DitchingBy Larry Barrett | Posted 2006-01-14 Email Print
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The bank's CIO says the move last year to bring its technology operations back in-house wasn't about money, but the bank is already seeing dividends.Information Utility" for "Internal Strategy">
The JPMorgan-IBM deal signed in 2002 originally called for the two companies to rely on a collection of IBM applications called Utility Management Infrastructure. The arrangement was designed to emulate a utility from which the banking giant could access computing resources as needed, essentially "on demand" support using open standards that tie together different brands of servers, storage devices and network components while using existing legacy and vendor applications.
At the time, JPMorgan Chase said the deal was driven by budgetary considerations, and that the move from a fixed-cost approach in-house to one with increased capacity and cost certainty would let it respond more quickly to changing market conditions.
But some knew the deal wasn't meant to last.
Lorrie Scardino, a research vice president for Gartner, says analysts and banking industry pundits knew the IBM contract was a goner as soon as the merger rumors began to swirl, based on Bank One's history of eschewing outsourcing deals in favor of managing its networks in-house.
"The No. 1 catalyst for a move from outsourcing to insourcing is a change in leadership," she says. "Everyone knew [former Bank One CEO and soon-to-be JPMorgan Chase CEO] James Dimon would make this move. His tendency is to invest in internal strategies. Knowing Bank One's strategy, [canceling the contract] was not a big surprise."
Another problem with canceling long-term outsourcing contracts: There is a financial penalty. Neither Adams nor representatives from IBM would comment on the termination agreement, but sources familiar with the deal say JPMorgan Chase's cost to end the contract not quite two years into a seven-year commitment was "at least eight figures."
Gartner estimates that the cost of returning I.T. in-house is typically between 2% and 15% of the annual cost of the outsourcing contract, meaning JPMorgan Chase may have spent between $14 million and $107 million in 2005 to bring the project back in-house.
Not only is there a financial loss when canceling such a long-term contract, but the all-out and then all-in transitions take time, irk employees and make it all but impossible for a giant organization to effectively implement new technologies that could give it an edge or help it keep pace with the competition, Scardino says.
But Robert McNeill, a principal analyst with Cambridge, Mass.-based Forrester Research, says JPMorgan Chase was looking for stability in its technology operations in order to respond quickly to business change.
"Unlike most other industries, the financial sector really views I.T. as a strategic enabler," he says. "JPMorgan Chase is
one of the biggest companies in the world, so they can absorb whatever costs are associated with canceling a deal of this size and then bringing it all back in-house. They're in the minority."
JPMorgan Chase Retakes Control of I.T.