J.P. Morgan & Co.'s recent $2 billion outsourcing pact is evidence that banks are managing their technology service contracts more closely than ever before, industry observers said.
The deal, struck May 13, created a four-company consortium called the Pinnacle Alliance that would provide Morgan with a wide range of technology services. The members of the consortium are Andersen Consulting, AT&T Solutions, Bell Atlantic Network Integration, and Computer Sciences Corp.
Morgan officials said the bank will supervise the companies and, in many cases, have them work together on projects.
Cooperation among the technology vendors on a single contract is, of itself, worthy of note. However, only a handful of banks could create contracts valuable enough that vendors such as those in Pinnacle would agree to break them into pieces.
Of more universal interest is how the Morgan deal fits into a trend in which banks manage, rather than passively observe, third-party service arrangements.
"I see it as a maturation of the outsourcing industry," says Barry Wiegler, managing director of the Sourcing Interests Group based in Bell Canyon, Calif.
"There is a movement toward greater trust and collaboration" between vendors and banks.
In the early 1990s, many saw outsourcing deals as an admission of failure: the only reason to farm out operations was because a bank was incapable of handling them itself.
That view has changed, largely because outsourcing deals - Morgan's included - are much more hands-on than ever before.
Morgan's pact involves direct communication between bank officials and all four contractors. "The direct interface with each company will allow Morgan to be more effective in communicating its business strategy," said Lawrence A. Willis, managing vice president at First Manhattan Consulting Group in New York.
The participants in the Pinnacle Alliance will run the bank's data center and computer operations, develop software applications, manage global computer networks, and support desktop computer systems.
The alliance's four firms won the bidding over some established bank technology vendors, including Electronic Data Systems Corp. and Integrated Systems Solutions Corp., because of their willingness to work together on projects.
Offering an example of the type of cooperation expected, Morgan officials noted a desktop project in which Andersen would handle market data feeds, Bell Atlantic would manage the hardware and network technology, and Computer Sciences would contribute some spot work.
Consultants agree that Electronic Data Systems and Integrated Systems Solutions may have lost the bidding because their business culture did not mesh with Morgan's desire for cooperation among vendors.
"It wasn't the specs or the technical details, it was whether these guys could get along," says M. Arthur Gillis, an independent consultant in New Orleans.
Of the Pinnacle companies, Andersen has the most experience in banking, observers said, but the others are eager to expand their work in the industry.
For instance, Computer Sciences, which specializes in data center management for the defense industry, is making a concerted effort to get into banking, as shown by its recent acquisition of Continuum Corp.
The two telecommunications firms have each secured contracts with major banks, including NationsBank Corp. and First Union Corp. of Charlotte, N.C.
The use of these vendors points to a greater emphasis on specialized technical competencies that are demanded by PC technology.
Mr. Willis noted that banks spend billions on technology each year, "so, if you're in that business, it makes sense to go after banks," he said.
If they haven't already, technology firms will be looking to get into the bank market, "because that's where the money is," he said.
