J.P. Morgan Chase & Co. has changed both the leadership and the focus of its LabMorgan unit, turning it from a venture capital arm that incubates technology firms to a support group meant to help the company's business units create efficiencies and improve service.
As part of the move, Denis J. O'Leary has stepped aside as the head of LabMorgan and has begun working instead with David Coulter, the banking company's retail chief, on projects involving consumer payments.
Martha Gallo, a managing director who has overseen Morgan Chase's quality improvement efforts under the Six Sigma program, has been named the new leader of LabMorgan.
Some observers said the overhaul, described at an internal "town hall" meeting Tuesday afternoon but not announced publicly, sounded like a death knell for LabMorgan, which was hailed as a creative experiment when it was introduced but has suffered from the demise of dot-com companies and technology ventures.
But Morgan Chase said the moves were simply helping the company pare costs.
In a telephone interview late Tuesday, Mr. O'Leary called the refocusing of LabMorgan a "logical progression" consistent with the downturn in the economy. "At this time, it's very hard for any firm to protect itself" from the harsh economic environment, he said. "We're taking a close look at our expenses and risk intensity and taking a more conservative approach to new investments."
At the Tuesday meeting, LabMorgan executives also said they would lay off some of the unit's 200-person staff. Mr. O'Leary would not say how many people would be let go, but Michael P. Mazza, a LabMorgan vice president who spoke at an industry conference in New York on Tuesday afternoon, said he expected the company to lay off a bit more than 15% of the unit's work force.
When Chase Manhattan Corp. bought J.P. Morgan & Co., about 15% of the jobs at other units were cut, he said. Since LabMorgan was spared from that round, its percentage cut could be slightly higher, he said.
The leadership change at LabMorgan is the second major shift of top management there in as many months. Nicholas Rohatyn, a J.P. Morgan veteran who was Mr. O'Leary's co-head, resigned early last month. Ms. Gallo, who joined J.P. Morgan in 1981 and held a number of positions there in technology and operations, was picked in January to head productivity and quality for Morgan Chase.
LabMorgan has about 60 companies in its investment portfolio, including Yodlee Inc., 724 Solutions Inc., and PayPal Inc. It intends to continue to seek a return from these investments, but it is handing over more of the "investment process" to J.P. Morgan Partners, the parent company's venture capital arm, Mr. O'Leary said.
"We're decreasing our expenses, increasing our focus on our existing portfolio, and revving up our focus on reengineering," he said.
As LabMorgan shifts from incubating technology to transforming the internal businesses of its parent company, it will become the gateway for managing the Six Sigma program, which initially was adopted by J.P. Morgan and then extended to the rest of the company after the Chase purchase.
Under the Six Sigma program, companies use engineering and statistical models to improve their operations and reduce waste. It gained momentum in business circles after General Electric Co. used it with much success.
On Wednesday, J.P. Morgan Chase said it had hired Jack Welch, former chief executive of General Electric, to lend advice on cultural and leadership development in the wake of last year's merger. Mr Welch, who stepped down from GE in September, will work mainly with William Harrison, president and chief executive officer, and will help the bank launch a "management development institute" for its employees.
LabMorgan's new focus means it will face less pressure to generate returns from its technology investments, formerly the source of much of its revenue. The unit also earns revenue from some fee-based businesses, licenses for intellectual capital, and credits it earns from other lines of business for helping them to avoid costs, Mr. Mazza said.
Mr. O'Leary said that LabMorgan never had a mandate to show an immediate profit. "The goal is to create shareholder value."
The creation of DealerTrack, an online auto-lending joint venture, was an example of the consummate LabMorgan deal, partly because it conforms to the principles of Six Sigma, he said. Morgan Chase partnered with Wells Fargo & Co. and AmeriCredit Corp. in the venture, which is meant to improve the methods by which auto dealers submit loans for approval, and decreased the time involved from hours or days, to minutes.
DealerTrack now has 10,000 dealer customers, Mr. O'Leary said, and it was responsible for helping Morgan Chase build its revenues this year from auto finance, a business from which other banking companies have fled.
The new LabMorgan will continue to focus on creating similar types of consortia with other financial institutions, Mr. O'Leary said. In this respect, the unit is following the playbook of Chase.com, the old Chase technology incubation unit that helped bring together a number of consortia, including Spectrum LLC for electronic bill payment and presentment and Identrus LLC for digital certificate services.
"The consortia model is the future," Mr. O'Leary said. "The dot-com, venture capital model is hard to sustain."
Some observers say they wonder whether LabMorgan itself will survive, given that history has not been kind to banking company units that exist outside their parents' main money-making businesses. For example, last year Citigroup Inc. pulled the plug on e-citi, a unit that also was devoted to fostering new technologies.
Bill Bradway, the president and a co-founder of Meridien Research Inc., said it was "too soon to say" whether the retrenching of LabMorgan was the first step toward its dissolution.
But Harry Milling, a financial services analyst at the Chicago investment research firm Morningstar Inc., called LabMorgan a "dying patient."
LabMorgan's venture capital investment function "was a total creation of the Internet craze of the late 1990s," and it makes little sense for Morgan Chase, which also has the private equity unit J.P. Morgan Partners, to continue to support LabMorgan, he said.
Further, he predicted that LabMorgan would be an ineffective catalyst for promoting efficiencies throughout the company. "It makes more sense managerially for each department to look at themselves. It's wrong to do it on a macro level."
Michael Mayo, an analyst at Prudential Securities, said LabMorgan's restructuring was in line with Morgan Chase's switch toward more expense control. "If it does a good job, why not keep it around? It's proving its worth every day."
In a tacit acknowledgement that technology-development units like LabMorgan risk being irrelevant to the rest of the company, Morgan Chase's management has worked carefully to ensure a close relationship between the unit and its other business lines.
A team of "e-strategists," who are based at the unit's lab, report to both the head of LabMorgan and to the head of a particular business line, Mr. Mazza said. These people make the call about what projects and deals to pursue, he said.
For LabMorgan, the upshot of this structure is that "we are not an island" he said. "We recognize that we need a high degree of participation from the underlying lines of business."
