IT Outsourcing Could Be an Issue in Bank Merger

The $58 billion merger announced last week by J.P. Morgan Chase & Co. and Bank One Corp. is expected to generate $2.2 billion in pretax cost savings over a three-year period, partly through a consolidation of the banks' systems, data centers and IT staffs.

But an expected debate on IT outsourcing vs. managing systems internally is all but certain to play a pivotal role in shaping the combined company's technology direction, according to analysts who follow the financial services industry.

New York-based J.P. Morgan Chase, which is buying Bank One, signed in late 2002 a seven-year, $5 billion outsourcing contract with IBM . The agreement transferred the bank's data processing infrastructure and about 4,000 IT workers and contractors to IBM, and it lets J.P. Morgan Chase buy computing capacity as needed.

That capability was a key driver for the bank, said Jim Eckenrode, an analyst at TowerGroup in Needham, Mass. J.P. Morgan Chase was left with excess computing capacity after the bear market began on Wall Street in mid-2000, he noted.

In contrast, Chicago-based Bank One has brought most of its IT operations back in-house since late 2001 as part of a program that was championed by CEO James Dimon and executed by CIO Austin Adams .

The two banks "have some differences in terms of their operating philosophies, so there could be a culture clash between the two organizations," Eckenrode said.

Management hierarchy decisions are expected to affect the outsourcing vs. insourcing issue. William Harrison Jr., J.P. Morgan's CEO, initially will head the new company, but he plans to give up the CEO job to Dimon in 2006 while remaining as chairman. It's not clear whether Adams or J.P. Morgan Chase CIO John Schmidlin will be the IT chief. Both have been named to serve on the bank's executive committee.

"A lot of those decisions haven't been made yet on the structure of the organization," a spokesman for J.P. Morgan Chase said. He declined further IT-related comment.

Because the banks aren't expected to complete their integration effort until 2007, the role of outsourcing "is the $64,000 question," said Bill Bradway, an analyst at Financial Insights in Framingham, Mass.

Copyright © 2004 IDG Communications, Inc.

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