Banks pick up pace of IT outsourcing

A combination of intense competition, the sluggish economy and the lure of pay-as-you-go IT services is prompting a growing number of banks and brokerages to outsource back-office systems and business processes.

Several high-profile financial services firms have signed outsourcing deals since early last month, handing off control of data and systems in order to save money and focus on core business operations.

For example, J.P. Morgan Chase & Co. this week announced a seven-year, US$5 billion agreement under which IBM will take over its data processing infrastructure.

The contract, which had been in final negotiations since mid-November, includes a planned transfer of about 4,000 J.P. Morgan IT workers and contractors to IBM during the first half of the year.

The deal also provides for New York-based J.P. Morgan to buy computing resources and other IT services from IBM under a utility model, meaning the bank will pay only for what it uses.

That was a key factor in the bank's decision to outsource, said Michael Sztejnberg, managing director of the Enterprise Technology Services Group at J.P. Morgan Chase.

In the current economic climate, "it is more attractive for us to be on a more variable, pay-as-you-use structure instead of investing a significant amount of capital in bricks and mortar and hardware and software," Sztejnberg added.

J.P. Morgan's outsourcing move came just two weeks after IBM announced a similar on-demand computing deal with Frankfurt-based Deutsche Bank AG. That agreement is valued at $2.5 billion over 10 years and includes the consolidation of data centers and smaller server sites across Europe to a new IBM facility in Frankfurt.

Also last month, Electronic Data Systems Corp. said it had signed a 10-year, $4.5 billion contract to manage Charlotte, N.C.-based Bank of America Corp.'s domestic voice and data networks.

In addition, Plano, Texas-based EDS inked a five-year outsourcing deal valued at $1.3 billion with Amsterdam-based ABN AMRO Bank NV's wholesale banking unit.

The recent agreements are indicative of a larger trend in which more than a dozen financial services firms have turned to outsourcing vendors during the past 12 months.

Twenty-one of 39 Fortune 500 banks, brokerages and insurance companies that were surveyed by Gartner Inc. in November said their top reason for outsourcing IT was to focus on core businesses. Other factors that were cited included increasing shareholder value, improving corporate efficiency and reducing operational risk management.

Many banks have been reluctant to outsource control of their data, said Gartner analyst Avivah Litan. "Now all of a sudden, they're doing it," she said, noting that outsourcing can provide a fast boost to corporate balance sheets.

But maintaining the security of sensitive financial data in outsourced IT environments "is a concern," Litan added. She said that she expects some banks to eventually "bring that data back in-house."

Klaus Thoma, a spokesman for Deutsche Bank, said the outsourcing deal it signed with IBM is expected to save the bank $1 billion over the next decade. Deutsche Bank is transferring 900 of its IT employees to IBM this quarter as part of the agreement.

Key to the deal was IBM's ability to update Deutsche Bank to state-of-the-art technology while offering it a utility model for purchasing IT resources, Thoma said. "This is being driven by our strategy to get rid of fixed costs [and] areas that we feel are not our core competencies," he said.

Deutsche Bank felt comfortable outsourcing its data processing operations because IBM and other IT services vendors have proven that they can provide sufficient uptime and security, said Thoma.