Westpac CEO hints at non-renewal of IBM outsourcing contract

Gail Kelly says the sourcing model has changed and organisations must now make sure they have the right partner for each element of IT

Westpac CEO Gail Kelly has suggested the bank is likely to choose not to renew its decade long outsourcing relationship with IBM, due to expire next year, in line with a trend to move away from decade long all-of-IT approaches to sourcing.

Speaking at a media conference following the announcement of the bank’s full year financial results, Kelly said that mainstream opinion on IT outsourcing models was swinging back from decade-long mega-deals toward a best-of-breed approach.

“Ten years ago there were a number of large institutions that went for the all in outsourcing arrangement, but I think that the models have changed,” she said. “I think one is much more likely to look at the different elements and make sure you have the right partner for all the elements – your desktop may be a different solution to your main frame for example.

“But, we have a good relationship with IBM and [CIO] Bob McKinnon and his team have been working extensively on that relationship with IBM and its been very healthy over the course of this year so I feel comfortable with that.”

Kelly also suggested that the bank would increasingly look to offshoring to meet its IT skills and services needs as the bank works through its St George integration and IT transformation.

“With the very significant program of work we’ve got on our agenda of the next few years with regards to technology we could not possibly actually source all the skills we need right here so it makes sense for us to leverage skills as they exist elsewhere – perhaps with IBM themselves and maybe with developers elsewhere…”

The speculation over whether the bank will renew its relationship with IBM goes back years, with the architect of the deal - then CIO Mary Ann Maxwel debating in 2007 whether the contract would be re-signed.

At the time, Maxwell said it was not surprising that the big banks were increasingly comfortable with managing more sophisticated outsourcing and multi-sourcing relationships.

Kelly's comments follow the announcement of the bank’s full year financial results to 30 September 2009 which saw the bank report a statutory net profit of $3,446m, down 11 per cent on the previous financial year; it also reported an economic profit of $2,094m, down 25 per cent.

Speaking at the presentation of the results, Westpac CFO Phil Coffey said the year had seen significant investment in the reliability, capacity and service of the bank’s IT including rolling out 12,000 PCs and upgrading its network to Telstra’s NextG network.

The bank also reported that its integration with St George was progressing with $392m being spent up to 30 September 2009 out of an overall integration budget of $700m.

Of the $392m total, $146m had been spent on IT, systems and operation, $103 million on restructuring and outsourcing, and $74 million on program governance and strategy development. A further $54m had been spent on transaction costs and stamp duty, and $15m on revenue and retention investment.

The bank also reported that expense synergies for the year to September 30 had reached $143m – 19 per cent ahead of initial estimates.

This had been achieved through the reduction of 1,275 permanent and contractor roles, saving $99m. Through rationalizing sourcing arrangements and areas of duplication the bank had further $44.

In June the bank said it was pushing ahead with core changes to its mammoth transformation project set to slash reporting times and balance financial control following its merger with St George.

In May the bank said it would derive much of its future IT innovation and costs savings from a cross pollination of IT systems between itself and St George, which was acquired by the bank last year.

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