State Street's China plan turns on its tech center
By Jenn Abelson
HANGZHOU, CHINA — When State Street Corp.'s electronic
trading system for investors began crashing frequently, the
Boston financial services firm made an unconventional move to
fix the aging technology.
Rather than go with proposals from IBM Corp. or Microsoft Corp. to solve the problem for upward of $5 million, State Street turned to a small group of doctoral students studying computer sciences in Hangzhou, a city two hours from Shanghai that is known as the Silicon Valley of China.
This risky move, motivated in part by challenging economic conditions in 2002, ultimately paid off: In less than 10 months and for just $90,000, students at Zhejiang University rebuilt the system to work faster and handle larger trading volumes.
It was an epiphany for State Street and transformed the way the company tackles technology.
Today, Hangzhou is home to more than 1,000 State Street employees, making its presence one of the largest among Massachusetts firms in China.
And the technology center it operates here is part of a new campaign to introduce Chinese mutual fund companies to State Street as the Boston firm attempts to penetrate the huge market.
In May, State Street received a long-awaited initial approval for a branch license to offer foreign currency trading to Chinese consumers — a $35 billion market — and pitch its technology and asset servicing to Chinese financial institutions.
"With the branch license, State Street Hangzhou becomes even more important to expanding its market share and supporting the technology needs for Chinese financial clients," said Jerry Cristoforo, executive vice president and general manager of State Street Hangzhou.
Technology has become a key part of State Street's business as it has evolved over the years from a commercial bank to one of the world's leading providers of financial services for institutional investors. State Street employs about 4,000 IT staff globally and the division accounts for between 20 and 25 percent of the company's annual operating expense budget. They manage more than 1,000 business applications that handle 2.7 million trades per month.
The Hangzhou site has allowed State Street to make highly trained staffers available around the clock to support the technical needs of the global operation. Often, US companies that outsource IT jobs overseas contract with a firm that is not intimately familiar with the business. But State Street directly employs workers, grooming them for years through a partnership with Zhejiang University, where students with advanced degrees study cutting-edge technology.
"There are few companies in Massachusetts that have major operations in China," said Paula L. Murphy, director of the Massachusetts Export Center, a government office that assists companies with international expansion. "Most firms operate through partnerships, and these are typically much smaller in scale than the State Street operation."
In China, the technology center has helped State Street gain an edge in a tough market.
Chinese regulations make it difficult for foreign financial services firms to manage investments and service assets of financial institutions — segments that make up the vast majority of State Street's business in the rest of the world. It can take years for international companies to get the proper licenses to manage domestic investments of Chinese consumers.
State Street's presence in China "is critical as a marketing asset and in gaining access to Chinese commercial institutions and government bodies," Peter Redshaw, an analyst with Gartner, a Boston technology research firm, wrote in a report on the technology center. As proof of the success, Redshaw pointed to State Street's acquisition of a $500 million piece of a $6 billion portion of the Chinese national pension firm that was outsourced to Western firms.
The rapid growth of the Hangzhou team is not just about labor cost savings. (Gartner estimates compensation for the Chinese workers is a fraction of what it costs to pay US staff.) State Street has avoided the purchase of expensive new systems and the cost of additional training since the tech center has modernized more than 200 applications. Last year, the team here developed the internal website used by the company around the world. State Street has expanded the center to also provide other business support for its Asia-Pacific offices.
In recent months, the company has begun promoting the technology center as a way to show off its commitment to China and tap into national pride. The center has been featured at industry conferences in China and highlighted during speaking engagements by company executives and industry analysts. Potential clients have toured the site, too.
"The development of the tech center in Hangzhou has played very well with the psychology of our Chinese clients,," said K.K. Tse, senior adviser for State Street. "The fact that we are investing into Hangzhou is always appreciated."
But like any pioneer, State Street faces growing competition. In recent years, IBM and Microsoft have set up partnerships with universities in China, and technology start-ups are looking to the country for skilled workers.
"We used to be the only game in town, and now there's competition and sometimes we lose talent," Cristoforo said. "It's really changed."