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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 re-engineer 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 - 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, DC, who recently led a team of lawyers on ING Insurance Americas' $US600 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 centres, 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 $US1 billion that Bank One invested in its own data centres and IT infrastructure over the past few years. But it must now re-establish 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.

Employees confirm there is a big readjustment going on inside the bank. "In some cases, responsibilities are getting greatly redefined, sometimes completely reversing the way things had been done," Rosario says.

That's why, even though the majority of outsourcing deals are less than satisfactory, most companies try to work things out with their service providers rather than backsourcing. According to a recent study by Deloitte Consulting, 70 percent of senior executives reported significant negative experiences with outsourcing projects, but only 25 percent of respondents brought the work back in-house. "That organizational disruption is what's kept companies from backing out of outsourcing relationships," Ford says.

JPMorgan officials, however, say the disruption was minimal. "We were only 21 months into the contract with IBM, and JPMorgan hadn't yet moved the bulk of the work to IBM's data centres," says Gilbert-Biro.