The Art of Outsourcing

The sheer magnitude of the numbers would raise any eyebrow. Almost $9 billion in high-profile technology contracts were signed in the month of December alone. But these weren't your typical software purchases, these were major outsourcing deals signed by the likes of JPMorgan Chase, ABN Amro and Deutsche Bank. While the outsourcing trend has been gaining momentum in the financial services technology space over the last 10 years, that momentum has kicked into high gear in the past year, a fact made evident by some recent major deals. In addition to JPMorgan Chase signing on with International Business Machines for a seven-year, $5 billion deal, Deutsche Bank has also tapped big blue for a 10-year, $2.5 billion deal while ABN Amro has turned to Electronic Data Systems for a five-year, $1.3 billion deal.

Outsourcing means different things to different firms and covers the gamut of technology needs from applications to hosting to infrastructure networks and processing. But one thing is certain - outsourcing is quickly becoming a trend no one can afford to overlook.

The growth rates for outsourcing are quite significant, according to Susan Cournoyer, senior analyst at Gartner. She says that outsourcing within the securities and financial services segment saw a 10.4 percent growth rate in 2002, with a projected 12.8 percent growth rate for 2003 globally. That growth rate is considerably higher than overall technology spending growth in the financial services industry, which saw only about a 1 percent increase in 2002 and is expected to grow about 4.9 percent in 2003.

"The spending is moving from discrete project engagements more towards these outsourcing projects encompassing many areas," says Cournoyer. She adds that most of the recent high-profile deals involve mainly infrastructure outsourcing, focused on servers, networks and data centers - areas that most firms do not consider proprietary or competitive.

And when the ink dries on the contracts and the technology-migration work begins, people are also going to be a large part of the equation. Hundreds to thousands of employees are going to be transferred from the firm side to the service provider, becoming their employees.

The drive toward outsourcing is most visibly dominated by cost savings, but it is also being driven by improved service levels and efficiencies, the need to consolidate following the tech boom of the 1990s, and the fact that many firms simply want to get back to concentrating on core competencies.

JPMorgan Chase Taps Big Blue

JPMorgan Chase, in particular, has signed a seven-year contract with IBM Global Services (totaling in excess of $5 billion) to outsource major portions of its data-processing-technology infrastructure, including mainframe operations, data centers, help desks, distributed computing, data networks and voice networks. JPMorgan Chase will retain its own technology force for desktop services and trading technologies, including ECNs and Tibco/Triarch technology work.

John Schmidlin, chief technology officer, enterprise technology services at JPMorgan Chase, explains that outsourcing has seen an evolution over the past 10 years, moving to more of a partnership model. "When you do something of this magnitude, you need to move to a very close partnership surrounded with contract terms and conditions and a tight alignment of teams and an understanding of where the business is going," he says.

This "partnership" with IBM also depends heavily on a joint IBM/JPMorgan Chase team working to ensure a smooth transition. Within the Enterprise Technology Services group at JPMorgan Chase, Schmidlin's outsourcing effort was aided by Tom Fogarty, managing director, global service delivery management; Mike Sztejnberg, managing director, architecture and strategy management; Diane Eshleman, managing director and chief procurement officer; and Douglas Rennie, managing director, transition and transformation management.

The beginnings of the outsourcing decision can be traced back to the end of 2001, when JPMorgan Chase decided to examine its internal technology infrastructure, looking at its own capabilities versus those of other global providers.

The decision to outsource was made after JPMorgan Chase spent over a year reviewing what was right for the firm and deciding which areas could potentially be outsourced. Three vendors were brought in once the JPMorgan Chase team had established the criteria for its needs. After reviewing the offerings by IBM, EDS and Computer Sciences Corp., the firm decided on IBM and entered into contract negotiations.

"We'd been reviewing our technology infrastructure for over a year and working with the global providers in assessing our needs," explains Schmidlin. "So we came up with a very detailed criteria around efficiencies, variability, innovation and career opportunities. The service providers were then judged against each other based on those criteria."

