IBM, HP Push Change in Outsourcing Industry

A little more than a week ago, JPMorgan Chase withdrew from a seven-year, $5 billion Internet technology outsourcing agreement it inked in 2002 with IBM. It decided to pull IT inside.

But this decision represents an anomaly in the outsourcing industry. All news reports verify the accomplishment of agreed upon milestones by IBM in the JPMorgan contract and refute friction between the former partners.

“JPMorgan, in view of its merger with Bank One, is in a very different place than when we signed the agreement,” IBM spokesperson Ian Colley told CRM Buyer.

IBM Unconcerned

Big Blue has no worries. “Outsourcing tends to be a very healthy marketplace,” he added. IBM’s piece of it has been growing, beyond IT, to all functions megacompanies don’t see as their core competencies.

These include customer care, call centers, warranty processing and services, supply procurement and human relations, Colley said. “Business process is an emerging space in outsourcing.”

IBM is leveraging its global experience and various business units, most recently enhanced by the acquisition of Price Waterhouse Coopers.

In-House IT a Challenge

“Basically, business process outsourcing means you have the option of handing off your application vendor headaches as well as your business processes to someone else,” Erin Kinikin, vice president at Forrester Research said.

“What this means is outsourcing will continue to grow,” agreed Robert McNeill, senior analyst at Forrester. “Insourcing certainly is an anomaly.”

However, in JPMorgan’s case, he said, because it is such “a big, big company, there are diminishing returns to an outsourcing relationship. Take the example of bulk purchases across the board for processes. JPMorgan has the sheer size to leverage that, too,” he said, and so does IBM.

Increased Competition

McNeill supported what Colley of IBM said. He also explained that the growth of outsourcing will increase the competition among outsourcing providers. Companies looking for outsourcing contracts will emphasize the competition by acting selectively in signing agreements, breaking up their needs and inviting bids from several smaller vendors rather than the two or three with the service breadth and financial capability to handle it all.

This will lead to greater transparency in service and pricing, McNeill said.

“Outsourcing is not a solution, but it can be an effective strategy or tactic to effectively meet business goals,” he said, citing as benefits cost reduction, increased speed to market of new products and services, and increased penetration of the marketplace.

HP’s Approach

Three years ago, HP made its debut in outsourcing services with client Proctor & Gamble. A year later, it signed a $1.5 billion, seven-year IT outsourcing deal with CIBC (Canadian Imperial Bank of Commerce).

“We’ve grown up over the last couple of years in HP to challenge the tier one outsourcing group of EDS and IBM,” Joe Hogan, worldwide vice president of marketing for Managed Services, told CRM Buyer. HP’s Managed Services is the fastest-growing business in HP, up 42 percent year over year in the third quarter of 2004. It was the eighth consecutive quarter of double-digit growth for the division.

HP’s outsourcing plans leave room for technology developed outside of HP, making the delivery plug-and-play for different software and programs. “What companies are looking for in the future are folks like HP that bring together an ecosystem of partners to allow the organization more adaptability to change,” Hogan said.

One-Stop Shops

In other words, HP thinks it’s licked the problem of separating outsourcing needs and spreading them across vendors. HP seeks to be the first one-stop shop for outsourcing.

“It’s not just about flexibility,” Hogan continued. “It’s about when you enter an outsourcing relationship, there’s got to be a commitment on both sides that you have to change the way you do work. Otherwise I don’t see how you can get value.”

“It’s no miracle. It’s collaborative,” he added. “There’s a lot of fallacy in doing an outsourcing deal that’s based on the understanding that it’s going to be static for five years.”