In 2002, JP Morgan signed a seven-year outsourcing arrangement with IBM, worth 5 billion dollars. This deal included data centres, help desks, distributed computing, and data and voice networks. JP Morgan viewed this agreement with IBM as a competitive advantage that would serve as a platform for efficient growth and innovation. It was an attempt to further enhance the performance of the company, while reducing their costs. However, two years later, JP Morgan announced the premature ending of their contract. JP Morgan ended the outsourcing deal with IBM, claiming that it caused technological stagnation in their operations.
Apparently, IBM refused to take on tasks without additional charge, particularly necessary improvements to the system. This structure lengthened certain procedures, and as result, projects sat idle and processes were stalled. Another reason behind the deal cancellation was internal organizational changes. JP Morgan merged with Bank One, which has cancelled a similar deal with IBM a few years earlier. With the combined resources and technology of the banks, management reassessed its capability of managing its core information systems, and realized that the IBM deal was no longer necessary.
JP Morgan Chase and Co. wanted to leverage on the assets it acquired from Bank One, including a $500 million investment in data centers. Also, ending the deal would mean saving the margins paid on hardware and software purchased through IBM, as the size of the newly merged bank would enable it to negotiate better bargains with suppliers – JP Morgan Chase and Co. , after that time, emerged as the second largest financial conglomerate next to Citigroup. Analysts believed that the primary catalyst for the back sourcing was the change in leadership.
Many of the key officers of Bank One took over JP Morgan Chase and Co. by holding the same positions that they had in the former. Some of these were CEO James Dimon and CIO Adam Austin. As emphasized by Austin, the new management wanted to have greater involvement in every aspect of their business, and IT is an important part of it. In fact, Dimon, being in the industry for years, had made a reputation of investing in internal strategies, which explains why experts were not really surprised by the premature death of the IBM contract. ANALYSIS AND CRITIQUE
Given the different scenarios that happened, it is necessary to focus on the impact of the outsourcing and backsourcing deals of the company, and deducing which arrangement is better for the company. The Impact of Outsourcing JP Morgan Chase’s contract with IBM is said to be one of the largest outsourcing deal on record. However, this 5 billion-worth of contract was only in its second year when JP Morgan opted to end its supposed-to-be-7-years relationship with IBM. Apparently, the outsourcing deal hugely affected the operations of the company.
First of all, outsourcing had a negative impact on the effectiveness on some key processes of the bank. Things that used to get done no longer got done. In just a short p of time, instead of improving the company’s productivity, the outsourcing deal had caused so much delay. Among the projects not getting done were server migrations, data center upgrades, and network patches. Corollary to that, even in office supply procurement, there were also delays. It even reached the point where project managers had to go and buy their own reams of paper.
Secondly, there were vague contract details in the agreement between JP Morgan and IBM. As a result, whenever there is a need to make improvements and updates, IBM had to charge extra fees to the bank. Thus, every additional improvement in the system entailed additional costs. Because of the bank’s resistance to pay for extra but often necessary improvements, JP Morgan’s innovation and efficiency in its information technology was compromised. Thirdly, to implement the outsourcing deal, JP Morgan had to lay off 4000 employees, which lead to a drop in employee morale.
With the loss of job security, employees lost their trust in management. Employees refused to commit to any project, and started to slack off. As a result, a lot of work were not getting done, which led to a decrease in the productivity of the company. The Impact of Backsourcing In the light of the shortcomings of the outsourcing deal and the implications of the merger with Bank One, JP Morgan opted to backsource. Bringing their IT back in-house also had huge effects in the company. Firstly, employee morale remained low. Many were resentful that the reasons why management outsourced- i. e. o gain competitive advantage, to improve efficiency, and to accelerate innovation- were also the reasons why they backsourced. As a result, they lost trust in the honesty and soundness of management’s judgment. Job security was still an issue, as more layoffs occurred, not only because of the backsourcing arrangement, but also because of the merger of the two banks. Some employees reapplied for their jobs, but were paid with less than 20% of their original salaries. With such a low morale, productivity in the company dropped, employees were reluctant to commit to projects, and more work piled up.
