Business Technology: Outsourcing On Outs At J.P. Morgan Chase, Wal-Mart

Noting that "We view technology as a key competitive advantage," J.P. Morgan Chase vice-chairman Thomas B. Ketchum said his company's massive outsourcing deal with IBM Global Services will "create capacity for efficient growth and accelerate our pace of innovation." In addition, the financial services company said, the deal will help it respond more quickly to changing market conditions.

Makes sense, right? Conventional wisdom tells us that J.P. Morgan is, after all, a bank and not a technology company; and purists said that to stay pure it needed to understand that its business is transactions, not transaction-processing; and pundits said that with the financial-services sector changing so rapidly, it couldn't keep pace without shifting the bulk of its business-technology operations to an outsider--after all, can you really expect a bank to be an expert in technology?

Well, as you all know from the news last week, the only fly in this ointment is that the stuff above is 21 months old--ancient history in this business--and that J.P. Morgan, after earlier this year acquiring Bank One, last week decided to cancel the $5 billion outsourcing megadeal it signed in late 2002 with IBM. (By the way, the technical term for such a shift is "reinsourcification"--feel free to drop it at your next cocktail party.)

But wait a minute--weren't outsourcing and particularly offshoring going to take over the planet? Weren't all technology jobs in the U.S. going to disappear by the middle of next year? Wasn't our standard of living supposed to sink below that of Cuba within the next couple of years? Didn't Lou Dobbs predict that unless offshore outsourcing is outlawed, then by 2006 no one in the entire United States of America will know how to use a computer? (Actually, he hasn't gone quite that far, but almost.)

So in the face of all those doom-and-gloom prognostications, why would the second-largest bank in the U.S.--with $1.12 trillion in assets--buck the trend? Why would it terminate a deal that only 21 months ago was described so breathlessly and that engaged one of the world's premiere technology companies? Can it be that the predictions about the cataclysmic nature of outsourcing--both domestic and offshore--are overblown? Is it possible that offshoring and outsourcing were both symptoms, while the real disease was the need to relentlessly innovate and compete on a global scale? And can it be that some companies are addressing that malady with home-grown remedies that don't necessarily include outsourcing of any kind?

Well, as one example we have J.P. Morgan, the country's second-largest financial institution. For another, there's the No. 1 largest company in the world: Wal-Mart. Here's how Wal-Mart CIO Linda Dillman, in an exclusive interview with InformationWeek, puts it: "We'd be nuts to outsource." And the reason for that wonderfully un-nuanced belief? "We can implement things faster than anyone could with a third party," Dillman says. "We run the entire world out of the facilities in [Bentonville, Ark.] at a cost that no one can touch." (Our full story on Wal-Mart's IT team, leaders, strategies, and processes will run in next week's issue.)

Like Dillman, J.P. Morgan president and chief operating officer Jamie Dimon is no fan of outsourcing--in 2002, as CEO of Bank One, he scrapped a $2 billion outsourcing deal with IBM and AT&T because he felt it "hadn't worked out" and Bank One needed to "control its own destiny." And earlier this year, speaking at a financial-services conference after J.P. Morgan's announcement that it would acquire Bank One, Dimon had this to say about his view of the role of IT : "We want to have both sides, the best systems and the best operations in the business. It's a core part of your company; it's like your spine."

And Dimon backed up that talk at Bank One, according to a report on cnnmoney.com : after dropping the outsourcing deals, the company invested more than "$1 billion to upgrade its entire technology suite, including building data centers." Dimon appears to have the same strategies in mind for J.P. Morgan: that same cnnmoney.com story says Dimon last week announced the opening of two new data centers in Delaware, a $300 million investment that created 100 new jobs.

Different companies will take different approaches at different times and under different circumstances. But more and more these days, the discussions about outsourcing and offshoring, and call centers and help desks and server farms and software maintenance are being displaced by higher-level thinking about fundamental business issues. As my colleague Paul McDougall reported last week, "...a statement attributed to [J.P. Morgan] CIO Austin Adams uses language similar to Dimon's to explain why Chase nixed its oursourcing contract. 'We believe that managing our own technology is best for the long-term growth and success of our company.' " Again, the symptoms might include offshoring, outsourcing, insourcing, or other ideas, but the real problem that needs to be attacked is a simple one: "the long-term growth and success of the company."

Indeed, that's the major issue today: global competitiveness. And that's a subject to pick up next week--between now and then, I'd love to hear your views. Please send them to the address below.

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