'The Internet Is Going to Change Wall Street as We Know it.'

Can one of Wall Street's venerable names become a driving force in the Internet economy? That's the challenge facing e-vangelists Peter Maillet and Peter Miller as they help J.P. Morgan transform itself for the digital age.

Peter Maillet & Peter Miller, 40 and 48
Labmorgan, J.P. Morgan & Co.
New York, New York

Peter Maillet began transforming J.P. Morgan when he tossed out the long-standing assumption that nothing gets done on Wall Street during the holidays. Maillet remembers that it was a Thursday evening when he sent his email out -- December 2, 1999. At the time, he was serving as business manager of Morgan's IT department. Before that, as chief operating officer for the Asia/Pacific region, he had helped the investment bank build its business there. Now he was assuming the temporary mantle of leader of J.P. Morgan's six-week-long e-SWAT initiative. The email informed 70 employees from across the company -- roughly half of them managing directors -- that their attendance was required at 15 Broad Street, a Morgan office located directly across from the familiar facade of the New York Stock Exchange.

"We asked them to show up on the Monday after we had sent out the email -- four days later," recalls Maillet. "It was a little surprising to some people, since December is not traditionally your high-intensity time on Wall Street." Instead of planning how they'd spend their year-end bonuses, the group of 70 people would spend six weeks plotting Morgan's e-finance strategy.

"We had a clear sense, even then, that the Internet is going to change Wall Street as we know it," Maillet says. "It had already happened at the retail level, and it was starting to happen at the wholesale level as well. And we were confronted with a question: Did we want to be a constructive force in driving change? Or did we want to have change done to us?"

The e-SWAT team included then-CIO Peter Miller, who had been Maillet's partner in forging stronger bonds between IT and the rest of the firm, as well as some top Morgan executives from around the world. The head of cash-equity trading for North America was there, as was the company's CTO, its head of corporate communications, and both coleaders of global research at Morgan. Several of Morgan's younger employees were involved too.

Douglas A. Warner III, Morgan's CEO and chairman, had given Maillet and Miller wide latitude in their mission. He had told them that he didn't want them to spend six weeks trying to validate any of his preconceived notions. Instead, he said simply, "I want to know what 70 of the best and brightest on Wall Street think about e-finance."

Warner himself helped kick off the initiative at that first meeting at 8 am on Monday, December 6 -- which sent a powerful signal that the results of the group's brainstorming wouldn't merely wind up in a three-ring binder on a shelf somewhere. Throughout the process, Warner made daily appearances, informally asking various working groups about their assumptions and their ideas. "In a company of 16,000 people, with the history and the embedded culture of J.P. Morgan, that kind of direct involvement by the CEO made it clear that this was not your typical strategy session," Maillet says.

The e-SWAT group divided itself into pods of six or seven people each and pressed those people to think about ways that Internet-based technologies could improve current clients' experiences with the bank and could extend the bank's reach to new clients. "Breakfast, lunch, and dinner were served on-site," Maillet says. "We worked six and seven days a week, full time, until the 20th of January." The group distilled 600 raw ideas into a list of 10 recommendations for review by Warner and by the bank's global managing directors. Some of the recommendations were specific -- say, creating Web portals for certain client groups, like corporate treasurers. There were also recommendations about branding and about building a knowledge-management Web site for employees.

The e-SWAT team also suggested that Morgan continue to explore how its role would change as markets went virtual. But the team didn't want to create a think tank that would ruminate on the potential impact on Morgan, or a skunk works that would develop products and services to replace those that the bank currently marketed. It wanted a new division of the bank -- on equal footing with the investment-banking, asset-management, and markets divisions -- that would help guide Morgan's transformation into "the preeminent e-finance firm in the world," as Maillet puts it.

By this time, it was February. The holidays -- busier than usual this year -- were over. It was time to get moving.

J.P. Morgan's Learning lab

LabMorgan, the new division born out of e-SWAT, started with just 35 of J.P. Morgan's 16,000 employees. But it has been a power player from day one. It has three central missions: to fund new e-finance companies, as a venture capitalist would; to incubate e-finance ideas that come from the outside world or from the ranks of Morgan employees; and to help push new Internet technologies into the mainstream of Morgan's business.

