No. 2 bank may outsource IT

Sources last week said J.P. Morgan Chase & Co. is weighing a decision to outsource the bulk of its IT operations, a deal that one insider noted could rank second in size and scope to the $40 billion contract signed in 1996 by General Motors Co. and Electronic Data Systems Corp.

Six sources, including two IT managers at New York-based J.P. Morgan Chase, said outsourcing discussions are in progress at the nation's No. 2 bank. Multiple sources identified IBM and Plano, Texas-based EDS as the top two contenders for the contract.

One data center manager at the bank, which has $742 billion in assets, said senior executives have "gone back and forth" on the possibility of outsourcing IT over the past few months. "One month we're about to move forward with it, and the next month it's put on hold again," the manager said. Like the other sources, he asked not to be identified.

A database administrator at J.P. Morgan Chase said there was talk within the bank that a final decision could be made as early as this week. But a consultant who works closely with the company said a high-ranking IT official told him that a deal wouldn't happen so soon. Another source told Computerworld that any agreement probably wouldn't be made until year's end.

A spokesman for J.P. Morgan Chase declined to comment on the situation, as did officials from IBM and EDS.

The J.P. Morgan Chase spokesman also wouldn't disclose the company's annual IT budget or the size of its IT staff. Octavio Marenzi, managing director at Celent Communications LLC, a Cambridge, Mass.-based financial services and IT consulting firm, estimated that the bank's 2002 IT budget is about $4.7 billion.

Outsourcing isn't entirely new to J.P. Morgan Chase, which was formed in December 2000 through the merger of Chase Manhattan Corp. and J.P. Morgan & Co. In 1996, J.P. Morgan outsourced one-third of its global information systems and telecommunications operations to a group of four vendors in a seven-year, $2 billion agreement.

One of those vendors was Computer Sciences Corp. An IT consultant last week said El Segundo, Calif.-based CSC might play a tangential role in supporting either IBM or EDS if J.P. Morgan Chase does award one of them a contract.

The outsourcing deliberations come at a time when J.P. Morgan Chase's executives are under pressure because of recent financial results. The bank last month said its third-quarter earnings dropped from $1.1 billion last year to $325 million, excluding special items. The biggest problems occurred within its investment banking unit, which posted an operating loss of $256 million.

Marenzi said a large number of investment banks are considering outsourcing because of cost pressures. But banks often "don't know the costs of running their [IT] operations," which makes it harder to decide whether outsourcing would save money, he said.

In addition to their potential for lowering costs, outsourcing megadeals can provide "a short-term revenue bump" for customers who sell their IT equipment and facilities to the outsourcing vendor, said Larry Tabb, an analyst at TowerGroup in Needham, Mass.

Copyright © 2002 IDG Communications, Inc.

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