Banks pick up pace of IT outsourcing

A combination of intense competition, the sluggish economy and the lure of pay-as-you-go IT services is prompting banks and...

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."

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