LabMorgan is the "e-transformation" unit of J.P. Morgan Chase-its designated catalyst and change agent. Part venture capital firm and part consultant,LabMorgan provides funding and advice for some 60 "portfolio companies" whose technology products are employed throughout $713 billion J.P. Morgan Chase. The portfolio companies provide software applications in areas such as capital markets (Atriax, Archipelago, Market Axess), knowledge management (Introspect), wireless (724 Solutions) and retail banking (Yodlee).
LabMorgan's 250 employees provide strategic and IT planning advice to J.P. Morgan's lines of business, which together spend some $4 billion a year on technology. Keeping the LOBs current with technology and best practices requires a constant influx of new ideas and information, which LabMorgan obtains from theportfolio companies and its recently launched LabMorgan Networks program, in which established technology firms like Sun, Oracle and IBM act as advisers to the portfolio companies and offer discounts on products and services.
AMEET PATEL, chief technology officer at LabMorgan, discusses the role played by LabMorgan in an interview with BS&T executive editor STEVEN MARLIN.
BS&T: Describe LabMorgan's role within J.P. Morgan Chase.
PATEL: There are four dimensions. The first is strategic consulting and transformation, working to e-enable the lines of business. The Lab is partnering with the internal LOBs to help them improve their use and adoption of key technologies or capabilities. Helping with consulting engagements internally,helping them reengineer, driving Web activities internally.
The second is investing in external companies-the venture capital angle. Providing investments in companies that we would actually use from a commercial standpoint internally. Using outside companies, namely our portfolio companies, that are providing traction internally to the firm.
The third is business formation, which is taking innovative ideas, putting it through a rigorous process and launching companies externally. Taking great internal ideas and having the ambition to create standalone entities that could also drive internal transaction flow.
The fourth component is partnership. We don't believe we can be successful in our business model if we don't partner. Our portfolio companies want it and we need it. Our operational model relies on a healthy dose of internal partnership within our LOBs and with our portfolio companies. What LabMorgan Networks allows us to do is-through a select set of technology partners-provide a partnership model that enhances our ability to transform the e-finance industry.
LabMorgan Networks allows us to take that partnership to the next level, and apply it to our portfolio companies as well as our internal LOBs.
BS&T: How does LabMorgan Networks work?
PATEL: It has three elements. The first is industry affiliations. We spend in excess of $4.5 billion annually on technology. We get some of the best products and services discounting schemes available. We are allowing our portfolio companies to get access to those discounts. And each of the portfolio companies now has access to expertise, advice, investments, both from a potential investor or for potential partnerships, for which they would ordinarily need to do their own legwork.
The second element is collaboration between the partners and the Lab itself, providing an ability to generate new business development and venturing opportunities. The technology partners are a who's who in technology, and provide ideas around infrastructure tied in with LabMorgan's financial services domain expertise. We're trying to take business formation to the next level by allowing a pipeline of activity from our technology partners to us and harness the other key partners in our process to launch companies externally.
The last piece of LabMorgan Networks is investment. Both ourselves and the technology partners are still investing on the venture capital side and we plan to share deal flow between our respective organizations. We are sharing deal flow with Sun, Oracle, Compaq. It allows them to look at investments in the application space, and it allows us to provide diversification and infrastructure plays for building the next generation of e-finance applications.
BS&T: How do the portfolio companies interface with the partner companies?
PATEL: The partnership is driven around the benefit of the portfolio companies. The portfolio companies decide how they want to work with a partner. We're not going to a portfolio company and saying they need to use partner W's technology instead of partner Y's. We want the portfolio companies to use our partners to get one-stop shopping, preferred access to products and pricing, therefore helping them on their burn rate issue.
We've been incubating this partnership LabMorgan Networks for the last six months. We provide portfolio companies the opportunity to get advice and expertise that typically would only be available to a large financial institution. Our portfolio companies want to be in the driver's seat in determining which partners they want to work with. They want to have choice on hosting, hardware, software, telecommunications.
BS&T: How do you decide where to invest?
