The Taurus Project – a diagnostic case study1 Professor Raúl Espejo Syncho Ltd. 1999

Introduction The Taurus Project was a major effort by the London Stock Exchange (LSE) to develop a computer system to dematerialise [render paperless] share transactions in the London market. This project had its origins in the mid 1980s and its unfinished conclusion in March 1993. The outcome was a major implementation failure. This paper is an attempt to discuss this failure, using the Viable System Model (Beer 1979, 1985) with the support of the VIPLAN method (Espejo, 1999). It is a retrospective study based almost entirely on the information provided by the book Escalation in Decision-Making (Drummond, 1996). All quotations in the text are from this book. Perhaps the main value of applying a model like the Viable System Model (VSM) to a concrete situation is to support decisions. This use, of course, is not possible in a retrospective study. Here its value is just to illustrate the diagnostic power of this conceptual framework. The VSM is a framework to understand relations, in particular those that support the creation of policies and those that explain the implementation and regulation of these policies. In this case the focus is on the LSE decision to develop Taurus, to support the settlement2 of share transactions in the London Shares Market (LSM). The development of this case study will use the idea of managing complexity, the concepts of identity and recursion, and the mechanisms for adaptation and monitoring-control (Espejo, 1999).

Managing the complexity of settlements The purpose of Taurus was to dematerialise share settlements in the London shares market. This was attempted at a time when share ownership was booming. The market moved from a situation where the main owners were large investors and institutions to millions of small shareowners (the many ‘Sids’ as the advertising of the time named the new shareowners). This implied a huge increase in the number of transactions, starting from the moment an investor wanted to buy shares to the new owner receiving shares certificates. During that period the market complexity grew by orders of magnitude. The issue was whether the London Stock Exchange (LSE) was ready to absorb it. The magnitude of this problem became apparent in 1987 when:

1 This paper is a revised version of a case study originally developed for The Open University course T306, Managing Complexity: A Systems Approach.

2 Settlement is a term that denotes the completion of a share transaction; it is analogous to the clearance of a cheque.

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The stock market crash changed perceptions by exposing the risk involved in unsettled share transactions. For the first time, the securities industry woke up to the fact that quadrillions of pounds were at risk day in, day out because of ‘black holes’ in the settlement system, holes that many senior managers in the industry hardly knew existed.

(Drummond, 1996, p.48).

Settlement, and in particular its paper work, was seen as the root cause of risk in share transactions. Overcoming this perceived weakness of the system was the impetus for Taurus. By 1988 there were about 1000 billion shares in circulation. But two years earlier, in 1986, with the so called Big Bang, the London Stock Exchange had been deregulated and large financial institutions had become involved in stockbroking and in keeping registers of stockowners. This became the starting point of a new business for banks. Some of them bought in traditional brokers and started to offer a much larger capacity for share dealings. It is interesting to observe these changes in systemic terms (Figure 1). Deregulation implied that the system in focus for shares exchange had shifted from the LSE to the LSM. However, as this story shows, this shift might not have been appreciated in full at the time. For LSE the complexity of its environment was increasing exponentially. This implied that it needed much more sophisticated attenuators of this complexity, able to cope with large and small shareowners, and also much larger amplification of its response capacity. On the one hand deregulation (i.e. the Big Bang) had provided the LSE this larger response capacity. On the other, a new computer system to deal with settlements, such as Taurus, could make more manageable the increased environmental complexity implied by an extended shares ownership. These two developments would appear at first sight as appropriate responses, yet the LSE and also other institutions in the City of London failed in making proper systemic connections between deregulation and the development of the new computer system. Clarifying these connections is at the core of this case study. The common view of the LSE was that of a trading floor rather than of a trading floor and a settlement house. Computerisation of settlements was a way to sweep under the carpet an unglamorous activity, which traditionally had been in the ‘back office’ of stockbrokers. As Peter Rawlins, LSE’s CEO at time said ‘Settlement was invariably the province of Gladys sitting down there, God bless her. She knew what went on. Nobody else did.’ (Drummond, p.45.)