Maillet, 40, and Miller, 48, had already been working together for more than a year to commercialize some of the software packages that Morgan's IT department had developed for internal use, such as a secure messaging system and a self-assessment tool for risk management. Maillet and Miller became two of the core members of LabMorgan. Nick Rohatyn, 40, a member of the CEO's "house-arrest group" of top managers (so called because they're required to spend roughly two days a month holed up together at headquarters, helping Warner craft strategy and review performance), was picked to head LabMorgan.

"The feeling was, Don't bother doing this unless one of the top-10 people in the company will be running it," says Maillet. Altogether, including Maillet, Miller, and Rohatyn, LabMorgan's initial incarnation included seven of the firm's managing directors.

Over 10 days, at the cusp of February and March, LabMorgan took shape. It would encompass the IT-commercialization work that Maillet and Miller had been doing, as well as Lab60, an incubator that had been started in the markets division by Thorkild Juncker, who joined LabMorgan as its European chief.

Miller says that those 10 days were among the most intense of his 25 years at J.P. Morgan. "We figured out the roles, the work we'd do, and we identified some of the earliest opportunities," he says. "It got approved by the chairman and the board, we built a Web site -- which included a system to submit résumés and business plans -- we got the press release ready, and we launched. The history of this place is to be cautious and careful. We never want to get something wrong. LabMorgan has shifted that mind-set to 'We'll do it as great as we can in 10 days. We'll evolve the model as we go.' "

The March 9 announcement generated a wave of stories in the press. Chase Manhattan and Citigroup had formed internal Web ventures, but Morgan's pledge to commit up to $1 billion to e-finance measures, including LabMorgan, in 2000, along with its dedication of impressive managerial horsepower to the group, set it apart. "It's easy to write a check," says Miller. "We spent serious people. That's the most important capital you have."

Sourcing and Screening

Twice a week, the sourcing-and-screening team that Peter Maillet leads with Jeff Saltz gathers at a conference table to review the business plans in LabMorgan's pipeline. Juncker, formerly Morgan's global head of foreign exchange and commodities, and now a full-time member of LabMorgan, checks in from London on a speakerphone.

A packet of business-plan summaries is handed around. On the front page is a chart titled "Idea Screening Status," which lists the number of ideas examined by LabMorgan in New York, Europe, and Asia so far this month and so far this year. Maillet explains that 100 or so new proposals come to LabMorgan each week. It had received nearly 1,500 new proposals as of the end of July -- its fifth month of operation. So far, there are 29 nascent businesses and joint ventures under LabMorgan's umbrella.

Incoming plans get an initial hour or two of attention before they are either rejected, accepted for an in-depth due-diligence process, or referred to another venture-capital group, such as J.P. Morgan Capital Corp. or New York-based Iron Street Labs, an independently owned incubator that the House of Morgan has a stake in and that shares prospective deals with LabMorgan. Maillet stresses that it's important to commit to deals quickly, so he has become a stickler for response time. The chart shows that LabMorgan screens ideas in just 3 days in New York and Europe; in Asia, the process takes 15 days. Maillet and Juncker spend a few minutes discussing ways to help Asia catch up. By the end of the year, they hope to have additional LabMorgan outposts in Israel, Madrid, São Paulo, Singapore, Sydney, and Tokyo.

Maillet runs the meeting with crisp precision, giving ideas roughly equal time and then sending them along one of three paths: rejected, accepted, or referred. "They've got a very solid focus on e-finance, nothing else," says Richard Thompson, 47, cofounder and managing partner at Iron Street Labs. "They don't get wowed by a proven entrepreneur with a bad idea, as some venture firms do. And they're faster than a traditional venture firm. They don't drag things out." After exactly one hour, Maillet ends the meeting and heads downstairs, where he's scheduled to brief an auditorium full of 150 Morgan investment-banking analysts-in-training.

The auditorium is located at 23 Wall Street, a building built in 1914 by J.P. Morgan Jr. just after the death of J.P. Morgan Sr. The cornerstone contains a copy of the elder Morgan's will, as well as the firm's original articles of partnership. More recently, the building was converted into a conference center, and inside the auditorium there are laptops and microphones in front of every seat. There are also tented name cards in front of every trainee -- the majority of whom seem to be from outside the United States.

A Q&A session follows Maillet's PowerPoint presentation about LabMorgan's structure and strategy. A few of the twentysomethings express skepticism about Morgan's foray into the world of the dotcoms. Hasn't NASDAQ turned its back on Internet startups like the ones that LabMorgan is trying to gestate? Didn't Morgan get burned by its involvement with the failed online clothing retailer boo.com?

