessons after each project and bring back them into the mix. I'd say very importantly above the project level, there's the whole portfolio level. There we try to operate as one company. And the last place I would tell you in terms of measuring technology effectiveness is actually the expense ratio of the firm, or when you go to buy the average fund from Vanguard, today to buy the average fund from Vanguard costs roughly 21 basis points, or 21 cents on every hundred dollars. That's a number that's come down dramatically over the years, and we think of technology as a key enabler of that.

DF: : Now a lot of what financial firms are doing today is trying to provide more access to customers, more self service. How much of that is a part of your success, and what are you doing to really improve upon that?

PH: Dan, that's a key part of the success, and I feel that we're so fortunate right now, all the talk of Web 2.0, or "next net." I mean, essentially the wind is really in Vanguard's sails. In fact over 80 per cent of our contacts with our clients, with our customer-base, are now done through the web. And that's - we're just very well situated in a sense right now, because there's so much more you can do over the web with the client base, and that's a key effort for us, is really to help our clients get their solutions, to really educate them on their investments, and it provides a terrific medium for doing that.

DF: Now you talked about innovation a bit, and certainly I think for a company like Vanguard you can have great products, but at the same time you have lots of competitors, and the game is really to continue to innovate. And how do you create a culture that's built around this notion of innovation?

PH: When I think of the culture, a few things come to mind. One, Dan, is we really try to stay close to our clients, but we really mean it. We're a firm that is owned by its clients. It's a big part of the culture. It's listening, staying close - one of the things we have at Vanguard is known as the Swiss Army. Essentially every person we have in management not only knows how to get on the phone and talk to clients, but they do it. It's a big part of the culture. In technology, we're bringing clients in often in our user center design labs, working with them, and certainly on the institutional side of the business. So that's part of the innovation, is really just staying close to your clients. The other thing that's worked for us is we try to bring new ideas to bear. Part of that is, sort of what we started this discussion off with, is we're big on rotating people through assignments, so it's very common. We have some of our best IT people who are out in the business, and some terrific business people in IT. And again we think it's very important to bring new perspectives to bear on the innovation front.

DF: On the security front though, I was just at a conference on security with some of the top people in the field, and they're very skeptical, and not very optimistic about the future in terms of security - that it's actually going to get much worse. That we have too many devices, more people online, more complexity, and that it's not the best environment for people to have confidence that being online is safe.

PH: Dan, you know, obviously it is the most precious asset we have, is our client's data. And you always have to stay out in front. You know I think of two broad domains, one is the outside world, and certainly the outside world is trying to get into financial service providers, and get access to our shareholders' data. And you have to stay ahead of that curve. And you have to invest heavily in that curve - and we do in terms of protections for our shareholders online. And then the other domain is just internally. You've got crew, consultants, contractors, and the like. That's an area that we're spending very heavily on. I think it's really always about staying one step ahead. Things like two-way, two-factor security online for our websites. We have lots of redundancy built in terms of asking questions. And ultimately, shareholders have to take a lot of responsibility in terms of protecting themselves, and we try to do our best in terms of educating them on that front.

DF: What are some examples of where you've really created some kind of product or service that shows how the combination of all the things you do in terms of providing low cost funds, but also the technology infrastructure you have in terms of the customer interaction has yielded great benefit?

PH: Let's see. Two areas come to mind. Dan, our industry is increasingly complex. There's literally close to 10,000 mutual funds, exchange traded funds, all different account types. One of our strategies is to basically try to simplify the offer. I mean, there are a lot of people that love investing, and they go out and they really try to understand it. And for others it's a built overwhelming. Technology can play a great role there on the simplification front. Just last week we launched a new service. If you go to open a new account online at Vanguard, and that's the primary way our shareholders open up a new account, there's now a service called The Vanguard Investment Express, and very simply, rather sort through our 100 plus mutual funds, we ask you a few questions, we get a profile of you, it's highly interactive, it's a rich internet app, and you quickly get to a portfolio that works for you. We have a similar application on the institutional side of our business - we're in the 401k business - we call it the one step program. It's a simplification process. We want to make it easy for our participants to enroll in the plan, get signed up and the like. On the retail side of our business - on the advice front, we have a service called Vanguard Financial Plan. It's entirely a web-based service. You enter some basic information about yourself, we schedule an appointment with you right online, and then you find yourself within a week or two having a full investment session with a certified financial planner at Vanguard. Years ago, you simply couldn't do that. I mean literally, you'd have to sit across the table and meet from someone. With the technology today, you can have this really rich experience and get the advice, and yet that interaction and do most of it online. So those are a few of the examples, simplification and advice. We're also trying to do more collaboration with our clients. So when they call up and you talk to someone at Vanguard, the client is actually looking at the same web or desktop that our internal crew are, and again, many of the questions are: "I'm on your website and…", and we're looking at the same information and we can collaborate with them. So those are some areas that we're really trying to apply the business and the technology together.

