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Cristina McEachern, VARBusiness
Cristina McEachern, VARBusiness
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Cancellation of JPMC-IBM Deal Not the Start of Trend

Industry not likely to curb similar outsourcing arrangements, analyst says.

Given Bank One's propensity for in-house IT, most observers say it's not a big shock that the bank, which recently merged with JPMorgan Chase & Co. (New York; $1.1 trillion in assets), is abandoning a major outsourcing contract that JPMC had with IBM Global Services (IGS). The combined company announced last month that it would reintegrate the parts of its infrastructure previously outsourced to IBM - including data centers, help desks, distributed computing and data and voice networks.

"The writing was on the wall," says Virginia Garcia, senior analyst of financial services strategies at Needham, Mass.-based TowerGroup, of the news that JPMorgan will rehire the same 4,000 employees who were transitioned to IBM when the firm inked the $5 billion, seven-year outsourcing contract with IGS over a year ago. "The instant that Bank One and JPMorgan announced they were merging, everyone started wondering what's going to happen to the IBM contract," she adds.

As for the rest of the financial services industry, Garcia says it's not likely that it will follow suit, adding that the merged JPMorgan Chase/Bank One entity is unique. "Bank One is a model of how to handle technology integration after mergers," she explains. "They spent a good deal of money integrating systems in place from mergers for a very efficient IT infrastructure." Garcia says that the rest of the industry likely will continue to increase its outsourcing to third-party providers in the U.S. and abroad.

Bank One had invested more than $1 billion to build its own scalable, state-of-the-art data centers, something that the IBM agreement was set to cover. "It didn't make economic sense to have this type of redundancy," Garcia says.

Austin Adams [see profile, page 30], JPMorgan Chase's CIO, echoed that sentiment in a prepared statement, saying, "We believe managing our own technology infrastructure is best for the long-term growth and success of our company as well as our shareholders. Our new capabilities will give us competitive advantages, accelerate innovation and enable us to become more streamlined and efficient."

A source close to the deal, though, says that IBM will continue to provide JPMorgan Chase with hardware, software and services around mainframe work, disaster recovery, help desk and call center initiatives. The source says the work will mainly take place within the retail banking division, treasury and securities services division, and investment banking division.

The interesting part, Garcia notes, is the fact that IBM doesn't expect the cancellation to impact its financial results this year. "This leads to the assumption that, No. 1, there was a termination fee that made up for the massive amount of money IBM was putting in to prepare [for the deal], and, No. 2, it was not a profitable relationship at this point for IBM," she says.

IBM spokesman Michael Corrado wouldn't comment on the financials surrounding the deal's cancellation, but he says that IBM remains one of JPMorgan's largest technology partners, and the firm will still be one of its largest customers. "The cancellation was due to the merger of these two banks; they decided they have the capacity necessary to run the infrastructure, but we will continue to work with them going forward," he says.-Cristina McEachern, VARBusiness

This article originally appeared in VARBusiness, a sibling publication of Bank Systems & Technology.

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