September 15, 2004 6:12 pm

JPMorgan ends $5bn IBM deal

JPMorgan Chase is scrapping a $5bn information technology outsourcing contract with International Business Machines after concluding that the work would be better handled in-house.

The decision to reverse the deal - the largest in financial services outsourcing - will involve transferring more than 4,000 IBM staff around the world back to the JPMorgan payroll.

The move is a blow to Sam Palmisano, IBM's chief executive, who has put IT and business process outsourcing at the centre of its growth strategy.

There had been widespread speculation that JPMorgan would reverse the deal following its acquisition of Chicago-based Bank One earlier this year.

Jamie Dimon, the Bank One chief who is now chief operating officer of the combined group, and Austin Adams, his chief information officer, have been high-profile opponents of the trend for banks to outsource technology. In 2002, they ended Bank One's contracts with IBM and AT&T, arguing that technology was so important that the banks should keep full control. On Wednesday Mr Adams told staff JPMorgan's original agreement with IBM was ?the right decision at the right time?. But in the wake of the merger with Bank One which has made a heavy investment in IT over the last few years it made sense to take the operations back in-house.

IBM said the move would boost its earnings per share next year because it was in the early stages of implementing the contract.

Paul Sweeny, head of financial services business at IBM Global Services, said: ?We value our relationship with JPMorgan Chase, which remains a significant IBM client, and will support their decision as we continue delivering technology infrastructure services to the firm.? JPMorgan said the move would have no material financial impact.

Under the seven-year deal, which was announced in December 2002, IBM took over JPMorgan's technology operations in a range of areas including data centres, help desks, distributed computing, data networks and voice networks.

The contract's cancellation is a strategic reversal for IBM as the company tries to persuade customers to outsource not only IT infrastructure but also business processes such as human resources, customer care and back-office finance.

Earlier this year Mr Palmisano identified outsourcing of sales, general and administrative spending as IBM's main growth opportunity. He told analysts in May that business process outsourcing and related services represented an emerging $500bn market, of which IBM aimed to capture 10 per cent.

IBM emphasised on Wednesday that its contract with JPMorgan involved only IT infrastructure.

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