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.

Reader ROI

• The cost to JPMorgan Chase's employees from the upheaval
• The cost to the company in productivity and morale
• How to avoid making costly outsourcing and backsourcing mistakes

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

Rumours 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 $US5 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 if - as a full-time employee - he would be next.

But before that could happen, on July 1, 2004, JPMorgan completed its merger with Chicago-based Bank One, which itself had cancelled 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."