Environment:Extended sharesownership

LSE ?

Code: = Amplifier

= Attenuator

Figure 1: LSE as the system in focus

Dealing with increased environmental Complexity: Taurus?

Response capacity: AutonomousBrokers

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This view of settlement might have been responsible for the Taurus failure. The idea of replacing the complexity of a large number of transactions with a single computer system seemed attractive, but it was deceptive. Indeed it was attractive to simplify the situation from a large number of independent ‘back office’ responses to one overarching automated response. However, the effect of this monolithic approach can be to increase the demands on the flexibility of the computer system to a degree that makes it impractical. It will become apparent from the discussion of Taurus that the London Stock Exchange was over ambitious in its expectations. But, ironically, the solution to the settlement issue was already in the London Shares Market itself after the Big Bang. Unfortunately, it took several years and about £400 million pounds to see it.

Historically, the ideas that led to Taurus had emerged at a stage when trade and settlement still affected a relatively small number of large institutions and market makers. But, the government’s policy on shares ownership had significantly increased this complexity. Taurus now had to cater for a much larger number of transactions, and the performance criteria required matching each individual transaction with a particular high quality response. These new performance criteria made the development of a centralised Taurus impractical. In fact, when these centralised design criteria were relaxed and time had given the Big Bang a chance to work, Crest – the system developed after the Taurus failure – became feasible.

“More importantly, part of the original problem had self-corrected. Brokers’ back offices were better organised than they had been in 1987 and were therefore better equipped to cope with an upsurge in trading volumes should it occur.”

(Drummond, 1996, p.152).

The Organisational Context An Issue of Identity Perhaps a major issue behind the Taurus failure was the lack of a clear identity for the London Stock Exchange. For a long time the LSE had been a major institution in the City of London, which could have easily been mistaken for the London Shares Market (LSM). But beyond its administrative role the LSE had been not much more than a major point of encounter for independent brokers/dealers. Until the early 1980s, brokers had seen themselves as members of the LSE and nothing more. In the late 1980s, they were still members of the LSE, providing advice and dealing services to the public, but now they could deal on their own account in a new unregulated market. Before the Big Bang, the LSE was a closed, fairly undemanding, brokers’ club –competition was not part of their culture. However, all this changed with the Big Bang. Large banks were now allowed to become brokers and, indeed, some of them bought in established houses. It was no longer a Club. At that point the LSE became very different to the LSM. Now, there were hundreds of autonomous brokers operating in the City of London. Taurus had been conceived within the old identity and assumed the cohesive behaviour of brokers within the framework of the LSE. The new situation made the commitment of banks and brokers to the centralising assumptions underpinning Taurus much less clear. LSE was now just one of multiple City institutions, and it was also clear that it need not have control over the settlement system. Therefore, rather than London Stock Exchange, the organisational system of

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concern in deciding Taurus should have been the London Shares Market. But the design implications of this distinction might have been unclear at the time.

Unfolding of complexity Before Taurus, the (technological) process of the London Shares Market started with investors contacting a broker in their City of London offices. Brokers would then go to the LSE to agree ‘jobs’ with jobbers, whom after completing transactions on the floor would pass the relevant information to brokers for them to complete transactions with the support of their back office employees3. The final step was closing the loop with investors as they received their share certificates. It was apparent that brokers and jobbers saw trading as their business, and settlement was perceived only as an administrative aftermath. This worldview had much to do with the way Taurus was conceived: computerisation could significantly reduce the back office administrative costs. Settlement was just a low level administrative task, was it not? However, this picture changed completely when ownership of shares became more popular and the LSE was overwhelmed by the Big Bang. For banks, which were keeping registers of shares and doing settlements these activities became profitable businesses in their own right. This was the huge operational change produced by the changes in progress. Now the Shares Market was de facto subsuming two autonomous primary activities: trading and settlement. All the signs about this evolution were there and they could have been seen, if only attention had been paid to what was going on in the banks. However, those responsible for deciding about Taurus, preferred to continue thinking in terms of the complete automation of a highly complex process that already was requiring in other institutions extensive investment in people and technology. The evidence suggests that trading was still for LSE the most important, and perhaps its only business. Even if it had had capacity to regulate and develop the trade business, it did not have functional capacity to regulate and develop the settlement business4. Its capacity in relation to trade was based on its history and long-standing relationship with brokers, which in any case had changed after the Big Bang5. As for settlement, Taurus was an attempt to absorb most of its complexity through a computer system, underplaying the relevance of the complex web of autonomous institutions involved in the related processes. The many brokers producing trading and settlement of shares constituted the LSM (Figure 2 shows this unfolding of complexity). The London Stock Exchange was experiencing a significant organisational change. From being the undisputed steering capacity for shares dealings, recognised as the

