Bank ditches $5bn IBM deal and brings IT back in-house

JP Morgan Chase is cancelling a $5bn IT outsourcing deal with IBM and bringing the service back in-house.

IBM will hand over the running of the investment bank's data centres, help desks, distributed computing, data and voice networks from January 2005. Around 4,000 IBM workers and contractors on the contract will also be transferred to JP Morgan Chase.

The bank said IBM will continue to remain a "key technology partner", providing IT services and products to a number of its major business units.

The move to bring its IT back in-house has been the subject of rumours since JP Morgan Chase bought Bank One in the US. Bank One's CEO James Dimon will take over as CEO of the merged business in 2006 and it was widely expected that he would repeat his decision to ditch an IBM outsourcing contract at Bank One.

Austin Adams, CIO at JP Morgan Chase, said in a statement: "We believe managing our own technology infrastructure is best for the long-term growth and success of our company as well as our shareholders. Our new capabilities will give us competitive advantages, accelerate innovation and enable us to become more streamlined and efficient."

In the short-term the cancellation of the deal will benefit IBM's accounts as the IT services outfit was still in the heavy investment stage of the contract. But Anthony Miller, analyst at Ovum Holway, said in a research note that in the long-term IBM will take a big hit on the deal.

"These deals are all about post-investment phase earnings, and that's a big hit. We rarely catch sight of profit margins on individual deals but if you assume an average of, say, a five per cent net margin on the contract, that's $250m of net income IBM is going to miss out on over the life of the deal," he said.

Miller also suggested JP Morgan Chase's decision to bring IT back in-house could have a knock-on effect on outsourcing deals in the financial service sector.

"The cancellation of the JP Morgan Chase deal could stem the tide of future banking megadeals, a sector we had expected to be one of the major drivers for outsourcing in coming years," he said.