State Street-Charles River: One Year Later and a Very Different Strategy

By Larry Tabb

Founder & Research Chairman, TABB Group

It’s been a year since State Street closed its Charles River Development acquisition, and the firms’ strategy is taking shape. State Street appears to be looking at the CRD acquisition as the foundation of a new open platform strategy, which is a very radical departure from its past. TABB Group founder and CEO Larry Tabb breaks down State Street’s vision for CRD and where the two firms are headed.

It’s been a year since State Street closed its Charles River Development (CRD) acquisition. CRD, for those who haven’t been following, is one of the largest (if not the largest) providers of front-end infrastructure for large asset and wealth managers, as well as asset owners, insurers and hedge funds. CRD held its user conference during the last week of September, and I was able to sit in to see exactly how far the two firms have come and where they are headed.[1]

First, a little background. CRD was founded in the mid-1980s by Peter Lambertus. An engineer at heart, Lambertus was an extremely competent developer and a hands-on CEO who strongly guided CRD’s technology development and impressive growth. His confidence in his own team and their capabilities pushed CRD to develop internally many of the functions that other firms would think either to outsource or perhaps partner with a specialist provider. While commentators, not unlike myself, thought of this as shortsighted (why build everything?), CRD was one of the few technology firms to pull it off.

CRD became a well-run and vibrant company that not only was functionally rich, but also greatly appreciated by its clients and well-respected by its competitors – so much so that after 30-plus years, Lambertus sold the company to State Street, one of the largest global custodians, for $2.6 billion. The valuation seemed so high that I penned this commentary on why State Street would pay so much for Charles River.

Well, after just one year, I was truly impressed.

In my 23 years as a technology analyst, I have come to realize that there are basically three major acquisition strategies for buying core processing systems: buy clients, buy revenue, or invest and transform. An acquirer is looking to either extend its client-base, or it views a sticky processing system as a cash cow, so they pare costs to a minimum and hold clients hostage; or, it looks at the acquisition as an investment in transforming not only the acquired platform but its existing business.

While acquisitions don’t typically fit neatly into one of the three above boxes, most of the acquisitions we have seen on the processing side of our business over the past two decades fall more squarely into buying or monetizing clients, while few fall into investment and transformation.

It appears that the State Street-CRD deal is the outlier. State Street not only is marketing the transformation of CRD, it is making significant investments in people, technology, and business strategy to transform both CRD and State Street the custodian, as well as State Street’s clients.

A transformation of this kind could not have come at a better time. While the market valuations are near all-time highs, the asset management industry is not. The transition from active to passive management and the existential cost compression occurring throughout the industry are challenging managers around the globe to think differently. And that is exactly what this combined organization could facilitate.

Unlike most infrastructure investments, instead of cutting infrastructure support and development, State Street is on a hiring spree. It has hired 250 new staff for the CRD team and announced plans to add another 100. In addition, it is in the process of re-platforming CRD onto the cloud; and while this initial development is more of a lift and shift model to enable clients to engage with a cloud-enabled platform, the companies have announced their plans to develop a cloud-native CRD infrastructure that more fully takes advantage of web services and can drive better economics throughout the buy side.

The other major shift I witnessed was a very sincere effort by the State Street-CRD team to aggressively partner with aligned industry vendors – to the point of making at least six or eight announcements in various keynotes and sessions to ask their user community for ideas on the most important and helpful partnership strategies to pursue. And not just with brokers, algorithms, or matching platforms (with which CRD has had long-standing order-routing relationships), but with more competitive traditional technology providers. For example, firms such as BNY Mellon Eagle, FINCAD, Cassini Systems, Dash Financial, and Attunity were event sponsors with product booths. That’s not to say sponsorships define an open platform strategy; but in years past, it would seem very odd for direct competitors such as BNY Mellon, with its Eagle data/portfolio management products, or Dash Financial, an execution management/analytics infrastructure provider, even to be allowed on premises, whereas today, they are featured partners.

While State Street is hiring, reinvesting in the CRD platform and adopting a very different partnership strategy, there still is an elephant in the room: How will State Street transform itself through the CRD acquisition?

State Street appears to be looking at the CRD acquisition as the foundation of a new platform strategy. For those who don’t follow the intricacies of platform economics, the gist is, if you can transform from a technology to a platform, you can add services across the spectrum that both can add value to the client as well as an additional revenue source. Think of the iPhone app store. Apple doesn’t have to develop every application, but since it owns the platform, it can monetize the applications that we as users demand. By transforming from a phone to a platform, Apple no longer owns the risk of developing all the applications and seeks lock-in by developing the best user experience. In this way Apple can be the gateway for a host of services that the most innovative minds can develop.

This is a very radical strategy compared to the past. And this is especially true, given CRD’s history of tightly managing the client’s technology and user experience.

If State Street can execute on this strategy, it not only will transform the CRD client experience, it also will enable State Street to gain the pole position in offering its more traditional services, such as execution, custody, data, analytics, and insight.

This open strategy is seemingly different than many firms’ closed offerings, which attempt to lock in clients and/or make them jump through hoops to integrate third-party offerings. If executed properly, owning the platform not only ensures that firms remain State Street-CRD clients, it also gives State Street better insight into what clients want and how to better serve them. It provides the vendors an API to write to and open standards to grab data and present information, and it enables clients to more easily on-board a wider array of service providers. Over time this makes it harder to leave and gives State Street a more aligned view of where to invest.

Now, State Street still has to successfully execute the strategy and build out this platform. But given the progress on exhibit at the recent CRD user conference, the company certainly seems to be on a very different – and more open – path that not only will provide a better foundation for growth but also will be eagerly embraced by State Street’s largest constituency: the institutional investment management community.

[1] This paper was not funded by State Street or Charles River Development. While State Street Corp. has been a TABB Group research client, CRD is not and has never been a TABB Group research or consulting client.