Prominent "Opponent" of Offshoring, Isn'tBy CIOinsight | Posted 03-05-2005
Prominent "Opponent" of Offshoring, Isn't
In September 2004, less than three months after its $58 billion acquisition of Bank One, JPMorgan Chase & Co. announced that it would be scrapping a seven-year, $5 billion IT outsourcing contract with IBM Corp. having decided instead to bring the technology back in-house. The reaction from the press was predictable: an explosion of stories declaring the end of outsourcing as we know it. Austin Adams, the new corporate CIO of the now $1.1 trillion JPMorgan Chase, was cast as the protagonist in a battle against the dangerous offshoring craze that has been robbing America of its precious IT jobs. But Adams, as it turns out, is greatly misunderstood. "I am clearly an advocate of offshoring," he says without hesitation.
Adams, a soft-spoken 33-year veteran of the banking industry, believes in using technology as a competitive advantage. In fact, his early career success was built on his ability to integrate bank mergers quicklyhe has been involved in no fewer than 90 mergers over the course of his careerand make the merged entity more competitive through its use of technology. But Adams's decision to rein in outsourcing contractsa move he also made as CIO of Bank Onehas nothing to do with some patriotic ambition to keep tech jobs in the U.S.: By the end of 2005, Adams will preside over roughly 3,000 offshore employees in India who will perform call center, basic operations and accounting functions, and he promises many more to come.
Instead, Adams's penchant for pulling outsourced IT back in-house developed over time, as the banks he worked for gradually merged, creating massive economies of scale, and, now, a $7 billion tech budget at JPMorgan Chase that no outsourcer could match. CIO Insight Executive Editor Dan Briody sat down with Adams in his office in midtown Manhattan to get his thoughts on outsourcing, offshoring and combining two of the world's biggest banks.
CIO INSIGHT: What impact, if any, will offshoring have on our economy?
ADAMS: I am clearly an advocate of offshoring. I just spent a couple of days in Mumbai, India, where we have a large captive site. I'm not the best person to quote the economic impact of offshoring, but I do believe it has been blown out of perspective. I mean, who's the biggest beneficiary in the world of offshoring? It's the U.S.
But the impact it has on us and our industry is that it forces all of us to look at what's the right resource strategy for us. In other words, it's not just about offshoring. We spend a lot of time talking about where the skill sets are domesticallythe people who have experience, the relative cost, the proximity of people being located in Houston or Chicago, Columbus, Ohio or Wilmington, Del., or New York City, wherever it may be. But when you see the attitudes and the ambition and the work ethic of our employees in India, I think that challenges all of us to question whether we are at that standard, and we're not.
Didn't JPMorgan Chase CEO Jamie Dimon once say he opposed offshoring because "no one ever washes a rented car?"
No, no, he didn't say offshoring. He said outsourcing. Coincidentally, Jamie's in Mumbai this week, and I got e-mails the last couple of nights from him saying that he thinks Mumbai is terrific.
Jamie and I are philosophically aligned. We both believe that outsourcing major parts of mission-critical technology to a third party is not the best solution for a large firm. At Bank One we brought back major outsourcing contracts from AT&T and IBM, and then subsequently did the same thing here. But our captive site in India is not technology development or support. It is, or will be, by the end of this year, roughly 3,000 people doing operational functions, accounting functions, call center, those kinds of things.
Since you brought the $5 billion IBM deal back in-house, people have held you out as a champion of insourcing. Is that inaccurate?
Very much, yeah.
You're not anti-outsourcing?
Not at all.
Determining When to Outsource
So how do you determine which parts of the business to outsource?
I think there are four major criteria around an outsourcing decision.
The first is whether the firm is large enough to attract and retain at least as good talent as the outsourcer, the third party. And there's absolutely no question about that with JPMorgan Chase. I tell people that if I were the CIO of a $10 billion bank, my approach to outsourcing would be dramatically different. But immodestly, I think we can hire as good or better talent than any of the players.Click here to read how opposition to offshoring could impact your plans and your business.
