A combination of intense competition, the sluggish economy and the
lure of pay-as-you-go IT services is prompting banks and brokerages
to outsource back-office systems and business processes.
Several high-profile financial services firms have signed
outsourcing deals in the past month, handing over control of data
and systems to save money and focus on core business
operations.
JP Morgan Chase last week announced a seven-year, $5bn (£3.1bn)
agreement under which IBM will take over its data processing
infrastructure.
The contract, which had been in final negotiations since
mid-November, includes a planned transfer of about 4,000 JP Morgan
IT workers and contractors to IBM during the first half of the
year.
JP Morgan can buy computing resources and other IT services from
IBM under a utility model, meaning the bank will pay only for what
it uses.
Michael Sztejnberg, managing director of the Enterprise Technology
Services Group at JP Morgan Chase, said this was a key factor in
the decision to outsource.
JP Morgan's outsourcing move came just two weeks after IBM
announced a similar on-demand computing deal with Frankfurt-based
Deutsche Bank. That agreement is valued at $2.5bn (£1.6bn) over 10
years and includes the consolidation of data centres and smaller
server sites across Europe to a new IBM facility in
Frankfurt.
IBM rival Electronic Data Systems last month signed a 10-year,
$4.5bn (£2.85bn) contract to manage Bank of America's domestic
voice and data networks. On Christmas Eve it finalised a £1bn
five-year outsourcing deal valued at $1.3bn with Amsterdam-based
ABN Amro Bank's wholesale banking business unit. It is also in
final negotiations with Barclays Bank on a major desktop services
outsourcing deal.
The recent agreements are indicative of a trend during the past 12
months in which more than a dozen financial services firms have
turned to outsourcing vendors.
Gartner group analyst Avivah Litan said banks had, traditionally,
been reluctant to outsource control of their data. "Now all of a
sudden they're doing it," she said, noting that outsourcing can
provide a fast boost to corporate balance sheets.
But maintaining the security of sensitive financial data in
outsourced IT environments "is a concern", she added.
Klaus Thoma, a spokesman for Deutsche Bank, said the bank expects
to save $1bn over the next decade through its outsourcing deal with
IBM. Deutsche Bank is transferring 900 of its IT employees to IBM
this quarter as part of the agreement.
Data security remains an in-house priority
JP Morgan Chase's Sztejnberg said concerns about the privacy and
security of financial data are increasing every year, but added
that, the bank's new outsourcing deal with IBM should help ease
some of those concerns.
IBM could upgrade JP Morgan's systems to state-of-the-art server
and storage technologies faster than the bank could on its own,
Sztejnberg said.
On the other hand, he added that JP Morgan planned to keep "a
significant amount of control and influence over the things that we
feel we need to, including security".
The bank is not letting go of key IT functions such as architecture
planning, application development or the deployment of online
banking, electronic cheque-processing and other technology-driven
banking services, he said.
Sztejnberg said he looks at IT in layers, with the basic delivery
of system resources to business units being at the bottom in
corporate value. "We've retained a lot of the top layers of that
stack," he said, noting that none of JP Morgan's IT architects or
application developers will be shifted to IBM.
IBM's ability to help Deutsche Bank meet regulatory requirements
for data security was a big factor in favour of outsourcing, said a
bank spokesman. For example, IBM will use data-mirroring technology
to back up the bank's information.
"There is more technical expertise on the side of the outsourcing
companies these days," he said.
Deutsche Bank will still be responsible for maintaining the
security of data, the spokesman added. "The real differentiator is
that you're dividing the hardware side from the development side."