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Patriots: Will the Winning Streak Continue?

The JPMorgan Chase-Bank One merger has become a bellwether for IT outsourcing.

Prior to their announced merger, Bank One and JPMorgan Chase had taken radically different approaches to outsourcing. But now that they're merging into a single organization, they'll have to reconcile their divergent strategies.

On the one hand, Bank One's CEO Jamie Dimon has proudly used the language and imagery of the American Revolution to describe his bank's sourcing strategy. "During the past 18 months we have in-sourced most of our systems, hiring more than 1,700 new technology professionals," Dimon wrote in the firm's 2002 annual report. "These people are patriots-not mercenaries-who are allowing us to take control of our destiny," he added.

Take that, Hessians.

Also in 2002, the bank forged a close partnership with Microsoft (Redmond, Wash.), which involved several joint ventures, offices at each others' campuses, and what one Bank One executive called "a collaborative, iterative approach."

In keeping with its in-sourcing strategy, Bank One began to build data processing facilities for its growing businesses, while moving to in-source credit card processing and the management of telecom, servers and databases. "With the volume of business and the quality of our people, we do not believe we are sacrificing any economies of scale or capability by managing the technology ourselves," wrote Dimon. "In fact, we are seeing evidence to the contrary."

Meanwhile, JPMorgan Chase entered into a comprehensive $5 billion, seven-year IT outsourcing deal with IBM in December 2002. "Those are the most strategic [deals]," says Akiba Stern, an attorney in the global sourcing group of Shaw Pittman LLP, which negotiated the IBM deal for JPMorgan Chase. "It's in those larger outsourcings that you most often see the opportunity for greater transformational change."

To be sure, it typically takes a bank of JPMC's size to make such a wide-ranging deal pay off. "In many of these transactions you really need to do the same kind and the same sophistication of work," says Stern. "A $10-million-a-year deal is really not that much different than a $100-million-a-year deal."

Indeed, the payoff from outsourcing has to offset the risk involved with uprooting existing operations. "If you're going to make a move to go offshore, you've got to balance the risk-reward equation," says Dan P. Steinman, a Chicago-based partner in the financial services group at Accenture. "In most, if not all cases, it's a scale play."

Make It Count

In other words, there's no point in reshaping the organization for small potatoes. "If you're going to fundamentally change your business model, you want materially impactful results out of that," says Steinman.

Think eight- to nine-digit savings. "Banks with non-interest expense of $3 to $10 billion-that's where there's an opportunity to make a huge difference," says Steinman.

Still, smaller deals can happen where there's an organizational philosophy encouraging the use and management of outsourced services. "There needs to be high-level management and board-level support to outsource key parts of business functions, and that support comes and goes," says George Kondrach, executive vice president of Innodata Isogen (Hackensack, N.J.), which has done outsourcing work for Chase and the Federal Reserve. "If the benefit is not delivered or sustained, their buy-in dissipates."

So will the Patriots keep winning? It depends on who's in charge of the team. "Let's say you had one bank that had a philosophy of in-sourcing and another that had a philosophy of outsourcing," says Fumiko Kondo, managing director, Intellilink Solutions (New York), a consulting firm. "The two parties would need to figure out what's the longer-term strategy-which frankly would end up by who's managing the joint entity that wins out."

Although Dimon isn't slated to take the reins as CEO of the combined firm until 2006, patriotism and force of personality may yet win the day. "Jamie's the closest thing to a rock star in banking," says Brian Geisel, president and CEO of Alogent (Atlanta).

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