Backsourcing – JPMorgan and IBM – Outsourcing
Have a backsourcing plan before outsourcing
When JPMorgan Chase signed a seven year USD 5 billion outsourcing contract with IBM in December 2002, it was touted as the largest outsourcing arrangement ever made. JP Morgan was the second largest financial services company in the US at that time in terms of net assets. The arrangement was to shift a major part of JPMorgan’s IT services infrastructure which included data centers, help desks and data and voice networks to IBM. Part of the arrangement was also to transfer 4000 IT employees to IBM. JPMorgan wanted to utilise IBM’s OnDemand capability.
Preliminary transfer started in April 2003 and was completed in January 2004. It was estimated that the major work on securing data centers, improving hardware and setting up a common networking infrastructure would take minimum two years to complete.
However, by July 2004, JPMorgan merged with consumer banking business leader, Bank One. Total combined assets of the merged entity were valued at USD 1.1 trillion. The deal was aimed at reducing JPMorgan’s dependence on investment banking.
Bank One believed it could manage technology in-house and was well experienced at integrating systems from acquired businesses. As a result, in August 2004, the agreement with IBM was called off citing that it could manage it mission critical technological infrastructure better with its improved capabilities, tools and processes now. A decision to rehire all 4000 employees was also taken. JPMorgan in all likelihood had to pay IBM millions for terminating the deal.
Such bringing of IT functions back in-house after they have been outsourced is known as BackSourcing. The backsourcing decision had negative consequences. There was poor morale and the loss of employee trust. Most experts felt that bringing IT back in-house was a good decision. Nevertheless, it was a costly and complex move. The time spent in first preparing the organisation for the outsourcing and then restructuring again to bring the IT work back in-house was a colossal waste. Most IT related projects and day-to-day activities almost came to a standstill. Lack of IT services was a serious problem. Technology was not updated and new projects were not scheduled. JPMorgan’s management gave the same reasons for the backsourcing decision that they had given when signing the outsourcing deal with IBM. This made some employees confused and resentful. Morale was at an all time low.
If outsourcing is a complex decision to make, most organisations fear taking a backsourcing decision for its disruptions. A recent survey by Deloitte indicates that more than 25 percent of companies are unhappy with their outsourcing decisions and have considered backsouring. Seventy percent of top executives interviewed expressed negative experiences with outsourcing. However, organisations should plan and assess how they will be able to take back their IT operations or other outsourced services beforehand. Even before outsourcing them in the first place. JPMorgan’s saga with IBM is an example for any organisation contemplating an outsourcing deal. The following set of best practices will make the outsourcing or backsourcing journey much easier.
Best Practices to BackSourcing
When the backsourcing course of action is decided upon, the outsourcer should be alerted beforehand. This helps promote a cooperative atmosphere as well as conform to any contractual commitments as well.
Documenting operational audits and requirements analysis helps avoid any failure to meet the expectations and results in the best outsourcing scenario.
Plan and Schedule
A sound backsourcing plan and schedule should:
• Incorporate clauses to make sure that all assets are returned properly
• Ensure support to the company staff for a specific time period until the company can reassume full operational control to its satisfaction.
Quick Reassignment of employees
Promptly decide upon employee reassignment and responsibilities. This minimises uncertainty and associated productivity and motivation concerns.
Security Policy and Procedures
To protect key information relevant security procedures need to be established. For example, password protection and new software installation procedures can be documented. Any annoyed former employee should not be able to access crucial data or cause system shutdown.
The course of action for any unforeseen occurrences during the switch should be planned for and be included as part of the backsourcing plan.
Ask the following questions before making the decision.
• What particular state of affairs or likely events will be responsible for ending a relationship?
• What are the penalties for termination? Which parties will incur them?
• How will the companies manage the backsourced operations?
Some outsourcers charge customers for services previously not defined in the contract. The contract between JPMorgan and IBM also was ambiguous. IBM could charge for something that was not previously being done within the bank before the deal began. If the customer is unwilling to pay, such extra but often essential improvements can have an adverse impact on IT. Such outsourcing deals can be bad in terms of IT innovation and efficiency. Such considerations must be accounted for.
JPMorgan’s and IBM’s experience stands out as an example to any organisation contemplating an outsourcing or backsourcing possibilities. Even with JPMorgan’s earlier claim on the value of backsourcing, the bank does more offshore outsourcing in India. I hope that it has planned better this time and will in future.