3Before 1979 brokers and jobbers physically delivered the orders to one another’s offices. There followed the tedious, complicated and expensive task of matching hundreds of buying and selling transaction. The system named Talisman had streamlined the task of clearance but the task of reforming the settlement system was only half-complete. Project Talisman was implemented in 1979. Talisman acted as a clearing house. Instead of brokers and jobbers dealing directly with one another, transactions were funnelled via the Stock Exchange. Jobbers are now known as market makers or the points of contact between sellers and buyers of stocks

4 Repeating Peter Rawlins’s statement: ‘Settlement was invariably the province of Gladys sitting down there, God bless her. She knew what went on. Nobody else did.’ (Drummond, p.45.)

5 In fact, about the same time of the Taurus saga, the LSE implemented, according to plan, one of the most sophisticated securities dealing systems in the world, which indeed did not spare the need for traders (i.e. recognised their autonomy).

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leader and cohesive force of stockbrokers, it was being transformed into one additional player of the London Shares Market. As an institution it offered a service to stockbrokers and banks but could not see itself any longer as the umbrella of all of them. Brokers and financial institutions in the City of London were producing the trade and settlement primary activities. Indeed, it can be argued that historically trade had been within the regulatory framework of the LSE and that brokers had accepted this a framework for cohesion. It was more difficult to argue the same role for LSE regarding settlement business (i.e. primary activity). For this activity the situation was far less clear, not the least because the LSE did not see it as an autonomous business. Additionally, the Bank of England and multiple committees were regulating the London shares market. Indeed, it was more appropriate to recognise the London Shares Market (LSM) as the organisation in focus for the Taurus project and not the LSE. Figure 2

Unfolding of Complexity: London Shares Market

London Shares MarketBroker 1 .

Broker ‘n’..,

Settlement

Shares type 1

Broker 1 .

Settlement

.

Taurus may not haverecognised the implications of a growing complexity of settlement activities and deregulation after the ‘Big Bang’.

Trade

Shares type ‘n’

Regulatory Mechanisms The mechanism for adaptation: a decision dilemma Deciding on Taurus was a classical situation in which much emphasis was given to environmental threats at the expense of operational complexity. LSE did not have operational capacity to deal with settlements; a good deal of this capacity had been evolving in banks since the Big Bang. In practice this meant that when LSE decided Taurus, those with the operational knowledge about settlements had little influence in the process. On the other hand those who saw London’s position in the world financial markets under threat, dominated the process. It can be argued that they saw the advantages of computerisation but not the complexity entailed by the operations themselves. Arguably, had these conversations between the ‘outside and then’ and the ‘inside and now’ taken place in a cohesive organisational framework focused on LSM, the selected design for Taurus would have recognised the already known

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operational complexity of settlement. As it happened, when Siscot6 was formed, the evidence suggests that no party felt ownership of the situation and therefore decisions were based on not challenging any of the other parties. This led to a decision heavily influenced by the pre ‘big-bang’ situation in which, as explained before, the complexity of settlement had been significantly lower. It was clear that there was no operational counterpart within the LSE to discuss the idealised Taurus project. The final decision-making body for Taurus was the Board of the LSE7. Unfortunately, as implied above, the organisational processes supporting its decisions were weak. Robustness in decisions derives from the quality of previous debates within the organisation, which in this case, should have happened in LSM and not LSE. It is the checks and balances produced by these debates that could have avoided ungrounded, far-fetched proposals. The Board did not have the benefit of these debates. Their decisions were mostly influenced by the threats to the City of London. The lack of a settlement history within the LSE and in particular the changes taking place within LSM, made the influence of the ‘inside and now’ perspective weak indeed.

