Backsourcing Pain

When an individual from the United States nowadays calls the customer support center of a business organization, chances are the customer support representative is one who resides another country. Globalization has opened opportunities for businesses to outsource their IT and customer relations department to other countries, usually in Asia. Although offshore outsourcing is a relatively recent trend, companies outsourcing their IT needs to other countries in the United States have been going on for a very long time. Such was the case of JP Morgan Chase.

This paper would provide a brief summary on the outsourcing venture with IBM in 2002 as well as the reasons for the premature termination of the venture between the two companies and whether the company’s decision was in full diligence in terms of the agreement between the two companies. It would also discuss the pros and cons of bringing back IT functions of JP Morgan Chase which were outsourced to IBM. Definition of Backsourcing In order to full comprehend the decision of JP Morgan to backsource their IT functions, the definition and process of backsourcing should be first discussed.

Companies have begun to look into outsourcing their Customer Relations and IT functions to other companies in order to acquire high quality services while cutting back expenses that the company would have to deal with if these were done in-house. However, once these operations are outsourced, it becomes more difficult to monitor the quality of service being provided. Because of this, many companies have decided to bring back these operations in-house through a process they have called “backsourcing” (Overby, 2005b; Tadelis, 2007).
While this process may be the ideal choice for many companies who are unsatisfied with the services provided by the outsourcing company, many companies would rather choose to work thing out with the outsourcing companies as opposed to backsourcing the operations that have been originally outsourced because of the expenses that concur along with backsourcing so much so that out of the 70% of executives that have stated their disappointment in the quality of service being provided by outsourcing companies, only 25% of them have decided to backsource the operations that have been originally outsourced to other companies.
These expenses include the reestablishment of all of its own systems, employees and operating procedures in order to realign these with the corporate structure and strategies of the company (Overby, 2005a). Backsourcing Endeavor of JP Morgan Chase Stephanie Overby’s (2005a) article “Outsourcing – and Backsourcing – at JP Morgan Chase” provides a look into the events surrounding the decision of the senior executives of JP Morgan Chase to outsource and ultimately backsource their IT functions to IBM.
Since 2001, news started to circulate among the employees of JP Morgan Chase that the company was looking into outsourcing most of its IT functions to IBM. The venture was announced through a press release on December 20, 2002. The venture was to last seven years and had cost JP Morgan Chase $5 billion. In the contract between the two companies, IBM was to handle the data centers, helpdesks, distributed computing and data and voice networks of JP Morgan Chase. Thomas B.
Ketchum stated in the press release that the venture would create an environment that will promote efficient growth of the company, acceleration of the innovation of the technology used of JP Morgan Chase, increase the service quality provided to the shareholders and customers of JP Morgan Chase and provide career opportunities for the employees of the IT department of JP Morgan Chase while reducing the expenses that the company would otherwise have to face (Overby, 2005a). Unfortunately, this was not the case.
Many employees of JP Morgan Chase have stated that once the venture was underway, they had to first be re-interviewed by the executives of IBM for the same position that they were employed in prior to the outsourcing of the IT functions to IBM by JP Morgan Chase. Many of the employees have been laid off as a result. Those who were retained experienced salary cuts of as much as 20% (Overby, 2005a). On September 15, 2004, JP Morgan Chase had announced through a press release that they were prematurely ending their outsourcing venture with IBM.
Austin Adams, CIO of JP Morgan Chase, stated in the press release that the decision was reached after the senior executives of the company believed that managing their own IT functions was the best options for the company in order to attain its long term goals since it would provide competitive advantages and more efficiency in the level of service being provided. Another reason for the decision was the completion of the merger between JP Morgan Chase and Bank One which was finalized on July 1, 2004.
Because Bank One had previous experiences in backsourcing their own IT functions, the merger between Bank One and JP Morgan Chase would ensure a smoother backsourcing transition (Overby, 2005a). Diligence of JP Morgan Chase’s Backsourcing Just like all backsourcing projects of different companies, many analysts have viewed that the outsourcing and subsequent backsourcing of the company’s IT functions were both costly and challenging despite its senior executive being noted to state that the transitions were smooth.
This was supported by the lack of diligence the senior executives placed on the morale and security of its employees as well as its selection of the outsourcing company (Overby, 2005a). In the past three years, IBM has made a mark in being an outsourcing company so much so that the company’s outsourcing activities, handled by IBM Global Services, was accountable in increasing IBM’s revenues from $36. 3 billion to $46. 2 billion between 2002 and 2004.
During the time that JP Morgan Chase entered in an outsourcing venture with IBM, IBM has already been handling the outsourcing services of many multibillion dollar companies which included American Express, Deutsche Bank and Michelin. This impressive clientele would initially make any company looking into outsourcing their IT functions make IBM a viable choice (Overby, 2005a). However, the senior executives of JP Morgan Chase have failed to look more closely into the quality of service and performance provided by IBM to its outsourcing clients by doing more background research.
Many financial experts including Schonenbach and Dane Anderson, program director of Meta Group, have actually noted that while IBM may continuously be catering to multibillion dollar companies, the most recent deals closed by the company have been significantly smaller and only lasting for a short period of time. This sudden shift on the contracts and deals closed by IBM resulted in the fact that multi-billion dollar deals are initially not lucrative on the part of the outsourcing companies.
Hence, they would try to compensate for their losses by charging their clients for services which they would consider to be not included in the original contract signs. Oftentimes, the corporate clients would resist in paying for these added services and improvements in spite of them agreeing that these are necessary, severely hampering the IT functions needed by the corporate client (Overby, 2005a).
