Outsourcing--and Backsourcing--at JPMorgan Chase

JPMorgan Chase’s decision to first outsource IT and then bring it back in-house stands as a cautionary tale for any CIO considering an outsourcing megadeal.

When David Rosario got the official notice at the end of 2002 that his job would be outsourced to IBM, he was not surprised.

Rumors had been circulating for months at JPMorgan Chase, where he had worked as a network engineer since 2001, that the company would be signing away much of IT to an external services company.

The $5 billion IBM-JPMorgan contract was heralded at the time as the largest outsourcing deal on record, and it received a great deal of publicity in the mainstream and trade press as the wave of the future. JPMorgan itself had trumpeted the deal as a "groundbreaking" partnership that would cut costs, increase innovation and benefit its IT workers.

But Rosario and other employees soon discovered that they would have to reinterview at IBM for their positions. During that process, Rosario was told that his job at IBM would be secure for the foreseeable future. Others, however, were not so lucky. They were told by Big Blue that their jobs would likely be gone within a year or two. As a result, some left as soon as they could.

Rosario stayed.

But his sense of security didn't last. Rosario watched as IBM cut the pay of most of the consultants working for the bank and then eventually let many of them go. And with IBM's well-publicized penchant for sending work offshore, he wondered ifas a full-time employeehe would be next.

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But before that could happen, on July 1, 2004, JPMorgan completed its merger with Chicago-based Bank One, which itself had canceled a well-publicized outsourcing deal with IBM and AT&T a few years earlier. Two and a half months later, the merged company announced that it would be ending its much-touted deal with IBM early and "backsourcing" its information technology, bringing it back in-house.

However, Rosario wasn't sure how long he could hold on to his regained position at JPMorgan. He knew that there were now Bank One employees doing the same work he was. And sure enough, not long after he began working for JPMorgan again, he found out his job was on the list of 12 positions to be eliminated in his department. Lucky for Rosario, he had become skilled at reading the IT tea leaves, and had already secured a job for himself in another area of the company as an IT architect. But not before all the to-and-fro took its toll on him. "I lost my trust in management a long time ago," he says. "I don't believe anything they say or do. I know they'll put a spin on anything, as long as it allows them to keep retention up for just as long as they need to."

Rosario is just one of thousands of employees affected by JPMorgan's decision to outsource to IBM and its subsequent move to bring the work back in-house. And he is not the only one who suffered such whiplash. In interviews with a number of current and former employees, CIO repeatedly heard stories of diminished morale and decreased productivity over the past several years.

But the bank's decisions have had ramifications even bigger than poor morale or the loss of employee trust. JPMorgan's decision to bring IT back in-house—though applauded by most industry analysts, IT experts and even employees like Rosario as the right thing to do—has been a costly and difficult move, according to analysts and current and former employees. It has eaten up years of management time and attention as managers prepared the organization for the outsourcing and then reorganized again to bring the work back in-house. A number of IT projects were slowed down and some day-to-day tasks did not get done, causing a lot of pent-up demand for IT services, according to several employees. In sum, JPMorgan's experience stands as a cautionary tale for any CIO considering a multibillion-dollar outsourcing deal.

"Bringing outsourced work back in-house can cause such disruption to an organization that most people don't do it," says Ralph Schonenbach, CEO of the Trestle Group, an outsourcing consultancy based in Zurich, Switzerland. "It's a very difficult and painful change for an organization to go through."

For their part, JPMorgan officials deny any such struggle. "This has been a smooth transition because the same people—the IBM employees and contractors supporting the JPMorgan account—were transferred back to JPMorgan. They simply changed employers, not jobs," says JPMorgan spokesperson Charlotte Gilbert-Biro. "In addition, Bank One executives and managers are experienced at transitioning technologists back in-house."

Employee Fatigue

On Dec. 20, 2002, JPMorgan announced its seven-year outsourcing arrangement with IBM—including data centers, help desks, distributed computing, and data and voice networks—with great fanfare. "We view technology as a key competitive advantage," stated Thomas B. Ketchum, JPMorgan's vice chairman, in a company press release. "Our agreement with IBM will create capacity for efficient growth and accelerate our pace of innovation while reducing costs, increasing quality and providing exciting career opportunities for our employees."

The deal would help JPMorgan create "significant value" for its clients, shareholders and employees, Ketchum promised. Less than a year into the relationship, then-CIO John Schmidlin said at a Gartner outsourcing summit that his only regret was that they hadn't signed the deal with IBM sooner.

Fast-forward to Sept. 15, 2004, when JPMorgan announced the premature end of the contract with IBM with equal flourish and similar promises. In another company press release, Austin Adams, the former CIO of Bank One who took over for Schmidlin as CIO for the $1.1 trillion merged bank, said, "We believemanaging 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." (Adams, who also presided over the backsourcing of Bank One's deal with IBM a few years earlier, declined to be interviewed for this story. Schmidlin could not be reached for comment.)

The fact that JPMorgan officials gave basically the same reasons for the retreat from the mega-outsourcing deal that they had proffered for inking the deal in the first place left some employees confused and resentful. "Morale was not high," says one former consultant who managed server support at JPMorgan and was let go. He asked not to be named.