While cost was one of the main criteria, Schmidlin says that it was not the only driving factor. "The technology infrastructure is a high fixed-cost base, so given the diversity of businesses that we have and given economic conditions - businesses going up and down and volumes going up and down - when you have a high fixed-cost structure, you can't change as business changes," he says. "We wanted greater variability as business goes up and down so we don't have to invest in big-cost components that lock you in. You want to be able to invest in that which you need and when business conditions change you want to have the ability to shed that and shed as much of the cost as possible."

Schmidlin also points out that continued innovation was key to the criteria, as the financial-services industry is always on the lookout for cutting edge, end-to-end solutions, which obviously require significant investment. "It is becoming more and more difficult to stay on top of that cutting edge given the complexity of what's occurred over the past three or four years and the pressures around service levels and business resiliency," he says.

More specifically, JPMorgan Chase is leveraging IBM's On-Demand Computing to lower costs and improve flexibility. Eric Ray, vice president, IBM Global Services Financial Markets Industry, explains that IBM's new on-demand computing model is similar to utility usage with a pay-for-what-you-use philosophy. He adds that this on-demand-computing model has been dubbed the Utility Management Infrastructure by IBM with JPMorgan Chase being the first commercial implementation.

"They're looking to drive cost out of their equation," says Ray. "They found themselves in an economic downturn with too many fixed assets on the floor so they're looking for a more flexible cost model so they can pay for what they use and free up a lot of capital that they can reinvest in other areas."

This on-demand model takes into account estimated capacity levels, as well as extra capacity for fluctuating market conditions. "One of the things we do together on a monthly basis is capacity planning and what their business projections are to make sure the right level of computing capability is available," says Ray.

Transition and Transformation

The actual turning over of technology and people to IBM will take place in two phases, with the official commencement date of April 1. The first phase, the transition, will begin on the commencement date when 4,000 JPMorgan Chase employees will officially become IBM employees and IBM will begin to manage the specific technology assets and processes for the firm.

"From April 1 to the end of this year we will make sure all of the processes are linked together and everything is moved over in a cohesive, well-timed and well-controlled manner," says Schmidlin.

The second phase will be the transformation, when innovation begins to come into play. This phase will include the consolidation of data centers and the distributed-computing environment, as well as new solutions being rolled out. Schmidlin says that some of these newer solutions will probably revolve around improved disaster recovery capabilities and service levels as well as the leveraging of new development from IBM Labs.

As an example of this innovation effort, Schmidlin explains, "If they come up with a recommendation or a way to do something better, they will review that with us and say, for instance, 'We have a new way of providing storage on demand,' then we would review it with the product head in charge of storage, come up with a solution that is better and, as a team effort, it will go forward."

Gartner's Cournoyer says, "For the JPMorgan Chase deal, IBM Research has been brought into focus on applying IBM's advanced research to IT and business within the firm. The bank absolutely wants to see innovation, but can they afford to pay for it is the question right now."

She adds that it's best for firms to look beyond cost savings and efficiencies in the early days of the deal, focusing also on innovation and building that aspect into the contract from the start.

As part of the IBM deal, there will be a "project office" dedicated to the JPMorgan Chase technology oversight. This office will be headed by the project executive and will be staffed full time to manage the relationship and help with the capacity planning and the design work, says IBM's Ray.

Gartner's Cournoyer says that part of the so-called "transformation stage" includes plans to eventually consolidate the firms servers to half of the current number. In addition, the goal is to bring together JPMorgan Chase's approximately 37 different networks into a single, integrated voice and data network. And, in a time when security and confidentiality are vitally important for financial-services networks, Schmidlin says that the network will be dedicated to JPMorgan Chase rather than shared.

