Chapter 1 Information Systems in Global Business Today 1

Morgan Stanley’s Return on System NoninvestmentCASE STUDY

organ Stanley is a global financialservices firm with more than 600 officesin 30 countries and over 53,000employees. It was founded in 1935 and

is headquartered in New York City. The firmoperates in four segments: Institutional Securities,Asset Management, Retail Brokerage, and Discover(which provides Discover Card services.) The firmacquired the Discover Card business as a result of itsmerger with retail brokerage Dean Witter Discoverand Co.in 1997.

The unification of Morgan Stanley and Dean Wittercreated a digital, cultural, and philosophical divide,which was extremely difficult to overcome. One of thebusiness sectors to suffer the most under this arrange-ment has been Retail Brokerage, which manages $616billion in client assets. Retail Brokerage providescomprehensive brokerage, investment, and financialservices to individual investors globally, with 9,526worldwide representatives in more than 500 retaillocations, including 485 in the United States.

Despite the merger, the Retail Brokerage groupwas never accepted as an equal partner by the rest of Morgan Stanley. Former Dean Witter employeeshave claimed they felt like disrespected outsidersafter the merger. The feeling persisted and manyretail brokers viewed their job security as tenuous at best.

Moreover, Retail Brokerage was not well-integratedwith the rest of the company. It ran on a differentsystems platform than the institutional brokerageside, and its employee systems were not integrated.Retail Brokerage systems were also much moreantiquated than those at other parts of the company.Brokers had to visit their offices on weekends to printportfolio summaries in advance of client meetings,because the outdated computer systems could nothandle the task during normal business hours. Evenon those off-hours, desktop PCs, which hadn’t beenupgraded in years, would often crash and printersclogged if they were being used by more than twopeople. Brokers did their work without benefit of anapplication that provided both real-time stock quotesand transaction histories. Some of the firm’s technol-ogy problems couldn’t be hidden from clients, whoroutinely complained about the customer Web siteand sparsely detailed year-end tax reports theyreceived.

Top brokers started to leave, taking with them theportfolios of numerous important clients. Profitsspecifically from Retail Brokerage droppedprecipitously and margins lagged behind those ofcomparable brokerage firms. During this time, nearly 1,500 brokers left the company. Bill Doyle, ananalyst with Forrester Research Inc., pointed out thatthe business was ailing partially as a result of a lackof investment in technology.

When the stock market crashed in 2001, CEOPhilip Purcell believed that the market’s comebackwould happen slowly. He therefore focused hisbusiness strategy on maximizing profits instead ofgenerating revenue. The implementation of thisstrategy involved cutting costs. Each of MorganStanley’s divisions received less funding for theiroperations, jobs were eliminated, and investing intechnology was obviously a low priority. Purcell, ofcourse, had miscalculated. The market reboundedwithin a few years, and Morgan Stanley was notpositioned to compete in retail. While his firm waswatching its margins, Merrill Lynch was spending $1 billion on new systems for its brokers. Theturmoil in the inner sanctum of Morgan Stanley’sleadership also contributed to the company’s woes.

Purcell locked horns with investors, executives,and former executives over a number of issues, oneof which was selling the underperforming Discovercredit card division. Some investors even wantedPurcell to spin off the entire Dean Witter part of thecompany. In March 2005, eight former executivesappealed to Morgan Stanley’s board of directors toremove Purcell as CEO for his mismanagement ofDiscover and Retail Brokerage. The board deter-mined that the best interest of the firm was servedby keeping Purcell and divesting itself of itsstruggling divisions. The board also approvedPurcell’s appointments of two executives who wereconsidered loyal to him and to the board.

Protesting Purcell’s leadership, two leadingexecutives in the investment banking divisionresigned. More departures followed. Purcell’s criticsnow had even more ammunition with which to bringhim down: in addition to mismanaging the strugglingareas of the business, his actions had threatened theperformance of the firm’s strength, investmentbanking. Purcell finally resigned in June 2005,unable to shake the claims that his solutions to

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2 Part One Organizations, Management, and the Networked Enterprise

problems were lightweight rather than dramatic andfar-reaching, and that his decisions were based onprotecting his job rather than improving the firm. He was succeeded by John Mack, a former MorganStanley president who had left the company in 2001as a result of a power struggle with Purcell.

