American Corporations are learning the downside of outsourcing fast! JP Morgan cancels IBM outsourcing- start of a new trend?
Subhra Kar, Special Correspondent
September 20, 2004

American Corporations are learning the downside of outsourcing fast! Outsourcing for JP Morgan did not do any good! IBM failed miserably to provide the services with flexibility and efficiency. The trend is not isolated! It is a major trend and continuing fast! The US Corporations are finding that it is difficult to receive high quality work with flexibility and cost effectiveness through outsourcing!

J.P. Morgan Chase & Co., said on Wednesday it was scrapping a $5 billion outsourcing deal with IBM Corp., amid an overall plan to manage more of its own technology services. J.P. Morgan recently acquired Bank One Corp. and the combined banks'' new president Jamie Dimon has eschewed outsourcing in favor of in-house operations. The bank planned to rehire about 4,000 workers who had been transferred to IBM in 2003 at the start of the 7-year deal. Aside from leaving revenue on the table, IBM lost the cachet of handling the bulk of the technology for one of the most prominent names on Wall Street. Typically, long-term service contracts are structured so that most of the profits are reaped in the latter part of the deal. IBM and J.P. Morgan declined to say how much so far was paid to IBM, which was to take over the global computing operations for J.P Morgan in such areas as retail banking, trading and securities processing. "They (IBM) might take a small hit, but I think they will be able to recover and re-leverage those assets," said Michael Haney, senior analyst with consultant Celent. He added that fewer all-encompassing technology services deals are expected in coming years as competition pushes down the size of these agreements, and customers consider doing more themselves. In turn, services providers like IBM are looking to sign more pacts for individual projects like software or data. Following J.P. Morgan Chase's $58 billion acquisition of Chicago-based Bank One Corp. in July, the No. 2 U.S. bank has been cutting costs aggressively. It also said there will be no material impact from the cancellation. Bank One decided to bring its information technology in-house several years ago and has spent over $1 billion to upgrade its entire technology suite, including building data centers. This philosophy has now taken hold at J.P. Morgan. This week J.P. Morgan's president and chief operating officer, Jamie Dimon, announced the opening of two new data centers in Delaware. The $300 million investment will add 100 jobs and support the bank's national network. IBM, the world's largest computer company, said in a regulatory filing that the cancellation of one of its biggest financial services outsourcing deals could help its 2005 earnings per share. In part that is because contract-related spending will cease, said IBM spokesman Michael Corrado. Armonk, New York-based IBM said the cancellation could improve earnings because it was still in the early stages of deployment on the contract. It also said its backlog of services will be revised when it announces its third-quarter earnings. IBM estimated a $118 billion services backlog at the end of the second quarter. J.P. Morgan said IBM would remain one of the largest technology partners for J.P Morgan, but the companies did not elaborate on their relationship going forward. IBM shares eased 35 cents to $86.37 on the New York Stock Exchange. J.P. Morgan shares slipped 41 cents to $39.08.