When it comes to service levels, Schmidlin says that the deal with IBM outlines what service levels exist today and what IBM will have to hit tomorrow. While he would not go into too much detail, Schmidlin says that these service levels could include listing when IBM has to have each center up and running around the world and the up-time range that is acceptable, and how often IBM has to meet specific service-level requirements.

While JPMorgan Chase is shifting 4,000 employees over to IBM, the company plans to retain about 2,500 of its technology employees. Most of these people work on applications development for specific business lines, as well as those responsible for desktop products, architecture and trading technologies.

Schmidlin explains that, from the beginning, the firm was very open with its employees about the outsourcing deal and that many participated in the teams that evaluated the vendor possibilities. IBM's Ray says that these types of deals are often very attractive for technology employees within firms such as JPMorgan Chase.

"Most are thrilled to come and work for us," he says. But while initially the transferred employees will work directly on the JPMorgan Chase projects, Ray says that over time they will also have the option to move into other areas of technology within IBM, depending on where they want to take their careers. "We have 1,700 or so job descriptions and titles that these people will have access to," he adds.

ABN Amro Signs With EDS

In another high-profile deal announced back in December, ABN Amro will contract with EDS for major outsourcing provisions. Valued at more than $1 billion over five years, the ABN Amro/EDS deal covers the outsourcing of technology services and application development for ABN Amro's Wholesale Client Strategic (WCS) Business Unit.

ABN Amro technology officials would not discuss deal details before the February announcement of the firm's 2002 results. However, a spokesman for the company says that the deal covers operations and management for the desktop, including networks and data center technology, as well as a majority of the application development and maintenance services for the WCS unit.

The spokesman also explains that the group announced two years ago it would look into ways to deliver services more efficiently and cost effectively. He adds that the company expects to see the benefits of cost savings by 2004.

While initially outsourcing will occur solely in the WCS unit, the ABN Amro spokesman says that it could be a possibility for other areas of the company as well. "At this point, we are not saying there are other areas that we would outsource, but we're not afraid of looking at outsourcing as an alternative for better provision of services," he says. "It's not a big issue because we're going to be doing large amounts of it and if we see a better way of doing things through outsourcing, we will do it."

Coley Clark, president, global financial services at EDS, says,"If you look at the trend over the last 10 years, you can see that larger and larger institutions are deciding to outsource - institutions that have great earnings and a robust future are doing it. The technology is becoming more and more complex but it's also becoming more and more important to rationalize systems, hardware and infrastructure to get the most efficiencies."

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The Team Weighs In

Q: What was the biggest challenge you faced with the project?

Tom Fogarty, managing director, global service delivery management "Making sure that we continued service-delivery improvements and optimization initiatives through 2002, while working on the outsourcing initiative."

Mike Sztejnberg, managing director, architecture & strategy management "Aligning this transaction with the fast-developing business environment. It was important to ensure that our deal addressed the changing nature of the marketplace."

Q: What was, or will be, the biggest success you can see from the project?

Diane Eshleman, managing director & chief procurement officer "Creating value for JPMC will be the most important metric of success. This value is the sum of performance improvements, economic benefits, agility, risk management and innovation."

Q: How important is teamwork?

Tom Fogarty "This would not have been accomplished unless we were all focused on the same objective and the objective had our 100 percent commitment."

Doug Rennie, managing director, transition & transformation management "The execution of this transaction will be global. In a multinational business environment, if you are executing a material change in the way you provide IT capabilities to our global clients, it will require very tight coordination between all regional locations. We will be transitioning people, assets and service-delivery responsibility simultaneously. To achieve this it requires very tight coordination between financial, legal and technical teams from both JPMC and IBM in all locations. Teamwork is the only way it will get done."

This article originally appeared in Wall Street & Technology magazine. Wall Street & Technology is the leading information portal for the financial technology marketplace, allowing traders, investment advisors, analysts and IT professionals to track the latest developments in IT that impact the capital marketsa weekly e-mail newsletter. Visit https://www.wallstreetandtech.com.