DF: Now Paul, I really know you've only been in the CIO chair for a few months now, but you've been talking about simplification, and I think its part of the CIO's role is to simplify technology at this point and lower the cost to deliver services. And how are you thinking about that and your core platforms?

PH: I think we're really fortunate here in that we haven't done mergers and acquisitions. We're not trying to blend a lot of systems in, we've really architected our systems, and we do a lot of the building here. So we can have a really high level of discretionary spending. That's something we focus on really heavily.

DF: And are you outsourcing a lot of the development for your software?

PH: No. About a quarter of our crew or our workforce are directly involved in IT, and I think one place that we're different from many firms is we really have a very low level of outsourcing. Today it's about a 10 per cent contractor rate. Ninety per cent of the people are right here in Vanguard and are involved with it. And the other element is that we probably do more building than most organisations. We're probably about 70 per cent build and 30 per cent buy in terms of applications.

DF: That seems like a - unusual to be that big on the build side. Given so many companies are moving toward common platforms and off the shelf kinds of services, or software as a service. So is that something you're contemplating to change that mix?

PH: I would say not so much changing the mix as again we really do try to run the overall portfolio and architecture as one company. And I think it's why we've been able to have such a high level of discretionary spending. Ultimately when you get into great client partnerships, your clients actually have to come to understand the IT piece of the equation. Clients need to understand what three-tiered architecture is. Clients need to understand that they don't want to build one-off solutions; that they want to actually build well-architected solutions. And, I think we have a great history of doing that. So we truly have enterprise data across the organisation, we have a mid tier that's highly leveraged, we're doing work around service-oriented-architecture, and our user interface, again we have a real center for excellence. When you log onto Vanguard, even if you're in different businesses, we want to have one common look and feel. So we are trying to leverage the technology across the different platforms.

DF: Now you mentioned service-oriented-architecture, SOA, and that's a big buzz word right now. And a lot of the major vendors are pushing that as a feature in terms of a major change in way that IT is configured. Is that something that you're in the beginning of, in the middle of, or really getting a strong push forward?

PH: The two areas where I'd say we're really trying to invest over the last perhaps two years is really SOA, service oriented architecture, probably more two to three years we've been on that journey. And it makes a ton of sense for a financial services firm where you can really partner with the business, identify your key services, and again, architect them out once, and leverage them versus doing it business line by business line, or application by application. Another area that we're really hopeful and optimistic is we're always on the hook to deliver and we're trying to deliver better and faster and cheaper for our clients. And agile methodologies are playing a great role here, and we're trying to be more agile with our clients, trying to be co-located with them, and more interactive in our approach, versus a more traditional waterfall kinds of methodologies--

DF: When you say co-located with your clients, you mean co-located with the developers?

PH: That's right. The developers, our internal clients, and occasionally actually our external clients, again when we're developing more web-based applications.

DF: So just a little bit - when you talk about clients, the clients as a CEO, you're serving clients within the company, and partners. And then you have clients who are your customers?

PH: That's right, that's right.

DF: And finally Paul, what do you see as your big challenges going forward for this year?

PH: Dan when I think of challenges, two come to mind immediately. One is sort of the threat issue, which is something you brought up, which is security, if there's anything that I would lose sleep over - the challenge is back to the data that we're trying to protect every single day, our clients data. So that's just an area that we continue to invest. We bring a lot of expertise into the security domain. So that's kind of the threat challenge. The other challenge is really at the other end of the spectrum, which is the opportunistic challenge. Vanguard is a very fortunate, very successful firm, so what you always worry about is complacency, and you worry about not being innovative enough, and you worry about not seizing the next opportunity. It's actually an area that I'm very optimistic about, because I feel so fortunate to be at this firm at this time, at this stage in technology, because it can play such a critical role to an organisation in which most of our shareholders choose to interact with us in an online forum. And you think about the things that are happening; whether its rich internet apps, or whether it's moving from pure text-based applications to more voice and video, or as you brought up, opportunities for collaboration and communication. Those are just great, great opportunities for Vanguard and our shareholders.

DF: Well Paul, thanks very much for speaking with me.

PH: You bet Dan. Thank you.