JP Morgan's merger with Bank One will see its 4,000 IT staff returning back in-house. Now other organisations should re-examine their outsourcing deals, say analysts.
US banking giant JP Morgan's decision to bring its outsourced IT functions back in-house (Computer Weekly, 21 September), abandoning a £2.8bn seven-year outsourcing deal with IBM, raises questions for companies considering outsourcing, or changing outsourcing partners.
JP Morgan Chase said its merger with Bank One would give it significantly greater capacity to manage its IT infrastructure, and that it would bring its 4,000 support employees and contractors back in-house, a reverse process called "insourcing".
But Robert Morgan, founder director of outsourcing consultancy Morgan Chambers, said there are lessons to learn from the way JP Morgan first structured its outsourcing pre-IBM. In 1996 it gave the outsourcing contract to the Pinnacle Alliance, a £1.25bn outsourcing consortium comprising CSC, Accenture (then Andersen Consulting) and AT&T Solutions, and Bell Atlantic.
The Pinnacle deal was hailed as the largest outsourcing deal of its kind when it was signed in 1996. It covered datacentres, desktops, networks and some corporate applications in the US and Europe.
Morgan said, "The Pinnacle Alliance had the seeds of its destruction because it was an experiment in artificially creating a shared-revenue model. It was not able to achieve it in terms of responsibility and, over time, it began to fall apart."
Nevertheless, he said, "A lot of companies believe you cannot really change your supplier when you have [an outsourcing project] as large and cumbersome as JP Morgan's, but this [decision to insource its IT] shows you can.
"This should give heart to clients that if you want to bring your IT in-house, or run a proper competitive tendering process, you can do it. For example, if you look at central as well as local government contracts, these change regularly. In fact, 17% to 19% of all outsourcing contracts [change suppliers]."
Andrew Parker, vice-president and research director at Forrester Research, said companies should consider how easily they can reverse any large outsourcing deal they enter.
Parker said some tactics worth considering include taking on shorter-term contracts and having specific review points, which allow the outsourcer or partner to sever the relationship or change elements. It also helps to have a relationship with the supplier in some other area of IT if possible, so that any penalty at breaking a contract can be renegotiated.
Other tactics involve having flexibility in the types of technology the outsourcing partner uses, for example in desktop or printer refresh cycles, said Parker. He added that a significant and growing number of contracts now include shared risk and reward.
There are still a sprinkling of mega-deals in process, said Parker. He cited Barclays' £400m six-year contract with Accenture this June, for application development and IT maintenance.
Hewlett-Packard and BT also signed a £1.02bn mutual deal over managing each other's desktop and telecoms infrastructures. In June, Airbus signed a £102m deal with HP over managing its SAP infrastructure.
A handful of other recent mega-contracts include the Inland Revenue's deal with Capgemini and Fujitsu; IBM's £600m eight-year deal with Michelin; and SAS's £837m deal with CSC.
Robert McNeill, senior analyst at Forrester Research, said, "The majority of new deals will not be mega-deals, but selective sourcing contracts focused on specific operations such as desktop management.
"Insourcing staff back in-house will remain the exception. It is difficult and expensive to bring IT operations back in-house, particularly those for which the outsourcer purchased the client's assets."
Outsourcing contract tactics
- Consider taking on shorter-term outsourcing contracts
- Have review points to allow the relationship to end or change
- Have a relationship with the supplier in other areas
- Ask for flexibility in the technology the outsourcing partner uses
- Consider contracts with an element of shared risk and reward.