J.P. Morgan, IBM in a $5 b, 7-year contract

Ben Berkowitz

LOS ANGELES: New York bank J.P. Morgan Chase and Co. has signed a seven-year contract for information technology services with IBM Corp. worth more than $5 billion as it moves to cut costs, mirroring similar moves by other banks.

"This, along with last week's announcement of an outsourcing contract with Deutsche Bank -- point to the probability of a strong services signings quarter for IBM," Bear Stearns analyst Andrew Neff said in a research note. "It is encouraging that the services signings are being closed at the end of the year and aren't being pushed out to 2003 suggesting possible closure of other (but unannounced) services signings," he said.

J.P. Morgan, which is the No. 2 U.S. financial services firm after Citigroup, said it would now outsource a large part of its data processing infrastructure, including data centers, help desks, and data and voice networks. As a result of the agreement, the bank said, it will transfer about 4,000 employees and contractors to IBM in the first half of next year. Desktop support and other services will remain in-house, the bank said.

J.P. Morgan said the deal would result in cost reductions and faster innovation, since it gives the bank access to IBM's research. The bank will install technology developed by IBM that uses open standards to connect disparate servers and storage devices, J.P. Morgan said.

Outsourcing information technology services has become more common as large corporations look for alternatives to fixed-cost approaches. J.P. Morgan said the contract with IBM will increase its capacity but also give it the flexibility to respond quickly to changing market conditions.

More outsourcing potential

"Our opportunity funnel for this type of outsourcing is stronger than it's ever been," Paul Sweeny, the general manager of IBM's financial services operations within its overall services business, told Reuters. "There's a lot of pressure on business to take costs out."

Sweeny said that as part of the deal, IBM will maintain 16,000 servers worldwide, consolidate 30 networks into one global voice and data network, and provide helpdesk services for more than 100,000 people. The arrangement allows J.P. Morgan, which has cut thousands of jobs to reduce costs and bolster flagging profits in the weak economy, to cut costs and focus on expanding its financial services.

"From a priority standpoint, the focus has not been on this side of the business," said Reilly Tierney, an analyst at Fox-Pitt, Kelton. "They are not out there trying to become the low cost competitor in banking...(the deal) allows them to focus elsewhere."

Sweeny said one of the primary challenges of taking over computer services for a financial institution was maintaining near-perfect uptime for systems so there is no disruption on trading floors or for operations like deposits and withdrawals at banks. "The business obviously is a real-time business. ... It's not acceptable to have a computer down," he said.

Other U.S. banks have also moved to outsource technology jobs as part of cost-cutting efforts. Bank of America Corp. said earlier this month it signed a 10-year, $4.5 billion deal for Electronic Data Systems Corp. to provide the No. 3 U.S. banking company with computer services.

On Dec. 18, IBM announced a 10-year, 2.5 billion euro deal with Deutsche Bank to provide it computer services throughout Europe.

Shares of Armonk, New York-based IBM ended down $1.02, or about 1.3 percent, at $76.34 on the NYSE. J.P. Morgan stock closed up 19 cents at $23.99 on the NYSE.

© Reuters