Financial firms bet on outsourcing

IBM’s $5 billion, seven-year outsourcing agreement with JPMorgan Chase is the latest and most valuable in a string of multibillion-dollar deals recently forged between IT services firms and financial institutions.

IBM’s $5 billion, seven-year outsourcing agreement with JPMorgan Chase is the latest and most valuable in a string of multibillion-dollar deals recently forged between IT services firms and financial institutions.

Financial services firms are turning to outsourcing to lessen IT costs and management burdens, free up cash, and find better ways to respond to fluctuating market conditions, analysts say.

IT agility is key to financial services companies, which face economic pressure from shrinking transaction volumes yet shoulder intense computing requirements, says Tom Kucharvy, an analyst at Summit Strategies. “The need for outsourcing among those companies is clearly on the rise,” he says.

The JPMorgan Chase pact announced last week calls for IBM to handle a significant portion of the firm’s technology infrastructure, including its data centers and voice and data networks, as well as absorb 4,000 JPMorgan Chase employees and contractors. JPMorgan Chase will retain control of some IT functions, including application development and delivery, and desktop support.

Considerable infrastructure consolidation is on tap, says Paul Sweeny, general manager of the financial services sector for IBM Global Services. IBM plans to reduce JPMorgan Chase’s 16,000 distributed servers by about half and move from 37 networks to a single voice and data network, Sweeny says.

In addition to the JPMorgan Chase deal, IBM last month inked a $2.6 billion, 10-year agreement with Deutsche Bank to manage some of its computer centers.

IBM isn’t the only company landing big outsourcing deals.

Electronic Data Systems (EDS) landed multibillion dollar deals with financial services companies Bank of America and ABN Amro in December.

The Bank of America contract is a 10-year, $4.5 billion outsourcing agreement whereby EDS will reengineer and manage the firm’s voice and data networks.

The ABN Amro outsourcing contract – valued at $1.3 billion over five years – covers provisioning of technology services and applications development for ABN Amro’s wholesale client strategic business unit.

Also in the billion-dollar club is Hewlett-Packard, which in September announced a seven-year, $1.5 billion outsourcing agreement with Canadian Imperial Bank of Commerce (CIBC) to manage much of its IT infrastructure, including desktop PCs, software and network gear.

What’s significant about some of these outsourcing agreements is not only the size of the deals but the services delivery and billing methods. Financial institutions are buying into utility-based pricing models that allow them to obtain IT services such as server processing and data storage on an as-needed basis rather than buying fixed IT services with fixed prices, analysts say.

“When the need for transaction processing drops, as it will in a downturned stock market, [customers] can cut back without having to lay people off or continue having to carry a lot of unproductive capital equipment like mainframes and servers,” says Bruce Caldwell, principal analyst at Gartner.

The flexibility of pay-as-you-use services appeals to JPMorgan Chase, spokesman Michael Dorfsman says.

“As our needs grow, or if they contract in certain areas, it enables us to be able to purchase or use the services that we need, on an expanded basis or a curtailed basis, rather than going out and making purchases ourselves,” Dorfsman says.

IBM has made on-demand computing a cornerstone of its technology strategy, committing $10 billion in resources and investments to the idea.

One of the underlying management technologies that eventually will enable IBM to deliver on-demand computing is its Utility Management Infrastructure (UMI), which was code-named Blue Typhoon while in development by IBM Research. Unveiled in December, UMI consists of tools and software for tying together disparate hardware, such as different brands of servers and storage devices, without requiring new applications to be written for each system, IBM says.

Sun with its N1 initiative and HP with its Adaptive Infrastructure also are pursuing pay-as-you-go computing models.

Summit Strategies’ Kucharvy says other industries will likely follow the lead of financial services companies – which traditionally are early IT adopters – as demand-based outsourcing services mature.