New Deals May Be Start Of Something Big

J.P. Morgan Chase talks with IBM about $5 billion outsourcing pact
Will J.P. Morgan Chase & Co.'s confirmation last week that it may outsource most of its computing operations to IBM kick-start the lagging IT services industry? Some observers think so. "There's a herd mentality out there, especially in the financial industry," says Humberto Andrade, an analyst at Technology Business Research.

IBM is in exclusive talks with J.P. Morgan Chase over a deal that would see the investment and banking company outsource mainframe, midrange, help-desk, and voice-and data-network operations to IBM Global Services, sources say. All told, the agreement could be worth as much as $5 billion.

Deals of such magnitude have been fewer and farther between in recent months, as uncertain business conditions have kept many companies from making major technology commitments. As a result, spending on all IT services this year will grow more slowly than in previous years, according to Gartner. The research company predicts such spending will total $557.5 billion this year, compared to $542.3 billion last year.

MODEST SPENDING RISE CHARTBut the need to cut costs across the board may cause more businesses to pull the trigger on outsourcing or extend contracts if the numbers add up. In a new InformationWeek Research report on outsourcing, 34% of 700 business-technology professionals say they expect to spend somewhat or significantly more money on outsourced services next year (see "Analyzing The Outsourcers"). Although it canceled what would have been an $8 billion deal with EDS, Procter & Gamble Co. remains committed to the concept. It says it wants to spread its business around to a number of vendors to minimize risk.

Other large companies remain hesitant to let outsiders run key operations. IT executives at Waste Management Inc. say they decided to keep a $750 million systems upgrade in-house to ensure that deployments fit business goals. "The most dangerous thing you can do is build a system and not recognize the impact it's going to have across the company," says Griff Macy, VP of enterprise systems development at Waste Management.

Bank One Corp. kept in-house control over a $500 million systems conversion project that wrapped last week. The company last year said it would hire 600 IT professionals for the project, which included moving 8 million customer accounts onto a single platform. It hired another 600 after it canceled outsourcing contracts. Bank One CIO Austin Adams says that the relatively inexpensive IT labor market argued against outsourcing in the current economic climate. "We've been able to attract a lot of talented people," he says.

Earlier this year, Bank One terminated outsourcing arrangements with IBM and AT&T. A desire to improve the company's internal IT skills development in part drove the decision, Adams says. "That was a priority for us," he says. "The decision to outsource is a function of a lot of variables; it's almost philosophical."

Ultimately, internal politics may sway the decision for or against outsourcing, analyst Andrade says. "Often it depends on the power of the CIO and how much power he's willing to give up."

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