Another shortcoming committed by JP Morgan Chase when deciding the outsourcing company they selected was to take into consideration of the experience of Bank One with IBM when they outsourced their IT functions that caused them to pull out their IT functions and return the operations in-house a few years prior to the completion of the merger between the two banks. In their experience, Bank One viewed that outsourcing their IT functions to IBM caused a stagnation of their entire IT staff.
Once the venture between Bank One and IBM, the venture failed to meet the bank’s goal to provide a competitive advantage as far as technology was concerned because the technology used was not updated during the venture and new projects were not looked into. Bank One also noticed that there were a number of things that were some things that were not accomplished as a result of the vagueness of the contract between the two companies. This provided a loophole for IBM to charge for services that were not previously done by the bank when the IT functions were still in-house.
As a result, these additional services were not completed unless Bank One would pay more. One example of this was the need to add or remove user of a particular account, this would mean that the IT department would need to update all 1,500 servers being used by for the needs of the company manually. Although a Tivoli module was introduced that could allow the updating of the banks databases and servers faster and more efficiently, this was never implemented by IBM since Bank One refused to pay for the additional costs that IBM was charging them for this module (Overby, 2005a).
As a result of the failure of the executives of JP Morgan Chase to look more closely into these factors, the company not only experienced the same challenges that Bank One faced when it outsourced its IT functions to IBM, but also experienced a decrease in the morale of their employees as well as their level of trust towards the company. Employees no longer believe in anything that the senior executives would say or do (Overby, 2005a).
Moreover, the executives failed to take into consideration the work and effort that would be needed in the backsourcing process. Jeff Kaplan, senior consultant with the Cutter Consortium’s Sourcing and Vendor Relationship Advisory Services and the managing director of ThinkStrategies, stated that there were seven steps that every company who is considering to backsource IT functions that have been outsourced to another company must take in order to ensure a smooth transition in bringing back the IT functions in-house.
Among these steps, Kaplan mentioned that the company must first establish a schedule and plan for the backsourcing process which should include provisions in order to ensure that the outsourcing company would be able to support the client until such time that it is able to reassume complete control of its operations. The company must also be able to determine the staff rearrangement and responsibilities at the soonest possible time in order to minimize the decrease in the productivity and morale of the employees (Overby, 2005b).
Unfortunately, this was not the case as clearly seen in the problems that JP Morgan Chase had to face during the backsourcing process. During the period when IBM handled the outsourced IT functions of JP Morgan Chase, employees were unable to get their jobs done because they did not feel that they were secure in their respective positions regardless on whether they were permanent employees of JP Morgan Chase or contractual.
Because they were unsure on whether they would be relocated to IBM, retained in JP Morgan Chase or laid off altogether, employees began to become hesitant in committing to new projects, resulting to JP Morgan Chase’s revenue to decline. More and more of the ongoing projects of JP Morgan had begun to also slow down in terms of its development and completion, causing an increase in the pent-up demands for IT services (Overby, 2005a). Things did not improve during when the backsourcing process was underway.
JP Morgan Chase now had to reverse all the reorganization done in order to support its IT function. This caused disruptions in the normal operations of the company because both managers and staff members to re-establish the systems and operating procedures back into the company. On top of this, JP Morgan Chase had just completed a merger with Bank One. This resulted to a re-shuffling of the employees of the two companies based on the different staffing levels, current skills, budget and working assignments.
In the end, more employees were laid off and more projects piled up (Overby, 2005b). Key Lessons from JP Morgan Chase’s Outsourcing Venture The decision to backsource or to switch vendors is becoming increasingly common as firms vie for ways to continue to IT costs and improve IT service levels (Whitten & Leidner, 2006). The outsourcing venture and subsequent backsourcing of the IT functions of JP Morgan Chase provides companies who are looking into outsourcing their own IT functions to other companies whether within the United States or overseas.
While it is true that in the long run, outsourcing IT functions are able to minimize the expenses that a company would otherwise incur should the IT function remain in-house, companies should understand that these does not happen immediately. As such, executives of the company should first perform an operations audit and needs assessment in order to evaluate and weigh whether outsourcing their IT functions is indeed the most viable venture that the company should invest in. Indeed, deciding hastily on an outsourcing venture expected on instant improvements would lead to higher unit costs in the long run (Hummerston, 2007).
Another lesson that could be gathered from the case of JP Morgan Chase is the amount of diligence that executives should put into with regard to the contract between the client and the outsourcing company in order to ensure that not only both parties would benefit from the venture, but would ensure that the client would be able to terminate the contract and regain control of the venture in the event that after careful evaluation, the outsourcing venture is not meeting up with the expectations of the client.
While it can be assumed that JP Morgan Chase had ensured that there were such provisions allocated in the contract that they have signed with IBM regarding their outsourcing venture, the experiences and challenges JP Morgan Chase had to overcome during the short period of time that IBM handled its IT responsibilities.
Aside from experiencing similar instances that had occurred with Bank One, many employees of JP Morgan Chase have stated that the situation between JP Morgan Chase and IBM was so dire that even the most trivial everyday activities were not accomplished because of contract obligations, which included the restocking of office supplies that are needed such as batteries for pagers, and reams of bond paper (Overby, 2005a; Overby 2005b).
Ironically, the best time to think about backsourcing a company’s IT function is during the period when the company is just considering in outsourcing its IT functions. The reason for this is for the company to ensure that the expenses and the time to be allotted in both the outsourcing and backsourcing would not have an adverse effect not just on the morale and level of trust the employees of the company have, but also the overall productivity and financial standing of the company (Overby, 2005b).

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