JPMorgan Chase cancels deal with IBM

IBM last week lost one of its highest-profile outsourced-IT clients, as JPMorgan Chase says it is canceling the remaining portion of a contract that was intended as a seven-year, $5 billion deal.

IBM last week lost one of its highest-profile outsourced-IT clients, as JPMorgan Chase says it is canceling the remaining portion of a contract that was intended as a seven-year, $5 billion deal.

JPMorgan says its July merger with Bank One led it to reconsider its IT strategy. The new firm has significantly greater capacity to manage its own technology infrastructure, and decided to bring its IT support staff back in-house, JPMorgan said in a written statement.

JPMorgan and IBM will wind down their existing contract this year, and in January 4,000 employees and contractors that transferred to IBM when the deal was made in December 2002 will begin transferring back to JPMorgan.

The original contract called for IBM to take over significant IT functions for JPMorgan, including managing its data centers, help desks, distributed computing, data and voice networks. JPMorgan planned to retain some functions including application development and delivery, and desktop support.

IBM says it will still provide hardware, software and services to several JPMorgan units, including retail banking, treasury and security services, and investment banking. IBM does not expect the canceled contract to significantly affect its head count.

IBM declined to comment on whether it would receive a termination fee.

When IBM announced the JPMorgan deal nearly two years ago, it hailed it as a groundbreaking one that would illustrate its newly unveiled on-demand strategy for adding flexibility to corporate IT infrastructures. ZapThink analyst Ronald Schmelzer predicted at the time the deal would be “[IBM’s] poster child for on-demand.”

“Poster children have pluses and minuses,” Schmelzer said last week on news of the cancellation. “Whether it will be seen as a knock on IBM’s reputation depends on the reasons for the cancellation.”

If changing needs after its merger was really the key reason JPMorgan exited the contract, then IBM is likely to escape any blame, Schmelzer says. But if other visible clients choose to end their multi-billion dollar outsourcing deals early, IBM might need to readjust its strategy.

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

Two other large IBM outsourcing customers say they’re happy with their arrangements and don’t anticipate changes. Representatives of Qwest, which last year signed a long-term deal analysts valued at up to $2 billion, and of American Express, which has a $4 billion deal, says their contracts are progressing as planned.

“We’re two years in, and we’re meeting our objectives,” says American Express spokeswoman Judy Tenzer. American Express signed a seven-year contract with IBM in 2002.

Analyst Bill Bradway of research firm Financial Insights says the changing-needs explanation for the cancellation is believable in this case. Bank One brought to JPMorgan a larger retail-banking presence, and Bank One CIO Austin Adams, now CIO of the merged company, is known for his do-it-yourself ethos, he says.

Cowley is a correspondent with the IDG News Service.