IBM, Amex Ink $4 Billion Outsourcing Deal

American Express Co. said it will outsource its data centers and other IT operations worldwide to IBM Global Services in a deal valued at $4 billion over seven years.

American Express Co. said it will outsource its data centers and other IT operations worldwide to IBM Global Services in a deal valued at $4 billion over seven years.

American Express becomes the first large enterprise to sign on for what IGS for the last 14 months has been promoting, first as e-sourcing and, more recently, as e-business on demand. Unlike traditional outsourcing in which providers such as IGS, Electronic Data Systems Corp. and others assume control of an enterprise customers data centers and operate them, typically under a long-term fixed contract, the e-sourcing model calls for enterprises to purchase server cycles, storage and other IT services on an as-needed basis from a shared infrastructure utility operated by a provider such as IGS. IBM CEO Louis Gerstner just over a year ago said IBM planned to invest $4 billion to build 50 new data centers and to develop new technologies to support e-business on demand.

The pay-as-you-go nature of the IGS offering was one of the key selling points for American Express, according to Glen Salow, executive vice president and CIO at American Express in New York. As the company adds new types of financial services products—many targeted toward consumers—its been difficult to predict the demand on IT resources. "We began to wonder if we could scale up and down fast enough," said Salow. "We came up with the hypothesis that, while we [in IT] were good at what we did, if we could leverage someone who was great and had IT operations at the core of their business, wed have greater flexibility."

Salow said American Express also expects to reduce operating expenses as a result of the outsourcing deal. He declined to specify expected savings, however.

The deal, which will see the takeover of American Express U.S.-based IT operations by IGS in March and the transfer of international IT operations in May, will involve the transfer of about 2,000 American Express employees to IGS. Salow said a small number—less than half of 1 percent—will see their jobs eliminated.

That number of employees moving to IBM represents about one-third of American Express total IT work force. The remainder of its IT work force are engaged in application development and maintenance, information technology strategy, strategic technology relationships, technology portfolio management, and network design and operation activities that will remain within American Express, according to Salow.

IGS officials said that the American Express deal will cause other large enterprises to seriously consider e-sourcing. "Seeing a company like American Express with strong brand name recognition and a strong internal IT capability embracing this will probably cause others to look seriously at it," said Bob Zapfel, general manager of IGS strategic outsourcing in Somers, N.Y.

Zapfel, however, acknowledged that, at least initially, the deal with American Express will not be structured as a classic e-sourcing arrangement. While American Express will be able to contract with IBM for IT services on an as-needed basis, the utility providing the services initially wont be a resource that is shared with other outsourcing customers. "Over time, it is fair to expect that that will be part of the delivery paradigm with Amex," said Zapfel.

The deal with IBM represents the first significant IT outsourcing step for American Express, Salow said. Over the past six years, he said, the company has outsourced focused IT services such as tape storage operations and PC support to outsourcers such as IBM and EDS.

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