The Efficient Frontier: AXA Financial Inc.

“When I got here, the whole model of asking for money was based upon what I referred to as ’emotional appeal.’ Whoever screamed the loudest usually ended up with the most,” says Paul Bateman, 50, and in his fourth year as director of enterprise governance for AXA Financial Inc. AXA hired Bateman from Citigroup in April 2000 to tackle its IT free-for-all. At AXA, the $7.6-billion U.S. subsidiary of AXA Group, the Paris-based financial-services conglomerate, IT had long been seen as a competitive differentiator—and remains so—but at $300 million, the company’s 2000 IT budget would soon equal 70 percent of its total net income.

Like so many businesses, AXA had a great fin de siecle. Entering 2000, AXA’s revenues soared as the financial markets boomed, and the company took in $2.4 billion in cash (and $5.6 billion in stock) for the sale, to Credit Suisse Group, of its 71 percent stake in Donaldson Lufkin & Jenrette Inc. Yet by the end of 2001, things had changed dramatically.

Though AXA Financial’s revenue reached $7.8 billion for 2001—more than $1 billion ahead of the previous year—earnings fell off a cliff. With the economy contracting, but especially in the aftermath of Sept. 11, reported net income declined more than 80 percent, from $2.4 billion in 2000 to $425 million in 2001. AXA’s insurance firms not only faced claims against losses in the terrorist attacks, but AXA Group itself owned a 25 percent share of American Airlines that morning.

Early in 2002, Henri de Castries, AXA Group’s chairman and CEO, reassured shareholders that AXA would continue to pursue its overarching strategy of combining its global scale, management expertise and extensive IT to sell mutual funds, say, to its annuities customers. But, internally, the status quo wouldn’t do. The message was out: The firm needed to do more with less. And efforts launched in the spring of 2000 to bring greater order to AXA Financial’s array of IT projects took on renewed urgency.

“When I took an as-is snapshot of what the lay of the land looked like,” Bateman recalls, “I discovered there were a number of projects behind schedule and over budget and, more important, that all projects were created equal. There was no hierarchy of improvement. There was no sense of how these projects related to our vision, mission, long-term, short-term—any kind of objective you wanted to define.”

To better understand where AXA spent on IT, and to link its budgets to strategic, rather than emotional goals, Bateman bet on a more empirical, logical approach to IT oversight—the much-hyped, oft-misunderstood technique of portfolio management.

“What appealed to us about portfolio management was that we needed a disciplined approach to our IT projects,” recalls Charlie Curcio, AXA Financial’s CFO for IT. “If you have spending on the rise, such as we had in the late nineties, when e-business was booming, you need a new way to focus on the true value of all of your projects.”

Some of the initial stages of IT management—taking an inventory of existing projects, and assessing budget and on-time completion—didn’t require more than spreadsheets. But as the cost-budget analysis of pending projects got more complex, Bateman turned to New York City-based software company UMT (United Management Technologies), whose approach to portfolio management has its roots in the theories of Nobel Prize-winning economist Harry Markowitz. Whereas some portfolio-management programs are little more than project management on steroids, UMT supports managing IT in much the same way that a fund manager does an investment portfolio. As such, it offered Bateman a way to decide not only how to optimize the performance of existing projects, but which projects should be approved in the first place. And it allowed him to evaluate any area within IT where money is managed and returns on that money can be optimized—particularly when he had to choose between a range of alternatives and make trade-offs. If I invest in X, for instance, what will be the impact of not investing in Y—and will I or won’t I be best able to execute on strategy Z?

“As the market continued to contract,” Curcio says, “portfolio management became increasingly valuable, because of the emphasis it places on getting the most out of the same resources.”

If Curcio’s endorsement sounds familiar, that’s because portfolio management is enjoying something of a vogue. “Consumer goods and automobile companies are starting to use portfolio management,” says Doug Lynn, a vice president at META Group Inc. “Big pharma has done it intuitively, but they haven’t used it to the extent they will in the future. And aerospace and defense are very big on this because they need to make sure projects are finished on time and on budget.” Lynn’s firm is quite bullish on portfolio management, predicting that the market will likely double, to $350 million, this year. Moreover, the benefits in terms of cost savings and efficiencies are reported to be remarkable.

“Leaders in IT portfolio management have demonstrated ways to cut IT costs by 2 to 5 percent, improve productivity 25 to 50 percent, and shift 10 to 15 percent of their IT budget into more strategic projects,” claims Eric Austvold, a research director at AMR Research Inc.

To download a chart of AXA Financial’s Portfolio Management Process, click here.

And yet, when Bateman, Curcio and a few others at AXA selected UMT’s approach, it wasn’t such an easy sell. Sure, it helped that people at AXA understood investment portfolios, asset allocation, risk management and the like, but not everyone saw its appeal right away. Swift results, however, helped Bateman gain traction.

“I bet we saved $5 million to $10 million in the first year alone,” Bateman says, “on projects that would have automatically gone through before. But now the business units knew what could get killed, so they killed it first. It just became immediately apparent how much junk we weeded out of the system.”

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