The second is somewhat controversial, but I feel strongly about it. If you compare the outsourcer's marginswhich I don't believe are any less than 15, 20, 25 percentto our costs of acquiring hardware, software, you have to ask, "Is our cost of hardware and software 15 to 20 to 25 percent greater than the outsourcer's cost?" I don't believe it. I absolutely know it isn't true. With the kinds of dollars we spend, it just doesn't happen. I know the internal costs of hardware and software for some of these firms aren't much different from ours. So I'll never concede that cost is a driver. In a large firm like this, if that's the case, then that's my failure.
The third criteria is the least discussed, but one of the most important. Is executive management some combination of the CEO, the COO and the executive committee of the firminterested in managing technology? Are they willing to help manage it, are they willing to help decision it, are they willing to help prioritize things? For example, 17 people from our executive committee meet every week, including [Chairman] William Harrison and Dimon, and every week technology is on the agenda, sometimes in a formal way, sometimes just me giving an update.
I'm not making judgments. At least one of our major financial services competitors has outsourced a lot of things, and it's a very successful firm. So I don't sit in judgment.
The fourth criteria is just the financials of it. Part of this is a straight financing transaction. In other words, an outsourcer is able to put a lot of those expenses on the balance sheet and amortize them over the period of the contract. We can't do that.
Is it harder to align the technology with the business when you're outsourcing?
I'd put this simple challenge on the table: If you're an employee of X outsourcing firm, then arguably you have a joint agenda. If you're working for X outsourcer, you're expected to run their agenda and run the client's agenda. You know who pays you, and it isn't the client. And so it would be hard to argue that the objectives of both those entities are always identical.
Do you ever feel that keeping technology in-house puts you at a cost or resource disadvantage?
After the Bank OneJPMorgan Chase merger was announced, you and John Schmidlin, the CIO of JPMorgan Chase at the time, worked together for several months as co-CIOs. You have wildly different philosophies on outsourcing; how did the discussion around the IBM contract go?
We did have different philosophies around outsourcing, that's true. But it's simple. What was misunderstood about this is the fact that the merger automatically voided the contract. So we were already back to ground zero because of the merger. Obviously, IBM wouldn't have accepted all of our volume for the same prices.
So for two to three months we explored the idea that we would give IBM increased business in certain technology towers, and we would insource only portions of that. It was a mixed model, a hybrid model. We looked at that with IBM for at least 60 days. And, frankly, I thought that was the best solution, going in.
But it fell apart for two reasons. We couldn't get comfortable in that there would be no end-to-end accountability in that scenario. And for IBM, it would have been an overall decrease in revenue, so they had a need to increase the individual pricing. So we couldn't resolve it.
The Role of IT
in the Merger">
What bearing, if any, did the fact that Bank One and JPMorgan Chase had different IT philosophies have in the merger talks?
I would say next to none. I was a part of a small team of people from Bank One that met with our counterparts at JPMorgan Chase for several days to do due diligence in advance of the announcement. It was very typical of my experience in the past, and there was appropriate consideration of the technology implications, financial opportunities, time frames and all that.
But the merger was mostly financially driven. I think it was very appropriate that there wasn't any material discussion about philosophical differences or anything like that. It was just "if we put these organizations together, then what are the opportunities on the business side for revenue and on the support side for efficiencies?" We were just a part of that. But you have to remember that a lot of the technologythe joint technology capabilitiesultimately drives the financials.
How many mergers have you been through in your career?
I've been around so long, I won't burden you with my career prior to 1985. But in 1985 I was named the CIO of First Union, which later adopted the Wachovia name. For 17 years I had this job at Wachovia and literally was involved in 90-plus acquisitions.
Now I'll admit some of those deals were small. For example, we were the biggest acquirer of failed thrifts in the early 1990s and that kind of stuff. But mergers is how I spent my life.
Then, in late 2000, I was approached by a search firm about going to Bank One. Now Bank One had grown extraordinarily rapidly through acquisition from 1985 until 2000, but it never totally integrated many of their acquisitions. Jamie Dimon had come in in early 2000 to assume the CEO role there, and the CIO position was vacant, so I began discussions with him.
Dimon was really playing catch-up at Bank One.
Between 2000 and 2003, we converted and integrated systems from acquisitions that had been made in 1989, 1991 and 1995. By contrast, at First Union, it was never more than 11 months from announcement date until we had converted every system, closed all the data centers and changed the name of the institution. In other words, fully integrated the acquisition.
You guys were efficient.
