It's far too soon to tell whether the combined Bank One Corp. and J.P. Morgan Chase & Co. will emphasize in-house IT services and transaction processing - which Bank One prefers - or their outsourced equivalents, which are more common at J.P. Morgan Chase.
Indeed, the two depict those decisions as second-tier ones that won't be grappled with for some time.
Either way, the merger of the giant banking companies will probably mean a smaller IT pie all around, with some winners and losers in the vendor community to emerge over time. Among the biggest question marks are whether J.P. Morgan Chase's landmark outsourcing contract with International Business Machines Corp. will survive, and whether Bank One will go forward with its plan to move its credit card processing from First Data Corp. to TSYS Inc., with an eye toward shifting it in-house eventually. J.P. Morgan Chase uses First Data, of Denver, for cards processing.
In any event, the merged organization should have plenty of opportunities to cut costs. TowerGroup estimates that J.P. Morgan Chase spends $4.4 billion a year on technology, while Bank One spends about $1.9 billion. Together that comes to about $1.1 billion more than the $5.2 billion Citigroup Inc. spends annually.
To meet and exceed the standard set by Citi, the new company ought to rid itself of $1.2 billion to $1.3 billion in technology costs, a figure that represents 30% to 40% of the pending merger's projected savings, said Guillermo Kopp, a research director at TowerGroup, a Needham, Mass., consulting firm that specializes in financial services technology.
At both companies there is precedent for dissolving outsource contracts after an acquisition. After Chase Manhattan Bank bought J.P. Morgan, the combined entity unwound the Pinnacle Alliance, a seven-year, $2 billion outsourcing agreement that J.P. Morgan signed in 1996 with Computer Sciences Corp., AT&T Corp., Bell Atlantic (now Verizon Communications Inc.), and Andersen Consulting (now Accenture).
At Bank One, one of chairman and CEO James Dimon's early actions after taking over in 2000 was to dissolve a nearly $2 billion outsourcing agreement with IBM Global Services and AT&T Solutions Inc. Then, last March, the Chicago banking company moved to sever a card outsourcing agreement with First Data. Through it all, hundreds of in-house technology workers were hired and Mr. Dimon publicly denounced outsourcing from time to time.
Now he is set to take over in two years an institution bound to a $5 billion, seven-year contract with IBM. J.P. Morgan Chase signed the agreement, one of the industry's largest, just over a year ago. Whether Mr. Dimon's philosophical opposition to outsourcing will bend once he sees the contract at work is a big question. Observers are divided on whether they think the arrangement will last, but most agree that IBM will be under more scrutiny than before as Mr. Dimon prepares to take the helm.
"A lot will depend on how IBM performs over the next couple of years," said Virginia Garcia, a senior analyst at TowerGroup. She characterized the merging companies' positions on outsourcing as a potential "clash of the titans." But if words and deeds separate them now, positive results on the outsourcing front would probably unite them in the end. "I don't believe Bank One will disregard the very real efficiencies J.P. Morgan Chase is putting in place for purely philosophical reasons," Ms. Garcia said.
Then again, money may not be the only consideration. M. Arthur Gillis, the president of Computer Based Solutions Inc., an outsourcing consultancy in Dallas, called Mr. Dimon "almost an evangelist" about in-house processing, and suggested that his reputation might be at stake if he gave ground.
Echoing sentiments that Mr. Dimon has expressed consistently, Mr. Gillis said, "Given the right talent and dedicated resources, a bank can do a better job than a contractor." An outsourcer "always has one foot in the next arena."
Such decisions, however, tend to be "situational," said Peter Bendor-Samuel, the chief executive officer of Everest Group in Dallas, a consultant to buyers of outsourcing services. J.P. Morgan Chase has "a long history of being sophisticated in how it structures contracts and manages them," he said. Mr. Dimon's philosophy may well have an impact, but probably not for three to four years. By that time a lot could change, Mr. Bendor-Samuel said. In the meantime IBM will want to execute "superbly" and build relationships with the combined organization.
Some observers said there would probably be considerable change to the current contract between IBM and J.P. Morgan Chase. "Will IBM lose?" asked Jim Beams, a research director at Financial Insights, a Framingham, Mass., division of International Data Corp. "No. Will the relationship change? Yes. The new organization will redefine it."
Mr. Kopp of TowerGroup said IBM might lose some of its outsourcing work but get equivalent work or more with the integration.
The merger partners are mum on the topic. A Bank One spokesman said the outsourcing issue is on a long list of things that need to be looked into. IBM and J.P. Morgan Chase did not respond to requests for comment. In an interview after the merger deal was announced, William B. Harrison Jr., J.P. Morgan Chase's CEO, said that in time the technology issues would be smoothed out.
Mr. Harrison defended the use of technology vendors. "There are a lot of components of an IT infrastructure that lend themselves to outsourcing," he told American Banker. "We'll work it out."
At the blended company, technology will be overseen by Donald H. Layton, the former head of markets in J.P. Morgan Chase's investment bank, who had most recently been running its consumer operations. Austin Adams, Mr. Dimon's right-hand technology chief at Bank One, and John Schmidlin, the tech chief from J.P. Morgan, will report to Mr. Layton.
In a merger, speed is of the essence, and for that reason the question of whether to outsource may not be the main one. "The issue really is how to execute causing the least disruption to the least amount of customers," said Susan Landry, a vice president and research director at Gartner Inc. in Stamford, Conn.
Perhaps a more compelling question is which card processor the new company will choose. J.P. Morgan Chase runs its processing on First Data. Bank One severed its relationship with First Data last year, bringing in TSYS, of Columbus, Ga., to help make the transition to in-house processing.
In data processing, "IBM will be in the new organization," Mr. Beams said. But in card processing, either First Data or TSYS will be chosen. "It's a clear case of win-lose."
