In 1998 Bank of Scotland outsourced its IT to First Banking System, a joint venture with Xansa. The joint venture company managed day-to-day IT functions at Bank of Scotland and introduced new core technologies.
However, the arrangement fell foul of the Halifax's takeover of Bank of Scotland last September. Explaining the decision to terminate the contract, HBOS said the Bank of Scotland's centralised IT structure was incompatible with its own in-house de-centralised approach.
The joint venture will be terminated in December 2003, costing Xansa £91m in lost turnover. However, outsourcing experts say the HBOS decision runs counter to industry trends.
Robert Morgan of outsourcing consultancy Morgan Chambers told CW360.com: "The outsourcing market has accelerated over the past six months, even though it can be hazardous.
"We are dealing with seven projects across four different banks which are worth a total of £3.5bn, and we expect that over the next three to four months, £2bn-worth of these contracts will come into the public domain."
Morgan, however, pointed out that only one in ten joint ventures are extended past their original life term and, where problems emerge, they are usually related to internal politics or the failure of the joint venture to generate extra revenue by failing to pick up work from other organisations.
Rob McCallough, head of IT at law firm Masons, agreed with Morgan. "There is still an active market, and a lot of opportunities for banks to cut costs," he said.
"But big mergers such as the Halifax and Bank of Scotland one cause havoc to the strategy as a result of duplication and corporate politics."
Peter Redshaw, Gartner senior analyst for vertical markets, Europe, said: "Despite the churn that exists in outsourcing, with companies often not renewing contracts, banks are still shelving discretionary expenditure and need to cut costs further, so there is still an important opportunity in the form of outsourcing."