In 1982, Bank of America initiated the development of the Master Net trust accounting system. After $78 million in losses on the project, the bank announced in 1988 that its trust business was being given to a subsidiary because it could no longer handle the operational requirements. MasterNet quickly became known within the information system industry as a classic case of a system that had fallen far short of expectations. The failure was particularly difficult for Bank of America with its rich history of technological successes. [001]

A. The MasterNet Story

Situation 1970: New President, Tom Clausen, took over BofA which had:

• just had several years of consistent 10% yearly growth in profits which exerted a lot of profit pressure
• 2,500,000 retail customers which enjoyed a stable and growing base,
• historically succeeded in decentralized retail banking due to good controls,
• recently diversified into corporate and international finance,
• enjoyed growth in loans and business in the new diversified areas to the extent that they were becoming significant,
• lacked experience, especially in the international markets,
• lacked appropriate controls for the size of the new business,
• had been historically recognized as a bank for the "common man." [A01]

Situation 1981: Tom Clausen became head of the World Bank and was replace by Sam Armacost. Now, BofA had:

• just reported it's first quarterly loss in 14 years,
• an extremely weak corporate and international loan portfolio
• a large and bureaucratic corporate staff,
• internal systems straining under increasing pressure, and
• the US had just experienced its highest interest rates in over 100 years. [A02]

The new president's strategy was to deploy information technology to "leap-frog into the 1990s." He picked the Trust Department to try the strategy because it had 1965 technology. He put Executive VP, Clyde Claus, in charge and told him, "either fix it or close it!" This department, just one year earlier had spent $6 million to modernize, but had failed. Claus elected to try to fix it when he discovered that Corporate Clients (who had $38 billion in assets at BofA) generally do their business at the bank that also does their Trust work. [A03]

Armacost set out to create a centralized repository of systems capability in an organization named BASE (Bank America's Systems Engineering) which had a $5 billion technological spending program. He attracted Max Hopper, the high profile systems manager who had a great success as the technical leader inn the development of American Airlines' SABRE reservation system. Armacost hoped that Hopper could bring his experience and success to BofA. [A04]

A Trust Department, basically, does banking and financially related business for corporations and wealthy individuals and estates. Its activities are organized as follows:

1. Corporate Trust where the bank acts as a registrar and transfer agent for stock and bond issues,
2. Employee Benefits where the bank holds and manages assets of private retirement plans which is complex, and entails:
   • services such as securities lending, portfolio analysis, performance measurement, benefits disbursements, and record keeping, and,
   • regulatory reporting for retirement funds which is extensive
3. Personal Trust where the bank manages financial assets for individuals and estates. [A05]

At the trust industry convention in the fall of 1982, Claus and two key data processing executives under Claus met Stephen Katz who had recently formed Premier Systems. He had just left SEI Corporation, an organization that he and Alfred West began. At SEI Katz sold a software system based on concepts in his MBA thesis to about 300 small banks through the 1970s. Now, Katz was entering the same business with Premier. At the convention, BofA officials began to work out a deal for Premier to develop a trust accounting system for BofA. [A06]

In 1983, BofA and Katz proceeded to create a consortium of banks to share the costs and risks of developing a state of the art trust accounting system. The other banks were the: Seattle-First National, United Virginia, and Philadelphia National. They were all using an SEI system at the time. Seattle-First National was a subsidiary of Seafirst Corp. BankAmerica, BofA's parent holding company, acquired Seafirst early in 1983 when Seafirst began to falter with losses in its substantial holdings of energy loans. [A07]

B. Development of the MasterNet System

Katz and Premier researched the project until March of 1984, when Claus presented Premier's proposal to BofA's management committee. The system, called MasterNet, was to consist of a large trust accounting system, called TrustPlus, plus eight smaller systems that augmented the core system. Each system would be integrated to provide the full complement of trust automation and would be accessible to remote clients on a real-time basis. BofA's ultimate goal was to sell the trust accounting services of the system to small and mid-size banks. MasterNet's initial budget was $20 million and the completion date was set at December 31, 1984. [B01]

BofA's data-processing staff met weekly with Premier's designers to discuss progress and needs. A committee of all departments affected by the new system, including those from the consortium banks, met monthly to define requirements. Also, expert users were assigned from all banks to become involved with the design process and provide continuity from design to implementation. Data processing executives felt that the degree of camaraderie and cooperation were exceptional throughout the design process. Also, BofA took significant steps to ease conversion to the new system. A comprehensive training program was implemented that assigned user/trainers to develop courses including videotape, classroom, and hands-on terminals. Afterwards, these user/trainers served as code testers and certifiers. [B02]

Despite the inclusion of other group, though, Katz made the decision to use Prime hardware. BofA succumbed to Katz despite the fact that BofA had been an IBM house since 1955. At the time, BofA had been using nearly 20 IBM or plug-compatible mainframes. [B03]

Though the initial December 31, 1984 deadline passed, Claus was not worried because of the progress in the system's development. Meanwhile, BofA was restructuring the organization of the bank under the guidance of Armacost's personally hired management consultant, Ichak Adizes. One outcome of Adizes' work was the formation of BASE (BankAmerica Systems Engineering) a consolidation of the assortment of systems engineering departments at BofA. [B04]

BASE was headed by Max Hopper of American Airlines' SABRE fame and would be responsible for the management, development, and application of technology. BASE also spearheaded a $5 billion, five year technological spending program that the bank announced at the same time which spanned virtually all operations within BofA. [B05]

As a result of the formation of BASE, Claus lost authority over his portion of the systems engineering department. He also lost the securities clearing operation due to other restructuring activities. Consequently, he found it increasingly difficult to get these two groups and his trust department to work together. Despite this, MasterNet development continued through 1985 and into 1986 until March. [B06]

