Merrill Lynch Phones Ahead

Talk about a wake-up call. John McKinley picked up his office phone and discovered that the line was dead. For most executives, this would be a nuisance. For the CTO of Merrill Lynch & Co., it was a potential disaster. A phone outage can mean millions of dollars' worth of lost business for the largest brokerage firm in the United States.

Fortunately, McKinley had another telephone on his credenza, a new device that uses the Internet and Merrill's high-speed data network to handle calls. The CTO had tinkered with the new phone, which was designed by Cisco Systems to take advantage of an emerging technology called "voice over Internet protocol" (VOIP), but McKinley had never relied on it to do business. When he lifted the handset, he heard a dial tone and got to work. For the next two hours, he used it to troubleshoot the problem, which turned out to be minor, until AT&T restored service.

When it was over, McKinley regarded the device with newfound respect. Merrill has big plans for VOIP, and this trial by fire showed McKinley that VOIP could pass the crucial first test: It worked like a normal phone. "The phone is the most important tool in our business," he says. "It's the only service that's 99.9% reliable. But no one is going to praise a system for having a dial tone. It has to be so reliable that people aren't even aware of what device they're using."

Big Possibilities, Immediate Payoff

A couple of years ago, Merrill looked like dead meat as it scrambled to respond to the threat posed by competitors such as E*Trade and Charles Schwab. But the firm emerged from that scrape as a born-again innovator with a potent Internet presence and a renewed commitment to applying technology as a competitive weapon. The VOIP phones are the stealth bombers of the company's arsenal.

About 3,000 of the company's 68,000 employees have the new phones now. McKinley plans to install VOIP phones in every new office starting in 2002, a target to which Merrill remains committed despite tough times and retrenchment on Wall Street. His case for the new technology is rooted in the belief that Merrill can't prosper by cutting trading costs to the bone. The firm lives and dies by customer service, easy accessibility, and global reach. "We are a high-touch business, and we sell bits, not atoms," says McKinley. "So adroit use of technology can be a way to gain tremendous competitive advantage.

"Imagine a phone that recognizes a customer before the broker even picks up the handset," McKinley continues, "and flashes a snapshot on a computer screen of the state of that customer's portfolio, along with his 10 most recent trades and how those stocks are performing. Such applications embody VOIP's potential -- a chance to improve our productivity and responsiveness to customers in deep, rich new ways."

But an emerging technology can't pull its weight at a place like Merrill if it doesn't also deliver a quick payoff. To improve the odds of successful early adoption, McKinley mapped out areas where VOIP could help Merrill save money fast. Indeed, before he'd even plugged in the first VOIP handsets, he saw a way to cut Merrill's phone bill. "I'm paying for the voice circuits to carry phone calls around the block or around the world," McKinley says. "And I've paid again to put in this great data network, which has grown huge in order to handle this gusher of information. Can't I have some convergence and start moving my voice traffic over the data network?"

VOIP technology can do that because it exploits a key difference between the network that has evolved to handle voice calls and the network that has been built for data. When you speak into the phone, your voice is turned into an electronic signal that is then diced up into discrete segments called "packets." Those packets are labeled with electronic tags and fed into the phone network, where they blend with millions of other voice packets. When they reach the other end, the packets are reassembled and sent to the phone of the person you are calling.

Internet-protocol networks also use packets to move around discrete bits of information. But unlike the traditional phone system, which opens up a dedicated line or circuit between your phone and the phone that you are calling each time you place a call, IP traffic takes the fastest route available. Different packets of data from the same file or email message may travel north through Minnesota and North Dakota, and south through Texas and Arizona, to get from New York to San Francisco, where they are reunited.

That's fine for data, where a few milliseconds of lag time on a transcontinental journey is no big deal. But voice calls are more exacting. The slightest delay in reuniting the packets can ... make ... a phone ... call ... sound like ... this. It's annoying if you're trying to talk to your college roommate. It's fatal if you're doing millions of dollars' worth of business each day over the phone.