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."