The mechanism for monitoring-control: the control-dilemma This lack of mechanisms for necessary debates was apparent not only before the project but also throughout its execution:

‘The divergence of opinion and conflicting priorities which emerged during the building of Taurus could only be addressed by a deep and sustained interchange between the decision-makers and the technical team. No mechanisms existed to facilitate such an exchange.’

(Drummond, 1996, p.129).

There is evidence that the monitoring-control of the organisational (LSM) system was weak, and also that the government’s intervention in the process for shares dealing made the organisational system less flexible precisely when it needed more flexibility. It is important to keep in mind that the relevant organisational system in this case was the London Shares Market and not the LSE. When Peter Rawlins joined the LSE as Chief Executive, the decision to go ahead with Taurus had already been taken but implementation had not yet begun. Despite his personal reservations about the project he was asked to move ahead with it. In going along with this request, he was accepting tacitly an oversimplification of one of the LSM primary activities. Taurus was going to solve the settlement issue. Within this framework it would have been too optimistic to expect the monitoring of the settlement primary activity. Who would be accountable for it if the activity was not seen as a viable system by the LSE. It would appear that most people were failing to see the organisational meaning of the Taurus project. However, as deadlines were missed and as John Watson, the project director, became less confident in providing completion dates, Peter Rawlins started to take more direct interest in the project, eventually asking Andersen Consultants to do a full auditing of the work in progress. It was only then that he perceived the need to call a halt to the project. This lack of systemic appreciation of settlement’s complexity was compounded by the regulatory intervention of the Department of Trade and Industry. This was a classical example of the ‘control dilemma’ (Espejo, 1999). 6 Siscot was the Securities Industry Steering Committee on Taurus, with participation of financial institutions, banks and brokers in general

7 At the beginning the name of this Board was the Council

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Regarding settlements, and in particular their dematerialization as proposed by Taurus, the DTI felt the need to issue new regulations to prevent fraud and unscrupulous trading. It became necessary to answer the question: ‘What is going to happen if Mrs Snooks’ shares are ripped off?’. Peter Rawlins said: ‘It was a very difficult thing to stand up and say to the world, “Look, frankly we are not doing this for Mrs Snooks of 22 Acacia Grove and her 100 ICI”. We were not trying to put her out of business or make it difficult for her but we definitely did not have her as number one priority…’ (Drummond, p.107)8 The government’s regulatory framework originally thought of as a handful of pages became a hefty 100-page document, which made even more difficult the development of a comprehensive system able to cope with all settlement contingencies. The ‘five or six pages of mechanics’ blossomed into over 100 pages of intricate clauses and sub-clauses (Drummond, p.107). The effect of this intervention was to reduce the flexibility of the LSE and LSM at the very time that they were facing increasing complexity. For the Taurus development team these regulations made the design of the system even more difficult, if not impossible. The government’s precise regulations for settlement were not only changing the specifications for Taurus but also making settlement much more difficult for the financial institutions. It is interesting to observe that stopping Taurus did not have the anticipated catastrophic consequences for the City of London. In fact, it might have been this signal that made the irrelevance of government’s over-regulation apparent and also showed the need for the London Shares Market to develop an identity beyond the LSE. Indeed, it was the Bank of England that took the lead in setting the terms for the new system – Crest – to manage settlement. This new system became possible as a result of simplified government regulations (hence ameliorating the effects of the control dilemma) and also by accepting that financial institutions had already self-organised to handle settlement. With hindsight it is easy to say that both aspects could have been anticipated!

