Redefining the Financial Services Industry
As the firm’s Chief Operating Officer, I manage a diverse group of critical firmwide operations and functions, as well as certain markets-intensive activities that are integral to our success. These include Global Technology, the Intelligent Solutions group (which drives innovation across the firm by leveraging big data and advanced analytics such as machine learning), Treasury and the Chief Investment Office, Mortgage Banking Capital Markets, Oversight & Control, Regulatory Affairs and the Chief Administrative Office, which includes Real Estate, Procurement, Military & Veteran Affairs, Compliance Operations and Strategy & Process Improvement, among others.
The Chief Operating Office (COO) has a broad and deep mandate, but this year, I want to highlight (i) our investment in technology; (ii) our approach to managing a $2.5 trillion balance sheet; and (iii) our ongoing commitment to a best-in-class culture.
Technology continues to fuel everything we do
Technology is at the core of what we do. Advances in technology make us faster and safer and drive a more engaging customer experience, differentiating our businesses today and for the future. The pace of technology change is always increasing, and we challenge ourselves to think, innovate and deliver like a technology company.
Our more than $9.5 billion technology budget demonstrates our significant, ongoing commitment to technology investment. The scale and diversity of our businesses enable us to invest wherever we see opportunity or competitive advantage to do so effectively. We will continue to grow the share of our technology budget allocated to new investment and innovation by optimizing our existing technology environment. We will also maintain a relentless focus and significant spend on cybersecurity, protecting the firm and enabling the secure introduction of new capabilities.
Optimize to innovate
2016 was a year of mobilizing a portfolio of optimization programs that increased the pace and quality of technology delivery while decreasing cost. Improving software development productivity and adopting cloud infrastructure are core elements of that strategy. We continued to improve developer productivity by enabling an agile technology workforce and automating the software development life cycle. We are also defining design standards to provide a common technical framework for development of applications of a particular type, for example, big data analytics. This will significantly reduce rework and duplication in the software development life cycle where, previously, application developers have had to create their own one-off frameworks. We anticipate that these steps ultimately will lead to a 20% efficiency gain in the development process.
Historically, we have followed a traditional “waterfall” approach to software development, with separate teams and processes for development, testing and operations. The agile approach, by contrast, is characterized by multifunctional and collaborative teams and allows frequent readjustment to project plans in response to changing requirements. Adopting this approach vastly improves software quality through its iterative nature and accelerates our ability to deliver incremental value. To put that into perspective, we are moving from software release cycles measured in quarters to cycles measured in days.
We have also made great progress toward fully automating development life cycle processes and standardizing developer toolkits. In 2016, automated code scanning and deployment tools resulted in savings of nearly 120,000 developer hours – and, over the next few years, we expect to be able to deliver more than 90% of our software through end-to-end automation.
Attracting, retaining and developing top technology talent is paramount, and we cast a net far and wide to find the best and the brightest. In 2016, 32% of our senior hires in technology came from non-financial services firms. We had a 10:1 applicant-to-position ratio for our Technology Analyst Program, which targets graduates of global universities that have strong technology programs. Our employee training programs cover new skill sets, such as cloud and agile development. We also reinforce a strong innovation culture and atmosphere to spark new solutions through open source projects and “hackathons” in which technologists collaboratively code to solve business problems. In 2016, we hosted a firmwide global hackathon across 20 cities with over 2,500 developer participants. This led to 400 new product ideas, of which 130 were potential opportunities for patents.
We continued to pursue a hybrid cloud strategy – leveraging a next-generation internal, private cloud, as well as external, public cloud services – to further enable our developers through on-demand availability, pay-for-use and elastic scalability. In 2016, we launched a new private cloud platform called Gaia, designed to provide developers with rapid agility – so that they spend more time developing and less time provisioning infrastructure and application services. Over 5,000 developers already have begun to use Gaia. By the end of 2017, we expect to more than double the number of applications hosted on the platform.
Over the last year, we established a new Cloud Services function within Global Technology to accelerate our hybrid cloud strategy, which includes running our first applications in the public cloud in 2017. Working collaboratively with public cloud providers, we have made significant progress developing a set of solutions that meets our rigorous risk and security standards. The public cloud reduces our peak infrastructure requirements by providing compute services during temporary fluctuations in demand. The public cloud also helps reduce long-term storage costs and accelerates developer access to new cloud services.
