The Days of the Outsourcing Megadeal Are Over

Celent Communications expects to see more focused outsourcing contracts.

With a potential 2.3 million jobs in the banking and securities industries currently at risk in the U.S. alone due to offshoring, Jamie Dimon, the new CEO of the combined JPMorgan Chase-Bank One merger, is setting a new precedent in outsourcing. This past week, JPMorgan Chase announced that it has canceled a $5 billion outsourcing deal with IBM Corp. and plans to rehire about 4,000 workers.

Jamie Dimon is one of the few CEOs who seem to be bucking the recent outsourcing trend in financial services. Many banks are focusing on what they view as their core businesses and outsourcing the rest. Dimon seems to feel that the management of information is a core business process, and he wants it in-house. However, when the second-leading U.S. bank bucks a trend, people take notice.

Dimon was famous for canceling outsourcing contracts with IBM and AT&T when he took over Bank One. Now that he and his top managers are taking control at JPMorgan after the merger, history seems to be repeating itself. We saw this coming when they brought credit card processing in-house this summer with the TSYS deal.

The news isn't all bad for IBM, however. JPMorgan Chase will continue to use what IBM refers to as its Universal Management Infrastructure, or UMI. This is the more technical term for IBM's on-demand marketing strategy; the difference is that IBM will be doing this in-house. The massive services piece is gone, but the hardware and software piece will largely remain. There is still a belief in the utility model for flexible capacity generation.

Although JPMorgan most likely had to pay IBM a cancellation fee, the challenge will actually be for IBM to recoup the investments it made in infrastructure and people now that the yearly services revenue will no longer be coming from JPMorgan Chase. IBM has dozens and dozens of outsourcing contracts with financial institutions worldwide, though, and I am sure they will be able to leverage their existing investment in the future, even if they take a small hit now.

Whenever large mergers like this happen, the newly formed management team needs to decide which bank's operations and technology platform will be used for the merged entity. With the COO (soon to be CEO) and CTO of JPMorgan Chase coming from Bank One, it's clear that its platform became the choice for the newly formed bank. What Dimon will do with the re-energized and larger IT team is not yet clear. The pressure will be on him to keep his costs as low or lower than his competitors- costs. Celent would not be surprised if he centralizes IT even further or uses an offshoring strategy.

The days of the JPMC/IBM-style megadeal are over. Celent expects to see costs being significantly reduced over time, along with more focused outsourcing contracts. Continued pressure from Indian services firms are adding to these pressures as they continue to raise more capital, increase capacity and add more capabilities.

Michael Haney is a senior analyst at Celent Communications, a financial services research and advisory company headquartered in Boston.