Secondly, the company spent twice the cost of reorganization: that is, they had a huge capital outlay to support an outsourcing deal, then incurred another set of expenditures to reverse those actions and set up a backsourced environment. Outsourcing costs incurred by JP Morgan are mainly due to the huge consultation fees for process reengineering. They also invested in counselling and retention bonuses to retain the employees through the transition period. As JP Morgan backsourced IT, they incurred huge losses for prematurely ending the contract.
Moreover, the changes made in outsourcing were done all over again in reverse. With that, they had to spend twice for the costs of reorganization. They had to re establish all their systems, staffs, operating procedures, organizational structure, and corporate strategies. Fortunately, JP Morgan was able to capitalize on the $1 billion investment of BankOne in its own information system. Finally, in moving from an outsourcing deal to a backsourced environment, JP Morgan had to deal with organizational disruption. Management had to reengineer their processes and make huge readjustments in their systems and operations.
Organizational responsibilities were redefined, and management completely reversed how things were done. Outsourcing Vs Backsourcing When JP Morgan prematurely ended their contract with IBM, the CEO said, “We believe managing our own technology infrastructure is best for the long-term growth and success of our company, as well as our shareholders. Our new capabilities will give us competitive advantages, accelerate innovation, and enable us to become more streamlined and efficient. ” However, these were the same reasons that management gave when they entered the outsourcing deal.
So the question is: which would provide greater benefits for the company – outsourced operations, or a backsourced environment? The main reason why companies outsource is to be able to focus on their core activities. Many businesses have generic functions such as phone reception and customer service. When these generic functions are outsourced, companies may focus on their key processes. Outsourcing would also lead to efficiency and cost savings, as overhead expenditure are reduced. Outsourcing can also provide operational control as poorly managed functions are provided by companies like IBM who are better in these areas.
However, according to the studies of Deloitte Consulting, 70 percent of companies that outsource report significant negative experiences with their outsourcing projects. Apparently, outsourcing has a number of limitations and weaknesses. The most common issue is the loss of control when the management of certain functions is turned over to another company. The outsourcing company may lose the ability to adapt to a rapidly changing environment. Additionally, the quality of the service provided may not meet expectations, because the service provider is not driven by the same standards as its outsourcer.
Service providers simply aim to meet the conditions of the contract, and not necessarily strive to provide the needs of the outsourcing company. Consequently, outsourcers incur more costs as they modify the terms of the contract, or as they settle for an inadequate system. With the said problems of outsourcing, companies may resort to backsourcing their operations. Nonetheless, in the aforementioned study by Deloitte Consulting, only 25 percent of the companies that had problems with outsourcing brought IT back in-house.
The difficulty in backsourcing can be traced to the high costs of reorganization and the organizational disruption during the transition period. However there are a numerous benefits of having an in-house system. Firstly, management would have complete control in their operations. This leads to greater flexibility, since changes in operations could be implemented more easily. Secondly, management could also control the quality of the operational functions of the company, by setting their standards of performance in their workforce.
Finally, they would be able to avoid the need for ongoing renegotiations and the high recurring costs of modifications. The decision whether to outsource or insource should mainly depend on the processes of a company. Organizations may outsource processes that do not fall under their main competencies, or non-core processes that consumes much of their resources. This would save them time, effort, and manpower, while enabling management to focus on the company’s strengths and core operations. On the other hand, it may be more advantageous to insource specialized processes that are impractical to outsource like Research and Development.
Moreover, as in the case of JP Morgan, it is better to insource because the company can actually provide better services at lower costs in-house, with the facilities of the acquired bank – Bank One – readily available for JP Morgan’s use. PHILIPPINE SETTING A similar case in the Philippines is the agreement between Government Service Insurance System (GSIS) and International Business Machines (IBM). In 2004, GSIS began migrating to a new computerized system, with an IBM DB2 software designed to manage all data pertaining to members’ and pensioners accounts.
GSIS claimed that it spent around P40 million for the DB2 software and IBM P-series servers. Unfortunately, in March and April 2009, the database software encountered a problem with the pension firm’s Integrated Loans, Membership, Acquired Assets and Accounts Management System (ILMAAAMS). The ILMAAAMS, which ran on IBM’s DB2 database software, reportedly crashed because of the vast amount of transactions made by GSIS members, composed of about 1. 5 million government employees and 200,000 pensioners. This translates to about 3 million records on file coming from 8,000 agencies nationwide, simultaneously.
