IBM Edges EDS in JP Morgan IT Deal

IBM has been tapped by JP Morgan Chase to negotiate a multi-year outsourcing contract, an IBM spokesman confirmed. Once the talks conclude, the deal could be worth about $5 billion.

The contract would rank among the largest outsourcing deals for IBM, eclipsing the $4 billion contract with American Express announced in February of this year.

It would also cap a string of recent wins for IBM, which edged out its major outsourcing rival EDS for the JP Morgan contract. Just this week, IBM signed on DBS Bank of Singapore in an outsourcing contract worth about $679 million. That arrangement is expected to help the bank cut about 20 percent out of its IT cost base over the next decade.

An added bonus for JP Morgan’s decision to go with IBM is Big Blue’s number one ranking in the number of technology patents it holds. Of the over 3,000 patents that IBM received in 2001, a record number (more than 1,500) were for infrastructure technologies such as software, servers and storage systems. IBM has also moved aggressively in recent years to exploit those patents commercially.

In addition to IBM’s ability to buy some of JP Morgan’s hardware and run its back office processes more efficiently, JP Morgan could find itself first in line when IBM’s latest research moves from R&D labs into practice. The distinction could be significant for JP Morgan , which, like many banks, is smarting from losses related to the telecommunications fallout and operating in an intensely competitive environment for retaining banking customers.

Like IBM’s outsourcing deals with American Express and DBS, the JP Morgan contract is expected to include the transfer of some JP Morgan IT staff to IBM’s payroll.

The timing of the deal could also have helped IBM win the business over its outsourcing rival. Plano, Texas-based EDS recently announced it would slash costs and lay off up to 5,600 employees, partly as a result of its exposure to WorldCom’s and US Airways’ bankruptcies that ate into its profits in the third quarter. In addition, it had to revise its outlook amid a slowing market for signing new contracts as enterprise customers take more time on IT purchases.

Outsourcing represents one of the few, if any, growth areas for technology vendors in the financial services vertical. Technology research firm Dataquest, a unit of tech research firm Gartner , has estimated that worldwide financial services business process outsourcing (BPO) revenue will grow by 9.3 percent this year to $41.3 billion, helped by a surge in interest from financial services firms.

For financial services firms, the research said, the drive to outsource more processes goes beyond cost-cutting mandates in the wake of a recent recession, accounting scandals and even the impact of Sept. 11 that have hit firms’ profits.

Dataquest noted that Internet platforms for new services and emerging new business models among vendors are also driving the surge in interest.

As a result, financial services that were once considered more sacrosanct in banks’ customer relationship arena, such as cash management, mortgage origination and lending, are increasingly part of outsourcing considerations.

In the case of JP Morgan Chase, IBM would be expected to help provide assistance in mid-range data center functions, such as batch-like credit card processing and “big iron” functions such as end-of-month reconciliations.

Even outsourcing as a term is beginning to represent more than just buying massive data processing capabilities. Increasingly, the term is starting to encompass a range of supply-chain processes such as procurement and order-fulfillment, which IBM CEO Sam Palmisano recently discussed in a speech about e-business and IBM’s computing “on demand” strategy.