Consolidation Move Sealed $5B IBM Deal

 
 
By eweek  |  Posted 2003-02-03 Email Print this article Print
 
 
 
 
 
 
 

IBM's winning bid of $5 billion for a seven-year outsourcing contract from J.P. Morgan received a critical boost last summer when the bank decided to seek a single provider.

IBMs winning bid of $5 billion for a seven-year outsourcing contract from J.P. Morgan Chase & Co. on Dec. 30 received a critical boost last summer when bank officials backed away from plans to dole out the deal to several suppliers and decided instead to seek a single provider.

Soon after making that call, the bank dropped incumbent provider Computer Sciences Corp. from consideration, narrowing potential suppliers to IBM and Electronic Data Systems Corp.

Eventually, the deal—reportedly the largest to date in the financial services industry—went to IBM Global Services.

J.P. Morgan IT officials told eWeek the bank decided that one large, integrated contract awarded to a single vendor will result in lower costs and better service. J.P. Morgan officials initially planned to award two contracts: one to manage the banks mainframe and midrange systems and another to cover networking and telecommunications. In addition to combining the contracts, J.P. Morgan expanded the scope of the original RFPs (requests for proposal) to include distributed systems management.

"There was very significant synergy in expanding the scope and combining the different what we call towers of technology into one," said Mike Sztejnberg, managing director of Enterprise Technology Services for J.P. Morgan, in Newport, N.J. "This would allow our suppliers to present a better solution ... to provide more of an end-to-end service model to us, which we were interested in."

The decision to consolidate the outsourcing under one expanded RFP ended up favoring IBM, which, said Sztejnberg, was seen as possessing a broader set of services and experience than either CSC or EDS. "We thought IBM had the breadth of experience, the scope, the scale and quality of solution and could deliver the economic benefits and innovation that would allow us to move forward," said Sztejnberg.

IGS is expected to take over operation of J.P. Morgans IT infrastructure and absorb 4,000 of the banks IT employees and contractors in the first half of this year. IGS will replace CSC, which in 1996 won a seven-year outsourcing contract with the bank.

Under that deal, which expires in July, CSC has acted as an outsourcing contractor, providing some services to the bank directly but passing out others to AT&T Solutions (the outsourcing arm of AT&T Corp.), Verizon Communications Inc. and Accenture Ltd. All are part of a partnership called the Pinnacle Alliance.

Under the new deal, CSC may continue to provide some services to J.P. Morgan as a subcontractor, a CSC spokesman said. CSC officials involved in the negotiations, however, declined to discuss details of the J.P. Morgan RFP won by IBM.

J.P. Morgan issued its two-part RFP in the first quarter of last year. After evaluating responses from IBM, CSC and EDS for about three months, bank officials temporarily halted the process in early summer, eventually deciding to consolidate outsourcing under one expanded RFP. IBM and EDS competed for the expanded deal for the next four months before IBM was declared the winner.

Even before issuing the single RFP, however, momentum toward a single, consolidated approach to managing its IT infrastructure had begun to build at the bank. In fact, in mid-2001, the banks Technology Council, under Vice Chairman Thomas Ketchum, had decided to centralize responsibility for IT infrastructure into a newly formed Enterprise Technology Services organization run by Chief Technology Officer John Schmidlin. Before that, different lines of business at the bank had been responsible for managing their own IT networks and systems. (Under the new outsourcing deal, business units will retain control of application delivery and development.)

The decision to take a centralized approach to managing IT infrastructure internally, said Sztejnberg, influenced the later decision to combine the RFPs. "As IT infrastructure becomes more utilitylike in many respects, it makes sense for it to be managed centrally," he said. "Thats what our organization realized and put into action."

Officials at IBM, meanwhile, were also working hard to nudge J.P. Morgan toward a centralized, single-vendor approach. According to IGS Financial Services Sector General Manager Paul Sweeny, in New York, IBM was able to convince J.P. Morgan that a single-vendor approach will deliver lower costs and better service than a multisupplier, best-of-breed approach.

"It was a combination of them [J.P. Morgan] coming to their own conclusions that it may be more efficient to put it in the hands of a single supplier and to consolidate their efforts as opposed to the independent RFPs that they had going," said Sweeny. "And, certainly, the economics that we drove out of the bigger deal seemed to be attractive to them as opposed to the piecemeal economics that theyd seen earlier in the process."

Officials at J.P. Morgan and IGS declined to estimate how much the bank is likely to save by outsourcing IT infrastructure to a single supplier.

The J.P. Morgan deal was the latest—and largest—in a recent string of significant outsourcing agreements signed by major financial institutions. The $4 billion seven-year deal signed by American Express Co. and the $2.5 billion, 10-year deal signed by Deutsche Bank AG were both with IGS. Such signings, said IBMs Sweeny, represent a trend toward large, multiyear, single-provider outsourcing deals, particularly in financial services.

A report from Gartner Inc. last week supports that idea. According to the Stamford, Conn., company, the number of outsourcing deals with value of at least $1 billion rose from nine in 2001 to 14 last year. Total value of such deals rose from $15.1 billion in 2001 to $28.4 billion last year.

Soon after announcing the outsourcing deal with IBM, J.P. Morgan reported a $387 million fourth-quarter loss, due in part to Enron Corp.-related settlement expenses. J.P. Morgan officials said the large loss will not affect terms of the agreement with IGS.

Besides being sold on the potential benefits of using IBM as a single-source outsourcing supplier, J.P. Morgan officials said they were attracted by the so-called e-business-on-demand model offered by IGS in which J.P. Morgan will pay only for the computing resources it uses, which can be scaled up and down as business conditions fluctuate.

Before buying into the concept, however, J.P. Morgan officials were skeptical. They insisted that IBM demonstrate it had the tools to manage not just mainframes but also distributed systems in an on-demand fashion.

J.P. Morgans doubts are shared by many. "The concept of utility computing is really not there today," said Dean Davison, an analyst at Meta Group Inc., in Los Angeles. "The tools are still lacking, and vendors dont know the cost structure well enough to price things at that level."

Indeed, said IBMs Sweeny, the company was not able to demonstrate robust on-demand capabilities across all its platforms. But IBM was able to convince J.P. Morgan officials that the necessary tools are in the works and will be available in a timely fashion.



 
 
 
 
 
 
 
 
 
 
 

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