CIO Takes Insourcing To The BankBy Edward Cone | Posted 2003-06-09 Email Print
WEBINAR: On-demand webcast
Next-Generation Applications Require the Power and Performance of Next-Generation Workstations REGISTER >
Contrary to current trends, Bank One terminated outsourcing agreements with AT&T and IBM and found it could save more money.Austin Adams believes he can run an information technology organization more efficiently than any hired gun.
"Experientially and philosophically, I am opposed to meaningful outsourcing," says Adams, the chief information officer at Bank One Corp., which in 2002 terminated large contracts with IBM Global Services and AT&T Solutions. Instead, Bank One began to manage the computer and communication operations it had contracted out to the two tech firms on its own.
"The goal of insourcing was to build internal expertise and manage a greater portion of our technology in-house," says Adams. "The payoffs have been cost savings and greater control" of technology projects.
Bank One informed AT&T in July 2002 and IBM in February 2002 that it would end its contracts. The insourcing process was completed in February 2003. This year's operating budget for information technology is about $75 million less than last year's bill, says Bank One, although it would not comment on its overall computer and communications systems budget.
Because computer services firms must add profit margins of 15% or more to make it worth their while, Adams believes they can't realize that level of savings over a well-run corporate I.T. department; he says they net out as more expensive. "Outsourcers have to make their margins, and those margins are much higher than the savings they pass on for hardware and operating software," he says.
The Chicago bank holding company with $277 billion in assets has hired about 1,800 information technology workers since beginning to move away from a $1.4 billion, six-year network management and development deal with AT&T, which was supposed to last until 2004, and a seven-year, $420 million data center management agreement with IBM slated to run until 2005.
Adams, who arrived at Bank One in 2000, stresses that his former outsourcers were doing what they were paid to do. IBM and AT&T declined to comment.
Since terminating the AT&T and IBM contracts, customer service to business users improved by 50% as measured by the number of negative reports filed by Bank One employees, Adams says. Adams thinks people often work more efficiently for their own employer than for a contract job, and that having control over who he hires and how his staff is compensated makes a big difference in performance. The two outsourcing contracts covered about 20% of Band One's total communications and information resources, much of which resided in the financial institutions Bank One acquired after the outsourcing deals were signed.
And the bank started its move toward near-complete I.T. independence even before opting out of its service contracts. The company announced in 2001 it would hire 600 technology workers, including project managers, system architects and Web developers. Overall, the bank employs more than 15,500 technology workers, up from 9,200 three years ago.
Still, Adams does not expect to become a trendsetter. "I don't think a lot of companies will be breaking outsourcing contracts in the next couple of years," he says. Nor should they unless they meet certain standards, says the former CIO at First Union Corp. The Adams criteria for insourcing include: access to enough qualified workers, a chief executive who is committed to managing technology, and a financial model that justifies the cost. Without these, he says, don't try this at home.
A worthwhile contract requires painstaking negotiation and active management. "Clients complain that they didn't factor in innovation," says Rich Matlus, a Gartner analyst.
"If you write it in, they'll do itbut you have to write it in." Costs go up when clients ask for things not covered in their contracts, with uncovered work orders providing a major contribution to outsourcers' profit margins. Even successful contracts have to be reviewed. "I.T. shops should be a broker of services, and that's not a static process," Matlus says. "The question of doing it yourself or outsourcing should always be reexamined."
The availability of technology workers is critical to decisions like this, says Adams. "Our ability to attract so many talented people was a contributing factor to unwinding those contracts," he says. High unemployment and lost tech jobs have people who would have once scorned a bank job eager to sign on.
A chief executive who is big on technology is another Adams essential. He reports to Bank One CEO Jamie Dimon, the former heir-apparent at Citicorp, with whom he met weekly on the decision to greatly increase the amount of its own technology the bank would handle. "We were in fervent agreement," says Adams.
Adams also looks carefully at the cost of employing his own people to see if he can run an information technology organization for less than the cost of an outsourcer. Given the vendor's need to build in a tidy profit margin, he saw that the cost equation worked in his favor, even for commodities like help desk and desktop computing. "With most outsourcers you get the same people for a higher bill," he says. Exceptions are made for cases like satellite offices without the critical mass of talent and buying power to justify internal services.
Still, few companies seem ready to follow in the footsteps of Bank One. Gartner says 85% of the thousands of companies that have outsourced I.T. are renewing with their original outsourcing partners, with about 12% switching to another vendor. However, only perhaps 3% bring their technology staff back in house.
Among the handful of insourcers, Eckerd was one that took back control of its information technology organization from IBM in 2001.
And although companies have started to bring information technology back in-house, outsourcing agreements continue to be signed with regularity. Says Doug Frederick, head of operations solutions at EDS, "the big deals are still out there." One of the most recent examples is the 10-year, $3 billion contract Procter & Gamble signed with Hewlett-Packardwhich is only for managing a portion of P&G computer operations.