PATEL: J.P. Morgan Partners, the largest VC fund in the world at $20 billion, advises us on our investments. There's a peer relationship between us. We have to have sign off from the LOBs that they're going to use the technology at least three years. The people making the decision are Denis O'Leary and Nick Rohatyn, co-CEOs of LabMorgan. Dave Coulter is part of the investment team. We also have Jeff Walker, who is delegated to Steve Murray, a general partner at J.P. Morgan Partners. So we have a pretty tight hurdle in terms of making our investments.
Equity positions vary from majority ownership to 2%-3%. We're not your typical VC where we're looking for a money-to-money type of return. Corporate development officers are assigned a basket of portfolio companies to look after, whether it's sales and marketing, investment, technology. We're using investments as a vehicle to get strategic alignment around how we're changing the larger institution. We use their technology internally.
BS&T: Are there sufficient investment opportunities?
PATEL: Yes. It's gotten to a reasonable state now. The context of e-finance is really broad. If you look at all of our vertical segments, we play in every market segment. With J.P. Morgan Chase, we're bigger and broader than we've been the last three to four years.
BS&T: How do you create new businesses?
PATEL: We go through four or five stages. The entrepreneur writes a concept. If it looks like a great investment opportunity, then we build a business plan. How much money is it going to cost to build? What's the competitive landscape? The go-to-market strategy? Is the technology build simple or complex? Then it goes to an architect or design phase to build out the venture, maybe get some external parties, do a prototype. Then a launch stage, then a commercialized stage to do a broad rollout.
We have a pipeline of about 30-40 ideas. We may be building out 3-5 companies at one time. Some of them might require different forms of business development or venturing environments. Some could be straight buildouts, where we'll be the majority owner. Some may require us to partner sooner in the process.Say you're building a utility in a certain market space. It makes no sense to build a utility if you're the only one in it. You need other parties to share flow. So typically we're open to building consortia.
Our goal is for J.P. Morgan Chase to be one owner, not the exclusive owner. We're usually never the sole owner. We're not trying to do massive spinoffs. Independent businesses are better able to survive if they have other corporate owners. Spectrum, Atriax, Market Axess, any of the big capital markets plays. We've typically not fully owned any of them.
BS&T: How do you interface with the LOBs?
PATEL: We've thought hard about building the right organizational model to work effectively with our LOBs. We're trying to prevent duplication of effort. Each of the LOBs has its own technology group. J.P. Morgan Chase has a very light corporate technology group, which mostly focuses on infrastructure. J.P. Morgan Chase is big on business-aligned technology groups. Those groups request my help on their projects. Very similar to going to an outside consultant to help with any major strategic or tactical initiative.
The businesses lean heavily on the Lab. We provide strategic and knowledge management consulting. We have seasoned e-business strategists who report to the executive committees of each of the LOBs. As well as Denis and Nick, who act as our client relationship managers and partner in providing work back to the larger franchise.
BS&T: How are you measured?
PATEL: All our projects have stringent NPV net present value numbers over a three year cycle and positive cost avoidance. We're partly a consulting organization that has to show our potential engagements our testimonials, our positive impact to the firm. Our conversation right now has a metric in terms of PR and communication. I have a set of 15 metrics that I use to measure the group. Overall the group is doing well in terms of impact to the larger firm. I only have 65 IT people. So by natura l design, I have to partner.
BS&T: What technology changes are on the horizon?
PATEL: The name of the game now is rationalization and efficiency. Minor improvements rather than massive change agent technology. Even a 5% productivity improvement can correlate to massive expense savings.
What's the next avenue in CRM, call center or automation? Knowledge management is a big topic. Products and services are commodity-oriented. It's knowledge and information that drives financial services. So we're spending a lot of time on how e-technology coupled with knowledge management can be done in an effective environment.
High ROI projects like Web infrastructure bandwidth optimization. We've been very active in portals and aggregation. How can we better leverage the user experience for our clients and customers and employees? There's still a lot of work to be done in making the Web reliable, available, secure.