On a late May morning, Richard Brown, chief financial officer of John Hancock Funds, arrived at his tenth-floor Boston office and sat down to an unhappy task. He peered out his window at the Charles River and the campus of the Massachusetts Institute of Technology, sighed, and picked up the phone.

Brown was about to call six companies and deliver some bad news. After undergoing a 13-month review, the firms had missed out on a chance to perform custodial services for John Hancock's $26 billion in mutual fund assets.

He was afraid the news would be especially painful for three of the companies, Investors Bank and Trust, State Street Research and Brown Brothers Harriman, all of Boston, which had been performing those custodial services, in some cases, for decades. Lost revenues totaled roughly $3.5 million, not a huge sum, but large enough apparently to prompt strenuous efforts to keep the business, Brown said.

Delivering the news to those companies would also be especially painful for Brown.

"We were very happy with Investors Bank and Trust and we were very happy with all of the work we've done with State Street over the years," he said. "That made it really difficult to tell people that we were moving our business."

But, as he wrapped up this long-term project of consolidating John Hancock's custodial duties from three firms to one, a task designed to cut costs and eliminate old computer systems, Brown had good reason to celebrate. He and a team of executives had just completed a review of seven companies who were vying for the fund company's custody business. In the end, the Bank of New York had won. John Hancock had not renegotiated its fee structures for several years, so, with competition driving fees down, the new arrangement helped the firm cut costs, Brown said. Through the review, Brown helped save his firm roughly $5 million, he said.

John Hancock's selection of the Bank of New York is a coup for a bank that holds about 17 percent of the financial services market share, compared to State Street's 40 percent, Brown said.

Bank of New York's win is also good news for the industry, said Kelli Stebel, an analyst for Morningstar.

"If they're taking market share away from State Street, good for them," she said. "Anytime we have a little price competition going on, that leads to better services and lower prices, which is better for shareholders."

But at that moment in late May, after more than a year of site visits, presentations, number crunching and committee meetings - all of which were made more difficult by close competition - Brown said he faced a "sense of dread" from the prospect of firing three firms which were essentially losing business right out of their own backyards.

"They're disappointed," he said of the companies' reactions to the news. The companies all gave near-perfect presentations during the review process, Brown said.

"They put in the effort," he said. "You had good reactions to the site visits and you still couldn't give them anything definitive as to why they weren't chosen. I wish I could have come up with some bad things about them."

Investors Bank and Trust held the majority of the business that was put up for grabs, performing custodial duties for roughly $22 billion of the John Hancock assets, Brown said. State Street performed those duties for roughly $3 billion and Brown Brothers Harriman handled the balance of the $26 billion, he said.

Investors Bank and Trust had held the business for nearly 30 years, said Karen Keenan, that firm's chief financial officer. She described the loss as "a very big disappointment."

"We feel we did everything right," she said. "We were actually receiving very positive signs right up until the very end."

All the same, the lost business will cost the firm $4 million in annualized 2002 revenue, or about one percent of total revenue, which does not represent a severe blow to the company, she said.

State Street had held John Hancock's business since 1968, said Alyson Riley, a spokesperson. The firm was more reserved than Investors Bank and Trust about sharing any frustration it may have felt from losing the business. Riley said she did not know about any sense of surprise when the news came. John Hancock's business amounted to just less than $3 billion in assets, compared with other clients who have entrusted State Street with custodial duties for hundreds of billions of dollars in assets, she said. Also, State Street still handles a portion of John Hancock's variable annuities business, she said.

Brown Brothers Harriman declined to comment on the matter.

John Hancock Funds decided last spring to consolidate the services with one firm, Brown said. For decades the firm's custodial services had been distributed across three companies, partly because that is the way it has traditionally been done, he said. Also, John Hancock had acquired mutual funds over the years that had already used State Street, Investors Bank and Trust or Brown Brothers Harriman and, for simplicity, it had stuck with those service providers, he said. A change, if not in the firm providing the services, then at least in how they were compensated, had been long overdue, Brown said.

John Hancock assembled a committee of eight executives to review proposals and choose a winner. It sent out requests for proposals in early June of 2000. Nearly two months later, firms began responding. The field was then narrowed to seven final candidates, Brown said.

Last fall, just when it seemed the committee was about to reach a decision, Osbert Hood, chief financial officer for John Hancock, left the firm. The process stalled temporarily until Brown replaced Hood in early January. His first assignment was to wrap up the custodial changeover. Brown began visiting finalists' sites.

Eventually, he and the committee were attracted to Bank of New York because of what Brown calls an impressive array of technological services and "just a feeling you had that this was the bank you were to go with."

The committee had been concerned about the physical distance between Bank of New York and John Hancock's Boston offices, but those concerns were mitigated by the bank's adroit use of Internet technology, Brown said. And the bank will also station employees in Boston "for as long as we need them," Brown said.

"We're going to have to tell them to leave," he said.

Now, after 13 months of work to get the job, Robert Darmanin, Bank of New York's senior vice president is, naturally, thrilled.

"To us, it's a marquee name in the country and specifically in the Boston community," Darmanin said. "The investment management industry is a key strategic market for the Bank of New York. Obviously, this is a great interest to us."

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