In 2016, we invested in a new global data center strategy to consolidate our existing facilities into fewer, larger, more modular sites. In early 2017, we opened our first new state-of-the-art data center, which is the strategic model for all future builds globally. The new data centers will house our next-generation optimized infrastructure, enabling significant cost benefits. For example, hardware commoditization already has reduced our server costs by 25%. We also have introduced innovative storage offerings, decreasing the price of our lowest tier storage by 75%. We are driving additional efficiency by reducing waste and becoming smarter around technology consumption – for example, reducing over-provisioned storage and automating manual operational tasks.
Our applications are also changing. We are designing and developing applications to take full advantage of the cloud’s benefits. In addition, there is growing internal and external demand for simple, self-service interfaces to our data and applications. To meet this demand, we are leveraging application programming interfaces (API) and launched an internal API store to provide access to a marketplace of secure application services to developers throughout the firm. The old world of developing and writing unique code is rapidly being replaced by reusable component pieces (“microservices”) that can communicate seamlessly, dramatically reducing integration development time and driving developer efficiency. We also are expanding the APIs we offer externally to enable direct client integration and secure solutions by third-party developers – for example, the partnership with Intuit that we recently announced. By the end of 2017, we estimate our applications will generate more than 100 million internal and external API calls each day.
Advancing innovation and partnerships
As a firm, innovation is our top strategic priority. We take pride in our ability to differentiate ourselves through the development of new solutions and the adoption of emerging technology at scale.
Demand for digital-centric experiences is transforming our businesses faster than ever. Most of our digital solutions will continue to be built in-house due to competitive and strategic importance. However, we have realized the complementary benefit of partnering with fintech companies to enhance select digital products and services. As a result, our strategy is a combination of build, buy and partner in order to continue delivering the best digital products and services at scale.
We have formalized a firmwide fintech strategy and ecosystem engagement model to identify and leverage partner relationships across all of our business areas. In their letters, each of our CEOs highlights examples of how technological innovation is delivering value to their business.
Our relationships with the external technology ecosystem helped drive value across our technology focus areas, including next-generation data and analytics platforms, such as Hadoop and Spark. To maximize the impact of these new data platforms, we have doubled our big data infrastructure consistently year-over-year. We now can access and analyze data in ways that we could not have done before. For example, last year, we re-engineered our Market Risk platform, one of the largest in-memory risk analytics platforms in the world. The platform now manages over 1 billion risk sensitivities and provides visibility 17 times faster than the prior system while delivering a more granular and holistic view of the firm’s risk exposure.
Within our global payments strategy, we have developed a new payments platform based on similar cutting-edge technologies. It will replace nine monolithic platforms and enhance client value through real-time crossborder payment execution and end-to-end payment status transparency. In addition, the platform will enable us to bring new products to market more quickly and offer a more configurable, flexible client experience through reusable APIs and microservices for event processing.
As we look forward, two emerging areas of innovation – robotics and machine learning – offer promising opportunities to drive new value through automation and insight.
Robotic process automation is software that automates routine, repetitive activity that otherwise would be performed manually. Virtual “bots” are available 24/7 to efficiently execute simple processes without the risk of human error. In 2016, we established an internal center of excellence to drive best practices around a growing pipeline of robotic process automation, including systems access administration, for which we expect to automate 1.7 million requests in 2017. We have line of sight into more than $30 million run rate saves from robotic process automation in 2017, a savings that, coupled with other optimization efforts, will continue to increase substantially in the years to come. This technology has the opportunity to deliver immediate benefit in several areas across the firm, helping us to position our workforce around higher value tasks and functions.
Machine learning offers another exciting opportunity to drive new capabilities for the firm and our customers and clients. Machine learning technology provides insights about data without needing to pre-program algorithms. Machine learning technology actively learns from data with the goal of predicting outcomes. The more these learning algorithms are engaged, the more effective they become at identifying patterns and relationships. In 2016, we established a center of excellence within Intelligent Solutions to explore and implement a growing number of use cases for machine learning applications across the firm.
As an example, we recently introduced COiN, a contract intelligence platform that uses unsupervised machine learning to analyze legal documents and to extract important data points and clauses. In an initial implementation of this technology, we can extract 150 relevant attributes from 12,000 annual commercial credit agreements in seconds compared with as many as 360,000 hours per year under manual review. This capability has far-reaching implications considering that approximately 80% of loan servicing errors today are due to contract interpretation errors.