According to GSIS, about 90% of its operations were adversely affected by the crash, which resulted to approximately Php5 billion in actual damages. The company blamed IBM for the disruptions, accusing the latter of supplying defective database software. GSIS filed a Php100 million legal case against IBM Philippines, who in turn filed a Php200 million libel suit against the GSIS for its series of negative advertisements against them, both in print and broadcast media. In November 2009, GSIS started migrating to the HP – Oracle System and was able to complete the process in just six weeks.
At present, the legal war between GSIS and IBM continues. Recommendations: Outsourcing is a double edge sword. It could either benefit a company or it can also cost that company a lot. Thus, many things need to be considered in choosing between outsourcing and the more traditional in-sourcing. Therefore, the situation of JP Morgan Chase and Co. could have gone on a better way if they just prepared and improved on certain aspects as follows: The negotiations with IBM should have contained certain terms which could possibly mitigate the risks involved in their contract.
First, the contract negotiations should have had clarified the terms and limitations of both parties. Having clearer terms and limitations will help both parties adjust to different situations and formulate the right solutions to the problems that may arise. There should also be better preparation, a set plan of action and a ready exit strategy. Also, JP Morgan Chase and Co. should have asked for flexibility in the technology, the outsourcing partner uses. They should have specified that the process or technology should fit or, at the very least, work hand in hand with the business’s existing processes.
There should also be a stipulation regarding review points to allow the relationship to change or end. JP Morgan Chase and Co. should consider that contracts have shared elements of both risk and reward. Greater risks entail more rewards precisely why JP Morgan should strike a balance between these two. It should perform different analysis tools in order to weigh alternatives more accurately. This, in turn, will help the company decide what projects to perform and which deals to enter. For example in the case of JP Morgan, short-term outsourcing contracts benefit the company better than long-term contracts.
In some cases, it could be a good mix of short-term and long-term contracts as determined by the nature of the contract that will provide the best rewards for the company. Essentially, it is a matter of being able to correctly judge and weigh alternatives that will yield the best results. ————————————————- Finally, the company should learn how to value its most important asset, the people. It should have been more honest and open with the employees about matters affecting the situation and condition of the company.
Being the most important asset of the company, human capital or employees should have been more involved in instances like this. As a summary, the following are the key points to be remembered from the JP Morgan and Chase experience: 1. For financial intermediaries in particular, outsourcing is not recommended. Outsourcing was a trend for many industries, especially in late 80’s until the early 90’s. This provides organizations the chance to concentrate on their core competencies by having their IT functions off shored.
Much of the stories with regard to this business trend were written on the earlier years of the deal, stories on the implementation years however, remain scarce. A company has to consider how it will ultimately affect its operations before jumping in the outsourcing bandwagon. Financial intermediaries in particular would be better off without outsourcing as the latter adversely affects performance of the company, particularly its capability to innovate and be efficient which takes a toll on the totality of the organization’s performance. 2.
Backsourcing is not for everyone. In a company where the latest data are the most crucial, it is recommended for them to keep their IT functions in house, especially in the case of JPMC where they had all necessary infrastructures ready for their IT functions. Departmental functions once outsource will incur twice the expenses if brought back once again to the company. Backsourcing is not a one size fits all solution rather it depends on the company’s available resources that determines its capability to bring in the IT functions again. 3. Negotiate shorter deals
Shorter deals promote flexibility which proves to be the most important factor missing in the JPMC situation. Albeit more expensive, this provides companies less expensive solutions and exit strategies in case deals go awry. 4. Always remember the value of employees The outsourcing and insourcing juggle brought down the morale of many of the employees. What the company failed to see was the fact that this constituted much of the intangible costs incurred. 5. Remember to weigh alternatives carefully. Organizations often overlook or ignore the relationship between cost and quality of service.
The relationship is a simple one. If you want to differentiate your IT service, provide the highest quality service and the highest quality products, it generally costs more. If the decision is IT costs too much, it is relatively straightforward to reduce IT costs, but commensurately you also reduce service. ” (Hirschiem, 1998) Higher expectations, particularly in IT lead to higher costs. More than just following the current trends in the industry, determining what to do with departmental functions involve planning and weighing alternatives carefully.
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