J.P. Morgan Chase to scale back outsourcing pact

Its Bank One acquisition affects the IBM deal, sources say

J.P. Morgan Chase & Co. plans to bring most of the IT activities it now outsources to IBM back in-house as part of its $58 billion acquisition of Bank One Corp., according to sources within and close to the financial services firm.

New York-based J.P. Morgan Chase last year transferred management of its data processing infrastructure and about 4,000 IT workers and contractors to IBM under a seven-year, $5 billion outsourcing contract that was signed in late 2002 (see story).

But an IT manager at J.P. Morgan Chase who requested anonymity said the bank plans to begin talks aimed at restructuring the agreement with IBM once the financial aspects of the Bank One acquisition are completed -- a step that's due to take place next month.

"IBM will probably hold on to some of the services, but the bulk of the work will be brought back in," the IT manager said. In particular, bank officials may be willing to leave some IT infrastructure-support responsibilities in IBM's hands, he said.

A consultant who works closely with J.P. Morgan Chase said he has been told that the bank wants to reclaim all of its network support activities "but allow IBM to continue to manage some of the data center infrastructure work" now handled by the company. He also asked not to be identified.

Tom Johnson, a spokesman for J.P. Morgan Chase, said the bank "can't comment on future negotiations." He did confirm that J.P. Morgan Chase and Bank One plan to complete the acquisition in July, although merging the operations of the two banks is expected to take until 2007.

IBM declined to comment this afternoon about the situation at J.P. Morgan Chase, despite repeated requests for a statement from the company.

It was unclear whether there is any dissatisfaction among J.P. Morgan executives about IBM's performance, or if any move to reduce the scope of the outsourcing deal is related only to the Bank One acquisition. But a rethinking of the contract with IBM has been seen as a possibility since the merger plan was announced in January (see story).

The setup of J.P. Morgan Chase's postmerger management hierarchy is expected to play a pivotal role in any negotiations with IBM as well as future outsourcing-vs.-insourcing decisions. William Harrison Jr., J.P. Morgan's CEO, will initially head the combined company. But in 2006, Harrison plans to give up the CEO job to James Dimon, his counterpart at Bank One, while staying on as chairman.

Chicago-based Bank One has brought most of its IT operations back in-house since late 2001 as part of an initiative spearheaded by Dimon and managed by CIO Austin Adams (see story).

Both Adams and J.P. Morgan Chase CIO John Schmidlin will be members of the combined bank's executive committee. No announcement has been made regarding which of the two CIOs will head IT operations after the merger.

However, some industry sources said they expect Adams to get the nod for CIO because of his extensive merger integration experience at the former First Union Corp. prior to joining Bank One in March 2001.

Analysts who track IT issues at financial services firms agreed that a Dimon/Adams combination in the CEO and CIO jobs would likely push J.P. Morgan Chase to do more technology work in-house.

"If Adams and Dimon end up at the helm, the trend toward insourcing will be adopted by the combined institution," predicted Jim Eckenrode, an analyst at Needham, Mass.-based TowerGroup.

Bill Bradway, an analyst at Financial Insights in Framingham, Mass., said he would expect J.P. Morgan Chase and Bank One to examine "every major relationship" that they have with IT vendors and other suppliers once the merger is completed.


Copyright © 2004 IDG Communications, Inc.

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