We also use machine learning to drive predictive recommendations for Investment Banking. Last year, we introduced the Emerging Opportunities Engine, which helps identify clients best positioned for follow-on equity offerings through automated analysis of current financial positions, market conditions and historical data. Given the initial success of the Emerging Opportunities Engine in Equity Capital Markets, we are expanding it to other areas, like Debt Capital Markets, similarly basing predictions on client financial data, issuance history and market activity.
We are initiating pilots for a broad range of machine learning use cases – from detecting anomalies for fraud and cybersecurity, to generating targeted trading strategies to share with clients, to optimizing our client-servicing channels. We are only at the very beginning of tapping the potential capabilities of machine learning and its benefits to our business.
We also are excited about the prospects of cognitive automation, which combines both robotics and machine learning technologies to mimic human judgment. Cognitive automation has the potential to automate more complex, human-like processes, such as perceiving, hypothesizing and reasoning. In 2016, we successfully piloted a virtual assistant technology to respond to employee technology service desk requests through a natural language interface. We are rolling out this technology in 2017 to help us initially triage over 120,000 service tickets, with plans to expand the capability to address even more of the 1.7 million annual employee requests.
Securing a changing landscape
Our cybersecurity strategy is focused on securely enabling new technology and business initiatives while maintaining a relentless focus on protecting the firm from cybersecurity threats. Our defensive philosophy follows a “kill chain” approach – layers of controls aligned to the multiple stages of the cyber threat life cycle (from early warning, to inbound/outbound prevention and detection, to response and recovery). We have aligned our security technology and processes to this life cycle, with a focus on a “shift left” approach – increasing our effectiveness in detecting and preventing malicious activity at the earliest points in the life cycle.
The firm continues to make significant investments in cybersecurity to enhance these defensive controls and our resilience to threats. For example, we have deployed web browser isolation technology to reduce the risk of employee compromise through phishing. Investments in security analytics, data science and automation technology will enable analysts within our Security Operations Centers to efficiently detect and respond to anomalous activity. We have adopted and continue to evolve leading-edge technology to prevent client fraud across lines of business, including risk-decisioning engines that help distinguish between good and bad activity in real time.
Through robust employee awareness and readiness programs, we continue to reinforce the idea that cybersecurity is everyone’s job. We also educate our customers and clients on how to protect their assets and business from cyber threats. We broadly distribute awareness communications and conduct both in-person and web-based training in which more than 7,000 clients in Asset & Wealth Management, more than 3,000 Commercial Banking clients and over 1,900 Corporate & Investment Bank clients participated in 2016 alone. As one of the largest global financial institutions, we embrace our cybersecurity leadership responsibility to the industry. In 2016, we led the creation of the Financial Systemic Analysis & Resilience Center (FSARC) in partnership with seven of our peer banks and the U.S. government. FSARC’s mission is to proactively identify, analyze, assess and coordinate activities to mitigate systemic risk to the U.S. financial system from cybersecurity threats through focused operations and enhanced collaboration.
Increasingly, our customers and clients view our cyber posture, like our fortress balance sheet, as a source of strength. We will continue to work tirelessly to identify opportunities in which the firm can leverage our cybersecurity expertise to strengthen our controls, protect our client relationships and improve the posture of the broader industry.
Liquidity and interest rate risk
The firm's Treasury and Chief Investment Office are integral to delivering on our strategic objectives, playing a primary role in overseeing our $2.5 trillion balance sheet and providing both governance and risk management expertise around interest rate and liquidity risk. We meet our objectives through our nearly $300 billion high-quality investment securities portfolio, as well as the $300+ billion of funding and liquidity sources directed by Treasury.
Most notable in 2016 was our work related to liquidity and funding in response to U.S. regulator feedback on our 2015 Resolution Plan. We introduced a comprehensive new liquidity framework to estimate available resources and liquidity needs during a resolution event – and, as part of this work, rolled out two enhanced liquidity models across our material legal entities. We further strengthened the firm's liquidity position, raising more than $50 billion of liquidity to meet the requirements of the new framework. While deposit growth in excess of loan growth drove some of this improvement, the liquidity benefit came mainly from a reduction in non-high quality liquid assets in our investment securities portfolio and an increase in Treasury-originated short and long-term secured funding.