In May, BofA staged a lavish two-day demonstration of the system touted as the "industry's most sophisticated technology" for handling trust accounts. Claus was positive about the presentation and felt that clients were impressed by the system's advanced technology. Claus apparently believed that the system was ready for production use, while other executives felt the show was staged merely to appease anxious customers. [B07]

During 1986, Claus' department began to prepare for the conversion to MasterNet. The first step called for the movement of the $38 billion worth of institutional trust customers. The smaller consumer division accounts would be converted later. The department made repeated attempts in late 1986, but were continually stopped by technical problems. The most glaring problems included poor response time and days-long system crashes. Despite the problems, Claus' department pressed on, putting in long hours in continuous attempts to get the system up and running. The enormity of the conversion task made it particularly difficult. Every single client asset had to be classified into one of the approximately 128 asset types. Personal notes kept by trust employees had to be gathered, reviewed, updated, and loaded into the system, entirely separate from the financial data. [B08]

Meanwhile, Bank of America as a whole was having significant problems. 1985 and 1986 brought the bank losses of $337 million and $518 million respectively. Since Armacost had become president, problem loans had been uncovered at an increasing rate. Also, news of the bank's losses and bad loans fueled rumors that BofA was in danger of failing. These rumors caused confusion in California where consumers began to close their accounts, causing a loss of more than $2 billion out of $44 billion of domestic deposits. These problems forced BofA's board of directors to oust Armacost and replace him and his vision of technology with the returning Tom Clausen. In October of 1986, Clausen regained control and immediately began cutting costs and selling assets in an effort to restore profitability. [B09]

C. MasterNet's Failure and Postmortem

BofA decided in April of 1986 to move BASE to Concord, a hi-tech suburb just east of San Francisco. As a result, several key employees quit and morale sank as the pressure and stress of the last few months combined with the move announcement pushed them over the edge. Similar difficulties had arisen in the securities clearing operation based in Los Angeles the previous month. [C01]

In early 1987, the system stability had improved enough to consider a serious conversion effort. A date of March 2 was set as the conversion deadline. As the systems engineering staff of sixteen rushed to complete the preparations, half of the group was pulled off of the project. [C02]

The remaining staff worked continuously up to March 2 and all of the institutional accounts were transferred by the deadline. Six days later, the first of over a dozen Prime disk drives failed. The staff spent a weekend downloading back-up data and the rest of the month dealing with the remaining failures. It turned out that the faults inherent in the Prime disk drives didn't show up in the first months of testing. Eventually, 21 of the 24 disk drives were replaced. [C03]

Meanwhile, improvements to MasterNet were being made and many of the problems of the previous year were cleared up. Unfortunately, new problems surfaced, for example, two new types of system halts were discovered in spring. Also, because the processors were fully utilized an additional two units were added to the current three. The hardware and software problems created an operational backlog that delayed processes such as monthly statement generation. Some accounts received monthly statements as much as two months late. In an effort to keep their records current, fund managers were forced to get information on their portfolios directly from investment managers instead of through MasterNet. Many clients began to consider switching to other organizations to handle their trust business. [C04]

In July of 1987, BofA announced that it was reserving $23 million related to losses due to MasterNet problems. In October of 1987, both Claus and Mertes (head of BASE after Hopper) resigned in the wake of the problems. BofA immediately assembled a seven member team to handle the MasterNet problem. Michael Simmons, formerly in charge of computers and telecommunications at Fidelity Investments in Boston, was hired in July of 1988 to replace Mertes. [CC05]

The Software industry press reported that none of the other banks were involved in MasterNet as BofA. Philadelphia National Bank dropped out of the consortium two years before. United Virginia Bank used MasterNet only for its custodial trust business, which is less complicated than master trust services, and Seattle-First National appeared to have delayed adopting MasterNet in its employee benefits business. [C06]

The basic financial benefit of the MasterNet project was not so much to be the generation of new cash flows, but the continuation of current cash flows. In 1987, BofA made nearly $100 million on its trust business despite the MasterNet problems. MasterNet was primarily intended to be a "catch-up" project with the highest priority of continuing the old system's operation, albeit more efficiently. A secondary goal of the MasterNet system was to add enough functionality to attract new clients. [C07]

In January of 1988, BofA announced that an additional $35 million would be added to the current $23 million reserve for MasterNet malfunctions. In comparison, BofA earned $60 million in the fourth quarter of 1987. Business began to evaporate as clients pulled their accounts from BofA. The number of accounts dropped from 800 to about 700 and total institutional assets declined to $34 billion from $38 billion. A few days after this first announcement, BofA announced that 95% of its institutional trust services clients would be shifted to BankAmerica's Seattle-First National subsidiary. The remaining 29 clients, representing BofA's largest and most complex accounts, would be given outright to State Street Bank and Trust Company. [C08]

In May of 1988, BofA completed the conversion of its trust account processing to a service bureau system running at the SEI data center while Seattle-First National handled day-to-day trust operations for its sister subsidiary. Thus, four years after the start of the project, not only was the system a major failure, but the whole trust business was lost. A total of $80 million was spent on the "stillborn" system and BofA received substantial press coverage of the debacle. The LA Times said in a front page story that BofA slipped in its "bid to leap into 1990s technology," while ComputerWorld, an information systems trade newspaper, called MasterNet an "$80 Million MIS Disaster." These words were especially poignent given BofA's technological leadership throughout most of its history. [C09]

At a time when BofA was struggling to regain profitability, the bad press helped convince the world that BofA really did have significant internal problems. At the same time, BofA was also getting press coverage for its loan losses and attempts to stay afloat as one of the largest banks in the country. MasterNet is now considered a classic example of an information technology failure. [C10]