The Price of STAGNATION

In recent years, IBM has made a successful push toward signing more mega-outsourcing deals. For the past three years, in fact, its IT services business has accounted for nearly half the company's total revenue, growing from $US36.3 billion in 2002 to $US46.2 billion in 2004. In its 2004 annual report, IBM noted that its IBM Global Services unit earns more than twice the annual revenue of its closest rival. In fact, around the same time that JPMorgan signed its deal with IBM, IBM also signed several multibillion-dollar contracts (five worth over $US1 billion in 2002 and seven in 2003) with major companies - including American Express ($US4 billion in 2002), Deutsche Bank ($US2.5 billion in 2002) and Michelin ($US1.21 billion in 2003) - that have not been cancelled.

However, in the past year, the outsourcing contracts IBM has signed have been smaller and shorter in duration. Experts such as Schonenbach and Dane Anderson, research director at Gartner, say this is largely because megadeals are not that profitable for the vendor, particularly in the short term. As a result, some outsourcers try to make money by charging customers for services they consider outside the contract, experts say. And if the customer resists paying for these extra but often necessary improvements, it can have a deleterious impact on IT. And indeed, a number of employees who worked on both the Bank One and JPMorgan outsourcing deals say they were bad for the banks in terms of IT innovation and efficiency.

In the Bank One deal, "outsourcing the entire IT staff stagnated us, from a technology viewpoint", says the JPMorgan systems engineer who survived the outsourcing - and then backsourcing - at Bank One. "Once they signed the contract, we didn't move at all beyond that date as far as picking up new technologies that would give us a competitive advantage. Technology was not refreshed, and new projects were not rolled out."

The problem was with the way things did - or, more accurately, didn't - get done. "The contract between Bank One and IBM had enough vagueness within it that IBM could charge for anything that wasn't already being done within the bank before the deal began," he says. "Our IBM managers said if something wasn't stated specifically in the contract - a particular task or a type of support - they wouldn't have us do it unless the bank paid them more. So a lot of things didn't get done."

For example, every time Bank One needed him to add or remove a user because of a new hire or fire, he and his team of 50 had to go onto all 1500 servers to add or remove that person. There was a Tivoli module that could have been added to help manage user accounts more efficiently, and he notified his IBM manager. "If you can find a way to make the bank pay for it, then we'll do it," he was told. The module was never added. Another Bank One systems administrator who was hired on by IBM says he also saw several examples in which IBM declined to implement additional improvements because Bank One would not pay for them.

The same thing happened with JPMorgan during its time with IBM, say several employees involved in that outsourcing deal. According to the former consultant who worked for the bank in New York before and after the outsourcing relationship, "IBM caused tremendous headaches for JPMorgan and the company's infrastructure, nickel-and-diming to control their own costs."

Others saw the same things at other IT locations. During the 21 months when IBM was in charge, "Things that used to get done no longer got done," says a database administrator who was hired by IBM from JPMorgan in Columbus, Ohio.

In fact, it seemed that even ordinary office products were hard to procure in a timely manner. "Even office supplies had to be approved two levels above my boss," Rosario says. "[IBM] even delayed getting batteries for our pagers, and some project managers had to go and buy their own reams of paper at Staples." Rosario adds that during the last six months of the JPMorgan outsourcing deal, IBM halted all projects. An IBM spokesman declined to comment, citing contractual obligations.

Once the work was backsourced, even the JPMorgan systems engineer - who knew what to expect, having gone through the same thing at Bank One - was amazed by the projects that had sat idle during the outsourcing. "What I'm seeing now is a whole lot of pent-up project demand," he says. "Now that it's all insourced, we're pushing straight ahead, and it's really keeping us busy."

However, the procedures put in place to deal with an outsourced environment continue to slow work down, according to two JPMorgan employees. During the outsourcing, all connectivity and possible combinations of hardware and software were tested in a lab environment before JPMorgan told IBM what it could install and how to do it. "They wanted to make sure the vendor would put things in the right way and always use best practices," says the systems engineer. "They have certification labs to test things to the nth degree, which on the surface sounds good. But [because of the testing backlog], they've got equipment out there that's six or seven years old and hasn't been upgraded. It's really slowing us down." JPMorgan confirmed that it continues to rely on the certification processes.