JPMorgan Chase Cancels Outsourcing Deal With IBM

'The writing was on the wall,' observers say.

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., is abandoning a major outsourcing contract that JPMorgan had with IBM Global Services. The company announced yesterday that it would be reintegrating 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 TowerGroup, of the news that JPMorgan will be rehiring 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."

As for the rest of the financial-services industry following suit, Garcia says it's not likely, adding that the merged JPMorgan/Bank One entity is different. "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 adds that she sees the rest of the industry continuing to increase its outsourcing, spending more and more money with third-party providers in the United States and abroad.

Garcia says she thought it would have taken more time to decide, considering JPMorgan was only 18 months into the contract and a good amount of money had been spent to prepare for the arrangement. But, with the "very vocal in-sourcing philosophy" of the Bank One team, the outsourcing deal didn't stand a chance after the merger, she adds.

"Bank One sees IT as a core competency and can handle it in-house," Garcia says. She explains that Bank One has invested over one billion dollars to build up its state-of-the-art data centers, something that the IBM agreement was set to cover, creating them to be very scalable. "It didn't make economic sense to have this type of redundancy."

Austin Adams, JPMorgan Chase's CIO, echoed that sentiment in last week's 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 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 says, is the fact that IBM doesn't expect that the cancellation will have an impact on 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 into prepare, and, No. 2, it was not a profitable relationship at this point for IBM," she adds.

More specifically, Garcia says that in the first part of any large outsourcing contract, the onus is on the vendor to invest a "substantial amount of money to build up the capability to support the institution."

IBM spokesman Michael Corrado wouldn't comment on the financials surrounding the deal's cancellation, but he did say 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," Corrado says.

Although Garcia says this is not a reflection of IBM's capabilities, from a marketing perspective, it's not the best of news. "It's not good news, but it happens," she says. "It's part of the very active merger activity in the financial-services industry -- there will be winners and there will be losers."

This article originally appeared in VARBusiness, Sep. 16, 2004.