Maillet compliments the analysts-to-be on their sharp questions, then counters. "This isn't a shift away from what we are to something that's trendy," he says. "What is every dotcom trying to do? They're trying to build a client base, build a brand, raise capital, develop market expertise. We have all that. We're not trying to build all that. We're just trying to recontextualize it for a new environment." If Morgan can bring the power of Internet innovation to its existing businesses, if it can reach clients it has never reached before, and if it can create new trading tools and online marketplaces, then LabMorgan will have fulfilled its purpose. "A company with a '.com' at the end of its name, or an 'e-' at the beginning, a press release, and some vaporware does not a business make," Maillet continues. "J.P. Morgan has the strength -- if we can transform ourselves."

Free Minds, Strong Bonds

Both Maillet and Miller are determined to make sure that LabMorgan maintains strong links with the rest of J.P. Morgan's business units. They're quick to correct anyone who suggests that LabMorgan is any kind of satellite. "We could have set up this operation in a loft in Chelsea," says Miller, "but it wouldn't influence the company, our clients, or the market's perception of us. At the end of the day, we want to be a big asset to the company."

For Miller, the goal was to adopt some of the cultural traits of a Chelsea-based startup without having to move to Chelsea. The dress code at LabMorgan is unofficially more casual than at the rest of the company. Sodas are readily available. And Nick Rohatyn is one of the few team members whose office has a door. There are, of course, no titles on the vertically oriented business cards, and LabMorgan employees are less concerned with hierarchy than are other parts of the company. "We believe that the value is in people's ideas, not in the stripes on their arm," says Miller.

By the end of this year, LabMorgan will take up two floors, which Miller has helped design, atop the company's headquarters tower at 60 Wall Street. Walls will be almost nonexistent, giving everyone at LabMorgan equally spectacular views of the Statue of Liberty downtown and of the Empire State Building uptown. A wireless local-area network will enable team members to have network access anywhere they go. Cordless phones that can be taken anywhere will make sure those team members don't miss important calls while they're in the middle of a huddle with coworkers.

Miller envisions the contrast between the walls of glossy, milled wood that visitors see now when they emerge from the elevators and the techno-decor of LabMorgan's new location: the hanging stairways; the glass-walled, octagonal meeting rooms; the flat-panel displays in the reception area that will flash reminders of Morgan's history of innovation. This is, after all, the company that bankrolled the first transatlantic undersea cable and, later, Thomas Edison's Electric Illuminating Co.

Despite the atmospheric differences, the LabMorgan crew goes to great lengths to link LabMorgan's work to that of the company. "We've built a ton of connectivity between us and the rest of the firm," says Rohatyn. "We've made nearly 200 presentations to the businesses in 145 days. We never forget that the central mission here is to transform the firm." On that afternoon in early August, Rohatyn would conduct a town-hall meeting with a group of colleagues at 60 Wall Street. Maillet, after giving the presentation to the analyst trainees, would take the train to Delaware to hold a series of town-hall meetings at Morgan's third-largest location.

One way that LabMorgan makes sure that its interests are aligned with those of the firm's four other divisions is to allow those divisions to invest, whenever possible, in the companies that LabMorgan produces. "The majority have co-investments, so people from the other businesses attend board meetings," says Maillet. For example, Cygnifi, a derivatives-pricing and risk-management service, got its start in J.P. Morgan's derivatives department, with support from the firm's markets division. "We took 20 people from the derivatives-pricing group to get it started, which was difficult, but Morgan is invested in its paying off," Miller says. "Cygnifi can serve J.P. Morgan's internal needs, and it can also serve other customers. We have excellent market share with derivatives, but we think that this will help expand the pie. And the risk-reward equation is pretty balanced in the mind of the business manager."

LabMorgan's Horizon, a self-assessment tool marketed with Ernst & Young that companies can use to determine their exposure to a wide array of operational risks, is traveling the same route. At an afternoon meeting, Miller and a group of LabMorgan technologists are discussing the advantages and the disadvantages of cutting Horizon loose and setting it up as an application-service provider (ASP) that would enable users to evaluate regularly the risks that they face -- such as shaky Web servers or uninsured buildings in hurricane zones. There is a section of the whiteboard that is marked "strengths," "weaknesses," "threats," and "opportunities." The group seems to be leaning toward a spin-off: "As an ASP, it would be easier and faster for people to try it and deploy it," Miller observes, summing up his team's comments. "And we wouldn't have to support eight different platforms, as we do now."

