State Street (NYSE:STT) plans to save as much as $600 million in IT expenses by 2014 and a sizable part of these savings is expected to be recurring, which will help its margins well beyond that year.  The asset management firm seeks to achieve this by setting “conservative, achievable goals” for reducing the amount of time and effort required to write and test its software. A notable fact about most asset management firms including State Street’s competitors BlackRock (NYSE:BLK) and Northern Trust (NYSE:NTRS) is that they develop almost all of their software in-house to cater to the highly customized and diversified nature of their service offerings.
Our $51 price estimate for State Street is about 15% above the current market price. We believe that this premium is largely due to the weak short-term outlook for global custody banking, coupled with the deteriorating European debt situation.
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State Street sets aside a budget of nearly $1 billion each year for its IT operations. This is a sizable part of its total annual expenses which have been around $7 billion in each of the previous two years. Clearly, a large chunk of this IT budget goes into employee compensation as State Street employs close to 7,000 IT staff – representing almost a quarter of its 29,740-strong workforce at the end of 2011.
The company now intends to squeeze these expenses by resorting to new technology like its own private cloud, besides implementing changes to its business processes and operations, with a majority of the cut coming from reduced software development costs. The changes intended would result in a series of one-time savings over next two years. State Street CIO Chris Perretta also targets a 30-40% reduction in the amount of codes written, besides a 30% reduction in the time taken to test these codes. The combination of these efforts would likely yield a $600 million in IT savings by 2014.
Moreover, if the company does achieve its software development and testing effort reduction targets, it will correspondingly make up to 30% of its IT development & testing workforce redundant. This would allow it to cut down on its employee strength – allowing recurring costs savings, which we estimate could be north of $100 million a year.Notes:
- State Street Private Cloud: $600 Million Savings Goal, InformationWeek, Jun 25 2012 [↩]