Well, we were the fastest in the industry, not that we didn't stub our toes occasionally, but it was a 180-degree different model than the Bank One model.
What did you learn from all those acquisitions?
I have a list of ten commandments, but let me just give you some of my strongest beliefs.
First of all, it's all about the people; the technology issues are not the biggest issues. You treat people in the acquired institution with respect and dignity. Regardless of how small the organization was relative to us, one of the things we always did was go to the institution and meet their senior technology team rather than ask them to come to our headquarters. More important, we gave them the first day and a half to talk to us and brag about what they had done, just listening.
Also, very close to the top of the list in mergers is the importance of making timely and final decisions on systems. That's simply critical. For example, Jamie Dimon made the decision, just prior to my coming to Bank One, of choosing the First Chicago system over the Bank One system when those two merged in 1998. He asked me, "Did I make the right decision?" And I said, without looking at the systems, "Yes, because a bad decision is better than no decision." That's the important point. You choose either one, but realize that you have 14,000 developers, and on announcement day, the question in all those developers' minds is, "Do I stop my project?"
What is unique about the Bank OneJPMorgan Chase merger?
Fundamentally it's not unlike other mergers. It is more complex, with greater geographical scope, and the magnitude of dollars and technology spend is greater. The timeline is very similar to the Bank OneFirst Chicago merger, a two-to-three-year time frame from announcement date. We're about a year into that.
What is the most challenging aspect of this merger?
Our technology spend is roughly $7 billion, which you can put into four vertical buckets. The first vertical is business as usual: spending technology dollars just to keep systems up, develop new functionality, build a new foreign exchange system or a new customer relationship management system. The second vertical is all the merger activity with Bank One, the integration of wire systems, loan systems, all that. The third vertical is the opportunity we have to fix existing infrastructure. The fourth vertical is basic risk management and finance stuff.
That third vertical is quite challenging. If you look back at the 12 largest banks in the U.S. in 1990, five of those banks are part of JPMorgan Chase today. And because of that we have a more complex, expensive technology environment than we should have. We still have legacy systems from every one of those companies. Not that there hasn't been some work done, but we have somewhere north of 5,000 application systems.
For example, our No. 1 priority for this year, as it is every year, is improving our day-to-day operating environment, and we have 15 different incident reporting systems. So early every morning, when we're trying to assess what might be issues from the night before, in various lines of business and sub-lines of business, we literally have 15 different formats for reporting. We will get it down to one this year. But that's that third vertical. The question is: What is the appropriate spend for that third vertical? That is the biggest opportunity. You can't help but think how much more efficient we could be.
You are an advocate of tying IT compensation directly to business results. How does that work?
It's rooted in a fundamental belief that technology groups succeed or fail based on whether they're running the business agenda. I know that sounds terribly simplistic, but if you interview lots of CEOs and COOs, I would bet you they'd say the technology group is a bunch of geeks who don't understand the business. So this kind of pay structure assures that we're running the business agenda.
The second value of it is the dialogue it forces between the business and the infrastructure organization. Because I give up a portion of my right to the IT manager's bonus, and give it to the line-of-business CIO, who reports jointly to the line-of-business head and me, that results in a close collaboration between the business head and the line-of-business CIO.
This model has evolved over the years. I started out by saying I want to take some portion of my IT lieutenant's bonus and give it to the line-of-business CEO. But the truth is, after a few years of that, the CEO said, "Austin, I really appreciate your effort, but I don't know enough about this stuff, and I just give the evaluation based on what my CIO tells me." So I quit playing that game.
Generally it works great, other than me needing a bodyguard to get out of the building.
So it's a tough sell to the tech folks?
Well, it's a lot easier to sell it to the business side than to the technology side. What I keep trying to help people on the technology side to understand is that they ultimately succeed if the business believes they succeed. I've learned that technology performance is more subjective and more about perception than you'd like.
What is Jamie Dimon's attitude toward technology?
I don't want to brag on him here too much, but he's a very strong believer in technology, and I've never been around anybody who was so willing to invest in technology. How many CEOs would request three hours a month with the technology team?
If you look at the 300 most senior people in our organization, I would argue that every one of those individuals is more dependent on technology for the success of their group than they were a year ago, every one of them. And every one of them will be more dependent a year from today than they are now. And that doesn't have to do with Austin Adams. That's just today's world.