Summary Taurus was about dematerialising the settlement of shares transactions. This aim implied setting common standards for these operations9. In this sense Taurus could have been seen as a distributed co-ordination information system aimed at facilitating traders’ activities in an evolving situation of increased complexity. Perhaps the problem was transforming it into an all-encompassing, centralised, computer system, without paying attention to the structural recursion of the LSM. Computerisation to that scale was not necessary. The project could have been done with much less use of 8 This was a very revealing situation. Rawlins’ comment was indeed very sensible from the point of view of the LSE, but not from the viewpoint of the LSM; as a whole the London Shares Market had to account for every transaction. However the issue was the implementation of this regulatory requirement.

9 The stock market crash of 1987 had prompted a highly influential group of bankers known as the ‘Group of Thirty’ to define international standards for equities settlement. Two crucially important recommendations required financial centres to implement three-day rolling settlement and delivery versus payment (DVP) by 1992)

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computers; however keeping London as a world centre for financial activities may have over influenced the LSE’s decisions. Taurus became an over ambitious project. The idea was to achieve standardisation in shares dealings. The project was conceived at a time when transactions were still not understood as the raw material of a business. The issue was construed as reducing back office costs and not as an opportunity to improve the quality of share transaction services. Apparently, an initial design of Taurus was even more monolithic than the one eventually selected. The latter one assumed brokers developing their own in house software to interface with the core Taurus software. But rather than working in this core the initial work of the project team was focused on building up interfaces. Since adaptive primary activities were behind these interfaces, the project team found it extremely difficult to keep specifications stable. Moreover as banks and brokers in general became aware that Taurus would not work, they started to reduce their efforts in this direction. As a result of the audit asked for by Peter Rawlins, Andersen Consultants found that the system was still not completely designed. Taurus was supposed to be a centralised system linking about 500 computers. As late as December 1992 the architecture required for this purpose had not been created. It would appear that over time, those directly involved in the project were finding that the complexity of settlement was beyond a single computer system design. However, there is also evidence that the Taurus project management was fragmented and weak. No one had an overview of the project or the authority and responsibility to take action:

The issue is important because it has been argued that the acceptance of responsibility holds the key to preventing the tragedy of the commons. Intervention in a ‘commons’ scenario requires power; that is, the ability to force individuals to abandon the pursuit of private interest where it conflicts with the common good.

(Drummond, 1996, p.191)

John Watson was supposed to have full responsibility for the project, but his ability to manage the project was undermined over time by the creation of a project executive with different people responsible for legal, marketing and other aspects of Taurus. Further problems arose because banks were not too happy with the idea of the LSE keeping a centralised register10. To overcome their objections and to make possible the participation of the industry in the development of Taurus, the Bank of England was instrumental in setting up the Securities Industry Steering Committee on Taurus (Siscot). In theory everyone in Siscot wanted to improve efficiency and reduce risk, but in practice everyone (brokers, settlers and banks) wanted to keep the status quo (Drummond, p. 56). This was a weak link between the project management and stakeholders. Decisions were difficult to make. Paradoxically consultation became the Achilles’ heel of Taurus! There was too much consultation and not enough decision. Late efforts to adjust the design of Taurus found that the design was inflexible and changes were not easy to introduce. Taurus had become a paradigmatic example of the difficulties of not recognising the complexity of organisational processes in the implementation of information technology.

10 Companies had to keep updated a register of shareowners, which as said above after the Big Bang became a business for banks; they had bought up most of the statutory registration business and invested heavily in it.

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By 1992, government policy had changed in favour of creating tax havens rather than giving incentives for share ownership. Consequently, share ownership had deepened rather than widened (Drummond, p. 137). This was the time to simplify Taurus. Taurus had been conceived as a single computer system, but the complexity of the situation was much greater than one single computer system could manage. It did not have requisite variety. No matter how much effort went into it, it was not going to work.

References Beer, S. (1979). The Heart of Enterprise. Chichester: Wiley.

Beer, S. (1985). Diagnosing the System for Organisations. Chichester: Wiley.

Drummond, H. (1996). Escalation in decision-making. Oxford, Oxford University Press.

Espejo, R. (1999) Viplan: A tutorial to learn about the Viable System Model and its use, Version 1.25, Syncho Ltd, Aston Science Park, Birmingham B7 4BJ, UK.