Forrester: JPMorgan Decision Won’t Chill Outsourcing Climate

Analysts expect fewer megadeals in the IT sector, and more attention to process and less to price.

The decision this month by JPMorgan Chase to bring its outsourced IT infrastructure back in-house won't affect the overall outsourcing climate, but it does illustrate a trend toward smaller deals and more pricing breaks, said a Forrester Research analyst at the TECHXNY conference in New York last Tuesday.

Robert McNeill, lead analyst for infrastructure outsourcing at the research firm, said that the expense of bringing operations back in-house, as JPMorgan chose to do with IT services that had been outsourced to IBM, will keep most companies from making such a move.

"Insourcing is extremely expensive: You have high organizational costs, human resource transitional issues and other factors that make that difficult," he said. "We find that only about 3 percent of organizations ever bring their operations back in-house." McNeill noted that JPMorgan Chase's move stemmed from organizational philosophy rather than dissatisfaction with outsourcing or IBM.

However, the firm sees the overall interest in IT outsourcing continuing to grow, especially as a pair of trends -- increased competition from vendors entering the field, and the price certainty gained from the benchmarking of results -- combine to keep prices on a downward trend of as much as 20 percent, McNeill said.

Benchmarking is increasingly critical to successfully outsourcing IT infrastructure, McNeill said. "Outsourcing promises a lot of cost savings, but it can be difficult to see if it's actually providing benefits," he said. "IT is really needs benchmark data and market pricing to make this work."

McNeill also noted that end-users are finding more success by selectively outsourcing portions of their IT operations, instead of making a wholesale move to take the department out of the building. That trend will lead to many fewer megadeals taking place, Forrester believes, as companies pick and choose the most efficient operations to outsource.

Article courtesy of Outsourcing Pipeline, October 05, 2004.