J.P. Morgan Scraps $5B IT Deal With IBM

Bank confirms plans to cancel outsourcing agreement, bring IT operations back in-house

IBM lost one of its highest-profile IT outsourcing clients last week, as J.P. Morgan Chase & Co. confirmed that it's canceling the remainder of a seven-year, $5 billion contract that the two companies signed in late 2002.

Sources told Computerworld last spring that New York-based J.P. Morgan planned to bring most of the IT work it had outsourced to IBM back in-house after completing its $58 billion acquisition of Bank One Corp. in July . At the time, a spokesman for J.P. Morgan said the bank couldn't comment "on future negotiations."

Last week, J.P. Morgan said the addition of Bank One created a larger company with the capacity to manage the technology infrastructure on its own. The merger also brought J.P. Morgan two prominent advocates of running IT internally: Bank One CEO James Dimon and CIO Austin Adams. Dimon is due to take over as CEO of J.P. Morgan in 2006, and Adams now heads IT for the merged company.

"We believe managing our own technology infrastructure is best for the long-term growth and success of our company," Adams said in a statement. He added that reintegrating IT operations into the bank "will give us competitive advantages, accelerate innovation and enable us to become more streamlined and efficient."

J.P. Morgan and IBM will wind down their contract this year, and the 4,000 IT employees and contractors who were shifted to IBM after the deal was signed will be transferred back to the bank in January.

The IT infrastructure functions currently being handled by IBM include management of the bank's data centers, help desks, distributed computing systems, and data and voice networks.

IBM spokesman James Sciales said IBM will still provide hardware, software and services to several J.P. Morgan business units, including its investment banking operations and its retail banking, treasury and securities services.

Austin Adams, CIO at J.P. Morgan Chase
Austin Adams, CIO at J.P. Morgan Chase

He added that IBM still had been investing in building up the resources it needed to support J.P. Morgan's systems. As a result, IBM doesn't expect the contract cancellation to negatively affect its financial results this year. Sciales declined to comment on whether IBM will receive a termination fee from J.P. Morgan.

When IBM announced the J.P. Morgan contract, it hailed the deal as a groundbreaking agreement that would illustrate the value of its "on-demand" strategy for adding flexibility to corporate IT infrastructures.

Changing Needs

ZapThink LLC analyst Ronald Schmelzer predicted at the time that the deal would be IBM's "poster child" for the on-demand approach. "Poster children have pluses and minuses," Schmelzer said last week after the cancellation was announced. He added that IBM will likely avoid any major damage to its reputation as an outsourcing vendor if the termination is seen by other users as being driven by changing needs at J.P. Morgan.

"There are a lot of companies that do big outsourcing deals, but IBM is really in a league of its own," Schmelzer said. "The whole on-demand computing plan is unique to them. Whether or not it's a long-term success depends on their ability to execute and demonstrate returns for their customers."

Bill Bradway, an analyst at Financial Insights in Framingham, Mass., said the changing-needs explanation for the contract cancellation is believable in this case. Bank One brought J.P. Morgan a much larger retail-banking presence, and Adams is known for his do-it-yourself ethos, Bradway said.

Bradway doesn't expect the insourcing move to spark a rip-and-replace program within J.P. Morgan's IT department. "At the end of the day, what's happening is that 4,000 people will turn in their IBM badges and get J.P. Morgan ones," he said. "Many of the systems they're working on will continue to be the same ones."

Copyright © 2004 IDG Communications, Inc.

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