If a business is spun off, Morgan's IT and audit groups, which helped develop it, would have an opportunity to invest in it. Often, Morgan executives wind up running LabMorgan's offspring, which gives those executives an outlet for their entrepreneurial urges without requiring them to abandon the firm entirely.

Maillet and Miller explain that although LabMorgan doesn't have direct client contact and isn't responsible for managing a trading book, it will be subject to specific performance measures. The volume of ideas coming to LabMorgan is watched carefully, as is what might be termed LabMorgan's "selectivity ratio": how many business proposals it acts on. Like all venture investments, the companies in the LabMorgan portfolio will be expected to produce revenue, profits, and, eventually, a sale or an IPO. How LabMorgan's work with other divisions (on projects like Morgan Online, a portal for private-banking clients) helps to bring in more clients and, ideally, helps to reduce costs will also be watched.

But what the two Peters feel most responsible for is marrying dotcom-style speed, agility, and blue-sky thinking with a 163-year-old, 16,000-employee investment bank that traces its roots back to 19th-century London. They see LabMorgan as a clearinghouse for leading-edge ideas from both inside and outside the company, with all the tools to nudge those ideas along quickly. They and their colleagues are wary of having LabMorgan branded as the division that gets to do cool new stuff while the other three divisions are stuck with drudgery. Transforming Morgan into a preeminent e-finance firm can't happen without collaboration, aligned interests, and strong bonds with the rest of the company.

"We will have failed if we wind up as 100 or 200 people all doing their insulated thing," Maillet says. "LabMorgan isn't here to change LabMorgan. It exists to change J.P. Morgan."

Scott Kirsner (kirsner@worldnet.att.net) is a Fast Company contributing editor. Contact Peter Maillet or Peter Miller by email (inquiries@labmorgan.com). As this article went to press, J.P.Morgan and Chase Manhattan agreed to a consolidation transaction that would merge the two companies.

Sidebar: Who's Fast

When J.P. Morgan unified several of its Internet-related projects under the LabMorgan umbrella, the firm's 16,000 employees -- and its many high- powered competitors -- took note. "We needed to be smart about opportunities and threats around e-finance," says peter miller, the bank's former CIO and one of LabMorgan's founding fathers. "One way to do that is to learn more and learn faster than anybody else." Here is LabMorgan's secret formula.

Grow leaders everywhere. LabMorgan doesn't want its 100 employees to be the only ones keeping an eye on new technologies. So the Lab cultivates "in-business e-leaders" throughout Morgan's other divisions. They spend roughly half of their time working on Net-related projects. "Some of them were initially members of e-SWAT," says Peter Maillet, referring to a six-week-long brainstorming program at Morgan. "Others have just developed a strong interest in the topic." To help the in-business e-leaders keep tabs on what's happening at LabMorgan, the Lab runs an intranet site with updates on all of its ventures.

Stay on track. LabMorgan rigorously tracks how quickly it responds to incoming business plans, since the best ideas get funded fast. LabMorgan maintains a chart that tracks how many proposals it receives, how many of those proposals need attention, and the average time it takes to respond to each.

Mix it up. When LabMorgan launched, all of its 35 employees were J.P. Morgan veterans. Since March, LabMorgan has hired 70 new employees, about 40% of whom were from outside the company. "We don't need everyone here to understand derivatives pricing in detail," Maillet says. "It's good to have some people who understand the client interface better than we do."

Provide lots of ways to participate. Along with becoming in-business e-leaders, Morgan employees can submit ideas to LabMorgan. If an idea is accepted, employees have the option of helping LabMorgan develop it. Says Miller: "We make it clear that we welcome all kinds of contributions from any employee."

Mingle, mingle, mingle. It wasn't typical for J.P. Morgan execs to seek opportunities to speak at conferences or trade shows. "Our tendency is to be more quiet and inner-focused," Maillet says. "But now we want to be connected with everyone." By mixing with other e-business players, and also by reviewing hundreds of business plans, "you get pattern recognition," Maillet says. "When you come across the twentieth idea in a certain space, if it isn't on your mental map of the world, it should be."

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