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Follow UsCaroline Humer
NEW YORK: American Express Co. on Monday said computer giant International
Business Machines Corp. will take over a large part of its technology in a $4
billion, seven-year deal aimed at saving the global financial services firm
hundreds of millions of dollars.
New York-based American Express, known for its travelers checks and signature
green and gold charge cards, said IBM will offer posts to about 2,000 employees
as part of the agreement. The deal includes transferring to IBM the data center
processing for more than 1 billion daily American Express transactions, hosting
the company's Web site, network servers, data storage and help desk support.
"It's not the biggest outsourcing deal in terms of value but it
certainly ranks up there with the top 10 that have ever been awarded," said
Gartner analyst Bruce Caldwell. "American Express is a real plum in terms
of its data center. It's one of the largest in the world and one of the best
managed," Caldwell said.
The change comes after American Express on Jan. 28 posted a 56-per cent
falloff in fourth-quarter net income, as the global travel slump and the US
recession hurt its charge card, travel and money management units.
IBM Global Services accounted for about 40 per cent of its parent's revenue
in the fourth quarter of 2001 and in recent years has been the No. 1 growth
driver for the computer maker. In the fourth quarter, however, the company said
services revenue declined 1 per cent due to the economic slowdown.
That slowdown has weighed on IBM's stock as analysts question how the company
will improve its revenue growth in 2002. IBM chief operating officer Samuel
Palmisano, a former services head, will take over for chief executive Louis
Gerstner on Friday.
'Pay-as-you-go' aspect of deal
The American Express agreement is IBM's largest and based in part on the
"on-demand" services model introduced in the fall of 2000, in which a
company's monthly payments vary as its need for computing expands and contracts.
IBM said that means that if American Express needs more computing power
because of increased financial transactions, for instance, IBM can respond by
tapping into computers in one of its locations.
"In the utility environment, if for one hour I need more capacity and I
don't the next hour, I don't pay for it, whereas in a traditional arrangement
typically you'd say 'we're going to need more so sign me up for "X"
amount more for a period of time,'" said Ginni Rometty, general manager for
IBM Global Services for the Americas.
Rometty said the $4 billion figure is the minimum American Express expects to
spend during seven years. "They outsource the heavy lifting to IBM but this
is really new. Pay as you go ... is the future of services in this
country," said Sam Albert of Sam Albert Associates, a consultancy in
Scarsdale, New York.
US operations, which account for about 75 per cent of the 2,000 positions,
should start transferring to the new systems in March, and international ones in
May, American Express said. An American Express spokeswoman said less than 20
American Express jobs would be cut in relation to the change.
North American services revenue is expected to total $295.3 billion in 2002,
of which comprehensive managed services, or outsourcing, will account for $113.5
billion, according to Gartner.
IBM shares were up 45 cents at $98.90 and American Express was up $1.40 or
just over 4 per cent at $35.05 in afternoon New York Stock Exchange trading. IBM
shares have lost 18 per cent this year and American Express has fallen less than
2 per cent while the Dow Jones Industrial Average is up about 1 per cent.