In 2002, JP Morgan signed a seven-year outsourcing arrangement with IBM, worth 5 billion dollars. This deal included data centres, help desks, distributed computing, and data and voice networks. JP Morgan viewed this agreement with IBM as a competitive advantage that would serve as a platform for efficient growth and innovation. It was an attempt to further enhance the performance of the company, while reducing their costs.
However, two years later, JP Morgan announced the premature ending of their contract. JP Morgan ended the outsourcing deal with IBM, claiming that it caused technological stagnation in their operations. Apparently, IBM refused to take on tasks without additional charge, particularly necessary improvements to the system. This structure lengthened certain procedures, and as result, projects sat idle and processes were stalled.
Another reason behind the deal cancellation was internal organizational changes. JP Morgan merged with Bank One, which has cancelled a similar deal with IBM a few years earlier. With the combined resources and technology of the banks, management reassessed its capability of managing its core information systems, and realized that the IBM deal was no longer necessary. JP Morgan Chase and Co. wanted to leverage on the assets it acquired from Bank One, including a $500 million investment in data centers. Also, ending the deal would mean saving the margins paid on hardware and software purchased through IBM, as the size of the newly merged bank would enable it to negotiate better bargains with suppliers – JP Morgan Chase and Co., after that time, emerged as the second largest financial conglomerate next to Citigroup.
Analysts believed that the primary catalyst for the back sourcing was the change in leadership. Many of the key officers of Bank One took over JP Morgan Chase and Co. by holding the same positions that they had in the former. Some of these were CEO James Dimon and CIO Adam Austin. As emphasized by Austin, the new management wanted to have greater involvement in every aspect of their business, and IT is an important part of it. In fact, Dimon, being in the industry for years, had made a reputation of investing in internal strategies, which explains why experts were not really surprised by the premature death of the IBM contract.
ANALYSIS AND CRITIQUE
Given the different scenarios that happened, it is necessary to focus on the impact of the outsourcing and backsourcing deals of the company, and deducing which arrangement is better for the company.
The Impact of Outsourcing
JP Morgan Chase’s contract with IBM is said to be one of the largest outsourcing deal on record. However, this 5 billion-worth of contract was only in its second year when JP Morgan opted to end its supposed-to-be-7-years relationship with IBM. Apparently, the outsourcing deal hugely affected the operations of the company.
First of all, outsourcing had a negative impact on the effectiveness on some key processes of the bank. Things that used to get done no longer got done. In just a short span of time, instead of improving the company’s productivity, the outsourcing deal had caused so much delay. Among the projects not getting done were server migrations, data center upgrades, and network patches. Corollary to that, even in office supply procurement, there were also delays. It even reached the point where project managers had to go and buy their own reams of paper.
Secondly, there were vague contract details in the agreement between JP Morgan and IBM. As a result, whenever there is a need to make improvements and updates, IBM had to charge extra fees to the bank. Thus, every additional improvement in the system entailed additional costs. Because of the bank’s resistance to pay for extra but often necessary improvements, JP Morgan’s innovation and efficiency in its information technology was compromised.
Thirdly, to implement the outsourcing deal, JP...