Will More Banks Bet on Insourcing?

The worlds largest banks will be closely monitoring the progress of J.P. Morgan Chase & Co.’s IT operation following the company’s decision to end its $5 billion, seven-year outsourcing arrangement with IBM Corp. (NYSE: IBM). (See JP Morgan Ends IBM Outsourcing Deal and Outsourcing Is Not a Silver Bullet.)

”Certainly, people in the banking industry will be keeping an eye on this,” says Jamie Snowdon, research director at analyst firm IDC. "The banking community is relatively close-knit, and they will be keen to see what happens."

Execs at J.P. Morgan have opted to bring their IT back in-house following the bank’s merger with Bank One earlier this year. This is a bold move, which runs contrary to current trends in the IT industry. Outsourcing has become an increasingly popular option for firms eager to avoid the hassle and expense of running their own data centers, help desks, and networks. But Morgan clearly believes it's now capable of handling its own IT.

However, there is a history of "insourcing" within the organization. Back in 2002, Bank One ended outsourcing contracts with AT&T Corp. (NYSE: T) and IBM Global Services, reportedly shaving $75 million off of its technology budget in the process. If J.P. Morgan can emulate this success, then other financial institutions may even follow their lead.

But Andrew Efstathiou, program manager at The Yankee Group, warns that only the largest banks could even consider the possibility of bringing their IT operations back in-house. “Most are relatively small, so they cannot afford the staff to take it in-house. It would take a hell of a lot of money to pursue this strategy,” he says.Analyst firm Gartner Inc. estimates that the cost of bringing IT back in-house is typically somewhere between 2 and 15 percent of the annual cost of an outsourcing contract. By this equation, J.P. Morgan could find itself spending anywhere between $14 million and $107 million to bring the project back under its own roof.

But this could be money well spent if it helps Morgan gain a technology lead over the competition, which is at the heart of the outsourcing/insourcing dilemma. Some companies fear that their more innovative IT projects could be replicated elsewhere in the industry via the outsourcing partner.

Efstathiou believes that the main area where banks can make a name for themselves is in how they deal with individual customers. As a result, it is customer-facing systems used to support banking products in branches, for example, that could be candidates for in-sourcing. But he warns that, once again, this only applies to certain financial organizations. “Not all banks are retail facing,” he says.

Experts also warn that the outsourcer can provide a valuable window onto the rest of the banking market. ”You could argue that doing it yourself produces a higher competitive edge and retains the intellectual property within your IT department,” says IDC's Snowdon. “But it may not be as easy to benchmark your performance across the rest of the IT industry.”

There are some big banking names involved in major outsourcing deals at the moment. These include Bank of America and Barclays

with Electronic Data Systems Corp. (EDS); Deutsche Bank AG with IBM; and the Bank of Ireland (NYSE: HPQ) with Hewlett-Packard Co. (NYSE: HPQ).— James Rogers, Site Editor, Next-gen Data Center Forum