With new leadership in place, Morgan Stanley hasfinally begun to address the issue of technology in itsRetail Brokerage division, which has been renamedthe Global Wealth Management Group. In October2005, the firm hired Eileen Murray as its head ofGlobal Operations and Technology. She worksdirectly under Chief Executive John Mack, withwhom she has a strong professional history. Murrayhas committed to boosting Morgan Stanley’s invest-ment in technology for retail, saying, “We expect tomake substantial improvements” that “will ultimatelyhelp our financial advisors better serve our clients,while also helping our clients better manage theirrelationship with us.” As proof, the technology andoperations budget for the Global Wealth ManagementGroup for 2006 exceeded $500 million. Mack alsobrought in a new boss for the group. It is now underthe leadership of James Gorman, who performed asuccessful parallel makeover at Merrill Lynch’sbrokerage division.

Mack has been under some pressure to sell theretail division, a choice he has been reluctant tomake. He subscribes to the view that ownership of aretail brokerage business is an investment in the firmbecause, in addition to providing revenue fromindividual investors, it gives Morgan Stanley a directchannel for selling its own investment bankingproducts. Mack’s goal is to increase the profit marginof the Global Wealth Management Group retailbrokerage, which ranges from 11 percent to 20percent, which would make it as profitable as rivals’businesses.

Mack has stated both publicly and privately thatsome of Morgan Stanley’s businesses had notreceived the technology they needed, and he intendsto make the necessary investments. In the firm’s2005 annual report, Mack said, “We are committed toaddressing underinvestment,” and “We’re going toupgrade our technology platforms and provide ourfinancial advisors and investment representativeswith a tool kit that is as competitive as that of ourleading peers.”

Some of the overwhelmed broker desktopworkstations have been replaced. The new systemsare better integrated with backend systems so thatbrokers have a better view of client portfolios.

The company plans further improvements in thisarea so that brokers will have access to all relevantclient data at once, including transaction history,contact history, and portfolio performance.Consolidating all of these features will requireseveral years of work. The company also rolled out anew tax-reporting application that automaticallyreconciles gains and losses and allows users todownload information from its client Web site intopopular tax programs. Before that time, customershad to wade through a confusing maze of figures toadd up gains and losses on their year-end tax reports.

In response to customer demands, MorganStanley scheduled an upgrade of its Web site forMay 2006, which analyst Doyle described as a par-ticularly weak area for the firm. The services avail-able online to Morgan Stanley customers datedback to pre-2000 technology. Doyle sees the Webpresence as a major challenge because MorganStanley has been focusing more on its wealthiestclients than on the rank-and-file small investors.The firm had previously assumed that these topclients weren’t interested in online servicesbecause they get the direct attention of brokers(whereas investors with portfolios under $100,000must deal with call centers). Research by Forresterhas shown the opposite to be true: wealthycustomers actually want more hands-on control oftheir portfolios, and therefore want more tools andservices available online. These customers preferto approach their brokers with their own ideas.Gorman, as head of retail brokerage, must not losesight of the significance that online technologyholds for his division.

Mack and Gorman must also take measures torepair the schism that developed after the mergerwith Dean Witter. Mack has been addressing theissue of a “one-firm culture.” The firm is trying tostem the loss of productive brokers. Increasingsalaries and expense accounts are not enough.The top brokers still feel they can fulfill their earningpotential better and hold jobs longer at other firms.It’s not just that their print queue gets jammed; it’sthat they question how much the company valuesthem if it’s not willing to support them in such a waythat they can best perform their jobs.

By the spring of 2006, signs of progress wereevident. In June 2006, Morgan Stanley generatedsecond-quarter net income of $1.96 billion. The retail brokerage division posted $157 million inpretax profit, the largest profit since the first quarterof 2005.

Chapter 1 Information Systems in Global Business Today 3

Sources: Edward Cone, “Morgan Stanley: Trading Sideways,”“Return on Noninvestment,” and “Follow the Money,” CIO Insight,April 4, 2006; “Morgan Stanley’s Mack Attack,” Business Week, June 22, 2006; George Stein and Gregory Cresci, “Morgan StanleySoars as Mack Delivers in 2nd Quarter (Update2),”Bloomberg.com, June 21, 2006; and www.morganstanley.com,accessed June 21, 2006.

CASE STUDY QUESTIONS1. Why did Morgan Stanley underinvest in informa-

tion technology?

2. Why was the merger with Dean Witter disruptivefor the company?

3. Why was Dean Witter and Retail Brokerage a good place to increase spending on information

systems? (Review the six strategic objectives ofinformation systems discussed in section 1.1.)

4. If you were James Gorman, the new head ofGlobal Wealth Management Group, what informa-tion systems would you invest in? Why? Do youthink Morgan Stanley’s plans for an integratedclient information system are worthwhile? [Hint:Think of the services you would like to receivefrom your banker or stock broker.]

5. Aside from new systems, what changes in man-agement and organization are required to restorerevenue and profit growth at the Global WealthManagement Group?