Investment bank JP Morgan Chase & Co has pulled the plug on its $5bn IT outsourcing project with IBM Global Services following the bank’s merger with Bank One.
In a joint statement, the companies said JP Morgan would reintegrate the previously outsourced portions of its technology infrastructure, including data centers, help desks, distributed computing, data networks, and voice networks. This will involve the 4,000 IT staff that transferred to IBM in January 2003 transferring back again to JP Morgan from January 2005.
Robert Morgan, director of business brand and development at Morgan Chambers told ComputerWire: This is a major disaster for IBM and JP Morgan. They should have been able to resolve their issues. It is a big wake-up call now for clients to assess whether the benefits of outsourcing are really there.
IBM’s contract with JP Morgan Chase was the single largest IT outsourcing deal in the banking sector. IBM GS took over 4,000 staff and contractors while administering a number of mainframe, data and voice networks, for which it was contracted to provide services over seven years. The bank said IBM would deliver on demand capabilities across retail banking, mortgages, trading and securities, which in turn makes it also one of the most significant on-demand IT services projects that IBM had undertaken. Eric Ray, VP of financial services industry for IBM GS, told us at the time of the deal’s announcement that on-demand pricing accounted for 50% of the entire project.
JP Morgan’s IT outsourcing strategy goes back to the $2bn Pinnacle Alliance, which was signed in 1997 and formed out of a consortium of firms including Accenture, CSC, and network providers AT&T and Bell Atlantic. This supposedly went on to produce 15% savings in IT costs. However, JP Morgan decided to adopt what was hoped to be a new innovative approach to its IT following the 2000 merger between JP Morgan and Chase Manhattan.
Morgan, at Morgan Chambers, told us that the problems that affected the Pinnacle Alliance also carried on through into the IBM/JP Morgan deal. The Pinnacle Alliance needed governance controls from clients and governance of reporting issues which were never addressed. It is at the management interface of the bank that these things can be solved, he said.
It was widely expected that JP Morgan would implement some changes to the IBM deal following the completion of its $58bn merger with Bank One to create America’s second-largest financial institution. After all, Bank One chairman Jamie Dimon is due to take over as the CEO of the newly merged JP Morgan in 2006, and he is widely seen to be against outsourcing. The company said it now has the scale from the merger to pursue its own global infrastructure services organization.
JP Morgan Chase however is known for its adventurous use of outsourcing, a culture that stands in contrast to Bank One. In March 2003, for example, Bank One picked Total System Services Inc to upgrade and eventually insource its credit card processing facility from First Data Corp.
Morgan said that the different strategies between Bank One and JP Morgan will have had a bearing on the early termination. The merging of the two cultures will have had a big influence, he said. We were involved with the IT outsourcing project between IBM and Asda, however when Walmart came along in 1999, it canned the deal. That didn’t get much publicity though.
In a release to the stock market, IBM said the termination would help boost its earnings on a year-to-year basis for 2005 with no impact on the full year, due to the fact that the project was still in its early phase, which typically involves a greater capital expenditure by the outsourcer. It said it would also revise its backlog of services deals, which stood at approximately $18bn at the end of the second quarter.
Early termination of the deal could prove very costly to JP Morgan, but Morgan said this could vary considerably depending on who owns the IT and human assets. He said it proves no outsourcing arrangement is bullet-proof. Service providers should beware that it is entirely possible to bring back in house projects, even on this scale, he said.
It follows a similar move made by the UK’s Inland Revenue last December, which removed incumbent suppliers EDS and Accenture following several high-profile problems. It went on to sign a new 3bn pound ($5.34bn) 10-year IT services contract with rival Capgemini, which was the biggest single contract of the year.