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.

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The second is somewhat controversial, but I feel strongly about it. If you compare the outsourcer's margins—which I don't believe are any less than 15, 20, 25 percent—to 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 firm—interested 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?

Never, ever.

After the Bank One–JPMorgan 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.

This article was originally published on 03-05-2005
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