Some workers had been hit by the outsourcing where it hurt even morein their paychecks. Though many employees (such as Rosario) saw only the company name on their paychecks change, others (typically consultants) took significant pay cuts by moving to IBM. "The five people in my group [all consultants]—which included network, systems and database administrators—were all told that they had to reapply for their jobs," says Scott Kirwin, who worked as an independent consultant for JPMorgan in New York from July 2002 until April 2003. "A lot of them did, but they were hired at salaries that were 20 percent less."

JPMorgan declined to comment on any salary reductions or layoffs that may have occurred during the outsourcing and backsourcing. However, bank officials at the time said that approximately 4,000 people, including employees and contractors, were transferred to IBM during the initial phase of the outsourcing. According to the bank's 2003 annual report, 2,800 of these people were full-time employees. In a statement announcing it would bring IT back in-house, JPMorgan officials said that roughly 4,000 workers would return to the bank. According to the bank's 2004 annual report, 3,100 of those people were full-time employees and 800 were contractors. Some of the original contractors were either hired as employees by IBM at lower salaries or laid off, according to several current and former JPMorgan workers.

Meanwhile, productivity at JPMorgan took a hit, according to several former and current employees. "For more than a year, there were a lot of people not getting any work done. They didn't know where they were going to be, they didn't want to commit to projects, and they started slacking off," says a former consultant who used to manage server support for JPMorgan. (He has since gotten another full-time IT position at a major company.) Among the projects not getting done were server migrations, data center upgrades and network patches. "When people aren't productive, the company loses money," he says.

During the backsourcing, layoffs also occurred. Some were merger-related. (When Bank One made its own backsourcing move in 2002, the company chose not to invite back some of the employees it had transferred to IBM, taking the opportunity to "upgrade talent where appropriate," says JPMorgan spokeswoman Gilbert-Biro.) While JPMorgan says more than 97 percent of the employees and contractors accepted their offer to return to the bank when the backsourcing initially took place, Rosario says many people are worried they will no longer be needed because of the merger with Bank One. And some have already lost their jobs. "I've seen several project managers and IT middle managers let go," he says. "And I've seen some people who have the option leave before they got laid off. I had options here in the bank, and I exercised those."

Analysts confirm that there have been layoffs during the backsourcing. These firings "don't get much attention because they aren't nearly the size of the 4,000-person workforce involved in the megadeal at IBM, but layoffs have been occurring," says Susan Cournoyer, vice president of research with Gartner Research.

JPMorgan has announced that the merger will result in a total of 12,000 layoffs by 2007. The bank, however, insists that many of the merger-related job eliminations will not occur in IT. "The vast majority of job reductions are in call centers, operating centers and back-office support, and do not affect technology," says Gilbert-Biro.

The Cost of Reorganization—Times Two

There was a price to pay at JPMorgan—not only in low morale and employee turnover during the back-and-forth of sourcing, but also in the reduced well-being of the IT organization and corporation as a whole. That price included the time and expense it took to first reorganize the company to support an outsourcing arrangement and then to reverse those changes to prepare for a backsourced environment. Kirwin saw the distraction it caused at JPMorgan, as managers and staff had to work on things such as documenting and presenting information required for the outsourcing—describing staffing levels, current skills, budgets and work assignments, and quantifying what their teams did on a day-to-day basis—all in addition to their normal duties. This kind of additional work lasted from the time when the initial plans for outsourcing were being discussed all the way through the period after the outsourcer was chosen, and continued through the outsourcing deal's duration.

"The minute you start talking about outsourcing, you lose productivity, not just among us employees but managers and directors who have to set aside what they're hired to do to talk about this significant business change," says Kirwin. "And there's never a dollar figure attached to that." If there were, "they might not sign these deals in the first place," he adds.

Specifically, you have to bring in a consultancy to help you figure out your outsourcing strategy and how to reengineer your processes for outsourcing. And then, you have to make lots of investments in HR to counsel employees, the Trestle Group's Schonenbach says. You also have to spend money on retention bonuses to keep key employees around during the transition.

Then, "if you decide to insource, you have to do that all over again in reverse, and it costs you twice as much," he adds. "These deals take a long time to pay off for both the customer and the outsourcer. So when you end it early, you're losing a lot of money."

JPMorgan won't say how much the divorce cost them, and IBM isn't talking either. But a number of analysts say that because the bank ended the contract prematurely—just 21 months into its seven-year contract&3151;it paid a substantial price.

To terminate a contract of that size that early into the deal, JPMorgan likely had to pay IBM millions of dollars, says Christopher Ford, a partner at the law firm Alston & Bird in Washington, D.C., who recently led a team of lawyers on ING Insurance Americas' $600 million IBM outsourcing deal. Cournoyer agrees that a "low-end estimate" for the final penalty would be in the multimillions of dollars.

When companies bring IT back in-house, it routinely costs them more—in the short term at least—to run their own data centers, help desks, distributed computing, and data and voice networks than it does to continue outsourcing them, according to Jeff Kaplan, senior consultant with the Cutter Consortium's Sourcing and Vendor Relationships Advisory Service and the managing director of ThinkStrategies. Clearly, JPMorgan will be taking advantage of the $1 billion that Bank One invested in its own data centers and IT infrastructure over the past few years. But it must now reestablish all of its own systems, staffs and operating procedures, and "realign them with the business so that they fit with the corporate structure and strategies," Kaplan says.

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