Deutsche Bank AG said Tuesday that its decision to hand over its computer centers in continental Europe to International Business Machines Corp. was designed to cut costs and was in keeping with its recent effort to shed businesses it does not consider core.
The Deutsche/IBM deal, which the banking company said it seeks to close by yearend and put into effect early next year, would last 10 years and carry a price tag of $2.5 billion to $3 billion, making it IBM's second-largest deal in the financial services sector.
The largest was a $4 billion, seven-year deal signed in February with American Express Co., a landmark pact that IBM says may have persuaded other financial services companies to look favorably at outsourcing.
There are signals that other big deals are on the way.
J.P. Morgan Chase & Co. is choosing between IBM and its top rival, Electronic Data Systems Corp., to provide a long menu of services, and Deutsche also said Tuesday that it is considering whether to outsource its global network operations.
Industry sources say the German banking company has put out for bid major contracts for network operations in the United States and Asia/Pacific; a Deutsche spokesman said the decision was up in the air.
In April, Deutsche signed an eight-year, $100 million contract with EDS to handle cash management technology in North America. IBM has won sizable deals this year from Nationwide Insurance, Manulife Financial, and other companies.
"We're seeing a huge upswing in interest in outsourcing in the financial services space," Paul T. Sweeny, the global general manger of IBM Global Services, said in a telephone interview. "Banks, financial markets companies, investment banks, and insurance companies - we've seen more activity in this sector than we've seen in the last 10 or 12 years."
He attributed the trend to heightened post-Sept. 11 security concerns and to "the general markets condition," which has prompted companies to cut costs and shed noncore businesses.
Klaus Thoma, a spokesman for Deutsche Bank in Frankfurt, said it is looking to save money through its deal with IBM, which was selected for its specific expertise. Deutsche expects the arrangement to save it more than $100 million a year, he said.
The deal will involve "not only the machinery but also about 900 people" who work in Deutsche's European computer centers and who will not be uprooted, he said.
"Within banks, the technology is often very fragmented, having been built up in the past with many different platforms," Mr. Thoma said. "The idea was to get more standardization with an IT specialist."
IBM will set up a European computer center in the Rhine-Main region and will offer the facility's services to other companies in order to increase efficiencies, IBM and Deutsche Bank said.
From a risk-management perspective, "outsourcing allows [IBM's clients] to diversify away from their own infrastructure and to a shared infrastructure," Mr. Sweeny said. "That reduces the risk, reduces the cost."
Many financial services companies overbuilt their technology systems in the dot-com era and now find themselves with unused capacity that is expensive to maintain, Mr. Sweeny said. IBM recently began emphasizing a pay-as-you-go "utility model" that is particularly appealing to companies, given the current paradigm of cost sensitivity, he said.
"We can share workload across many customers and many industries and sectors, so we can translate that into a lower unit cost," Mr. Sweeny said.
With the exception of a few U.S. financial institutions - most notably Bank One Corp. and Washington Mutual Inc. - there has been a significant trend toward outsourcing. Even companies that favor handling technology in-house rely on vendors to some extent. "They're selecting outsourcing services that they can buy cheaper and at higher quality than they can do it themselves," Mr. Sweeny said, citing Web hosting as an example.
Pamela Brewster, a senior analyst at the Boston-based technology consulting and research firm Celent Communications, said the Deutsche/IBM deal made sense in light of the banking company's streamlining and restructuring efforts. Last week Deutsche confirmed that it was selling its global securities services business, and that State Street Corp. was the leading bidder.
"I think we're probably going to see a trend of more very large financial institutions outsourcing some of their basic technology, hardware management in particular," Ms. Brewster said.
Just as in the investment management industry, "the banks are beginning to realize that their core competencies aren't necessarily in building all the systems in-house," she said. "There's nothing strategic about those basic functions. I think you're going to see those more commoditized technologies outsourced."
On Monday, Cap Gemini Ernst & Young LLC and IDC Corp. released a survey of senior IT executives at 65 companies from various industries; it concluded that "the volatile business environment is driving companies to evaluate outsourcing as a strategy for transforming their business to adapt to the new market reality."