Our focus on optimizing the firm’s balance sheet continued with rigor through 2016. We extended our optimization framework to analyze the maturity structure of our long-term debt, and we introduced the industry’s first total loss absorbing capacity (TLAC) efficient callable debt structure, resulting in a larger proportion of our outstanding long-term debt being TLAC eligible. More broadly, our optimization framework helped to inform our new multi-factor equity allocation approach to better align incentives with the broader set of constraints we face. Our firmwide Asset Strategy group together with our Deposit Strategy group provide strategic cross-business focus on our deposit, lending and investment activities. These forums have and will continue to evolve our analytical frameworks and monitoring capabilities, as well as continually assess market opportunities and associated resources and risks.
2016 also saw a move higher in U.S. dollar interest rates and featured a second rate hike by the Fed in December. During the second half of 2016, three month LIBOR increased 35 basis points to 1%, while 10-year Treasury yields increased nearly 100 basis points to 2.43%. Staying true to our disciplined risk management framework, we opportunistically added duration through our investment securities portfolio as long-end rates rose.
Market expectations have shifted as well. At the end of the second quarter of 2016, the market was expecting the Fed’s interest rate on reserves to remain below 1% through the end of 2019. With recent and anticipated Fed interest rate hikes, industry expectations are now for the rate on reserves to reach 2% during 2019. And, as indicated by our $2.4 billion of “earnings-at-risk,” our firm benefits greatly when rates rise, particularly short rates, which allow us to capture the full value of our significant deposit franchise.
We continue to build on the great work started in 2015 on our intraday liquidity program, with technology at the core of our advancements. We are able to monitor, in real time, the liquidity impact of over $6 trillion of transactions daily and the credit exposure across tens of thousands of intraday credit facilities, consuming up to 5,500 updates per second. This year, we introduced big data analytics, which has substantially improved our predictive capabilities around intraday drivers. We store 90 million data points covering in excess of 18 months of daily history, adding over 500,000 data points per day. We are now realizing the benefits of harnessing this vast amount of data, informing decisions internally and improving the quality of our dialogue with clients. Additionally, we are leveraging technology to further optimize approximately $1 trillion of collateral the firm has received, as well as the firm’s own collateral, to provide a more integrated and dynamic operating model for collateral firmwide.
A culture of accountability
Having fortress controls remains a critical priority, but controls alone are not sufficient without the right culture. The COO will continue its leadership to reinforce our Business Principles and cultural values throughout the firm and maintain an appropriate governance framework to effectively manage our approach to conduct risk. Confirming we are getting it right requires a comprehensive set of metrics, and, over the past year, we have introduced a series of conduct measures to do just that.
Culture and Conduct Risk was reaffirmed as a strategic priority at our Operating Committee annual strategy off-site meeting in July. We recently appointed a Chief Culture and Conduct Officer for the firm to reinforce ownership of conduct risk and a consistent firmwide approach in the first line of defense. We also established a separate risk stripe for Conduct Risk so that we have disciplined and consistent oversight and a clear conduct risk management framework.
We use increasingly sophisticated detective controls to help us identify broad, as well as individual, trends in employee conduct. For example, we now have in production a Front Office Supervisory monthly report across our markets businesses globally. This tool consolidates key sales and trading metrics, such as number of canceled and amended trades and credit and market risk limit breaches, with compliance metrics, such as an employee’s compliance with mandatory training and consecutive leave requirements, to give supervisors a view of their employees’ behavior. We also surveil certain electronic communications and trades to identify potential misconduct, and we have implemented controls designed to prevent and detect abuses related to collusion, market misconduct or manipulation and corruption, among others.
We continue to develop our Culture and Conduct Risk Dashboard, which is reviewed with our Board of Directors and senior management. The Dashboard is a qualitative and quantitative assessment that includes key metrics and commentary related to how well-controlled we are and how well we manage risk, compliance results for our businesses and employees, Code of Conduct matters, employee survey results, and customer and client feedback/complaints for each of our businesses.
In 2017, we will continue to connect key programs, metrics and policies across the firm to identify additional opportunities – and our Board of Directors will continue to hold us accountable for this important work. Our approach is iterative, driven by our commitment to our firmwide values and ongoing communication of our standards to our employees. We engage in ongoing dialogue with our regulators, industry peers and other experts to identify and adopt best practices.
I have never been more excited about the opportunities ahead. Our focus on innovation and aggressive optimization to meet new challenges will continue to result in dynamic changes to our operating model as we best position our businesses for the future. In so doing, we will maintain a relentless commitment to the highest standards of conduct and safety and soundness to protect the integrity and security of the markets in which we operate and the assets of our customers and clients.
Chief Operating Officer