The landmark $4 billion, seven-year outsourcing deal in which International Business Machines Corp. agreed to handle most of American Express Co.'s technology operations is a huge boost for a practice that recently has fallen out of favor: the comprehensive outsourcing of information technology by a major financial services company.
IBM said that the American Express deal, announced Monday and slated to begin Friday, sets a price record for an outsourcing deal involving a financial services company. Larger deals have been signed in other industries, such as the $15 billion, 10-year deal that IBM signed in 2000 with Japan's Nippon Telegraph and Telephone.
Paul Sweeny, IBM's general manager for the financial services sector, called the Amex deal "the largest deal ever done in the financial space" and said it could be "the catalyst to allow other financial institutions to look at this very seriously."
Describing how the deal came about, Mr. Sweeny said: "We were invited in to talk with them, worked our way through a competitive process which took about a year, and then they made their decision based on a number of factors - price, flexibility, and capability."
More than 40% of IBM's revenues come from its IBM Global Services division, which also has technology outsourcing deals with Bank of Nova Scotia, Royal Bank of Canada, Washington Mutual Inc., and Royal Bank of Scotland.
IBM has "more activity in the financial services sector than ever before," because of the increased pressure on these companies to trim costs and gird against the possibility of future terrorist attacks, Mr. Sweeny said. Its 200 data centers around the world make backup and recovery much more manageable, he said.
Mr. Sweeny will oversee the American Express deal along with one of his direct subordinates, senior project executive Frank Broderick. Steve Karl, the senior vice president of technology operations, will also be a point person.
The deal - which will transfer about 2,000 American Express technology employees to IBM, and, Amex hopes, shave hundreds of millions in technology expenses - is "a very attractive business model, and I wouldn't be surprised if others copy it," said Glen Salow, Amex's executive vice president and chief information officer. Fewer than 20 American Express employees will be laid off, he said.
About a year ago - before the various financial problems that beset it last year - American Express sat down and looked at its technology operations and decided it needed more flexibility, Mr. Salow said. "We wanted to ensure that as the company grew, that our technology operations would not be on the critical path preventing growth."
The company compared itself with the rest of market, and even though it compared favorably with other financial institutions, "we reached the hypothesis that someone might be able to do this faster then us, at a lower cost and at higher quality, because that's what they do as a company," Mr. Salow said. "Then we spent a year testing that hypothesis culminating with this decision."
Other major outsourcing deals between financial services companies and technology giants have had smaller price tags, in part because they have been set up for shorter terms. American Express and IBM called their deal "worth more than $4 billion over a seven-year term, with options to extend."
The largest deals on record include the 1997 agreement, worth $3.8 billion over 10 years, for Electronic Data Systems Corp. to run information technology for Commonwealth Bank of Australia. That same year United Bank of Switzerland signed a 10-year, $2.5 billion deal with Perot Systems Corp.
In the United States, the last major deal was the $1.8 billion, six-year arrangement signed in 1999 by Bank One Corp., AT&T, and IBM. A previous landmark deal was reached in 1996, when J.P. Morgan & Co. (which was later bought by Chase Manhattan Corp.) signed a seven-year, $2.1 billion arrangement with the Pinnacle Alliance, a group of four companies that included AT&T Solutions, Bell Atlantic Network Integration, Computer Sciences Corp., and Andersen Consulting.
M. Arthur Gillis, a technology consultant who specializes in outsourcing arrangements, said that only 15 of the top 100 U.S. banking companies outsource technology operations, because it is considered a core competency.
Mr. Gillis, the president of the Dallas-based Computer Based Solutions Inc., said that in recent years, a bank saying it could not handle its technology "would be like saying 'We don't know how to issue credit cards. We don't how to make loans.' So naturally there's a lot of psychology in the matter."
However, "most institutions outsource not to save money but to get the job done better, quicker, sooner," he said.
Mr. Salow said Amex's goal was to "improve the flexibility of our business models so that we can thrive in a variety of economies." The implementation of that strategy will include expanding the credit card portion of its card business, which has been heavily weighted toward charge cards, he said.
IBM will run American Express's information technology infrastructure, data center, and computer servers. Amex will retain responsibility for its technology strategy. "This deal is about running [the system] on a day-to-day basis," Mr. Salow said.
The deal will operate on as-needed basis, like a utility company, he said - when American Express needs more capacity, IBM will expand to meet the need, and Amex will pay only for what it uses.
