JP Morgan, IBM Finalize $5 Billion IT Deal

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JP Morgan Chase has finalized its largest-ever contract, a seven-year outsourcing agreement with IBM worth in excess of $5 billion, the commercial/investment bank announced Monday.

The deal also ranks as IBM’s largest outsourcing agreement, eclipsing its seven-year, $4 billion outsourcing arrangement with American Express.

Perhaps more important for IBM, the contract with JP Morgan Chase is among its first major outsourcing contracts that deploy new “on-demand” services, part of IBM’s much-ballyhooed strategy of providing “pay as you go” computing services and IT infrastructure to corporate customers.

Although Deutsche Bank just announced it would deploy some on-demand services as part of a 10-year, $2.5 billion outsourcing contract it awarded to IBM, the on-demand services expected in the JP Morgan contract loom larger.

IBM plans to take on a significant portion of the bank’s data processing infrastructure, including hosting data centers, help desks, distributing applications, and maintaining data and voice networks. It is also expected to help power and host mission-critical functions such as trading applications for the securities side of the banking giant’s operations.

From that perspective, the deal could end up becoming a benchmark that helps define a coming era of Web Services. For example, the contract calls for IBM’s global services division and JPMorgan Chase to create a “virtual pool” of computing resources that will be accessed and deployed as needed — or on-demand.

IBM Research calls the underlying technology Utility Management Infrastructure (U.M.I.). It is based on open architecture standards that underpin the process of knitting together disparate back-end systems such as different servers and storage devices. The idea is to avoid having to write new applications for each separate system. Such services represent how IBM has made on-demand computing services a cornerstone of its overall business strategy. The company’s Chief Executive Sam Palmisano has also said IBM would invest $10 billion over the next decade as part of its commitment to offering computing and services on-demand, which includes major support of the Linux open source operating system.

“I think this [deal] is going to be their poster child for ‘on-demand’,” said
Ronald Schmelzer, a senior analyst with ZapThink, a tech research firm which specializes in XML and Web Services computing protocols.

“On the positive side, it reflects the movement toward utility computing, even IT infrastructure as services, which started out as part of the ASP trend” in the mid to late-1990s, he said.

However, he added, as the tech giant sells more of these kinds of contracts, and ends up running critical infrastructure for more major companies, “is IBM really going to be able to scale up ‘on-demand’ infrastructure, beyond simply bearing everybody’s else’s [IT] costs?”

IBM, for its part, has been bullish about its ability to not only balance customers’ demand for computing power, but to help them make internal IT costs more flexible. When Palmisano discussed the company’s on-demand strategy in October, he referred to the trend as a key factor in helping enterprise customers shift their fixed IT investment costs over to the variable cost side of the ledger.

On Monday, JP Morgan said it expected to do just that by scaling its computing needs in line with internal and external demand.

As is customary in outsourcing agreements, the contract includes the transfer of about 4,000 JP Morgan Chase employees to IBM’s rolls during the first half of 2003. Application delivery and development, desktop support and other core competencies will for the most part stay in-house at JP Morgan Chase, the bank said.

Word of the outsourcing negotiations between IBM and JP Morgan Chase slipped out in November when IBM confirmed it was in talks on the contract. The news was a blow to outsourcing rival EDS , which had been in the running for the business.

But EDS has recently roared back to grab its share of the outsourcing trend among major financial services companies. In February of 2003, for example, EDS is to start work on a $4.5 billion, multi-year outsourcing contract with Bank of America. The deal includes managing Bank of America’s carrier services, establishing a “one-stop-shop” for voice and data, redesigning its optical network and providing help desk support.