J.P. Morgan Chase assumes bellwether position

I SINCERELY hope J.P. Morgan Chase’s cancellation of its outsourcing deal with IBM will set CxOs to wondering about the wisdom of outsourcing IT.

When this deal was announced it was characterized as a major plank in IBM’s strategy to sell on-demand computing, providing the bank with lower cost,

flexible IT resources. Now it’s being cancelled, reportedly as part of a cost-cutting exercise at the financial services firm.

This is bad news for outsourcers who claim they can lower IT costs because of their superior know-how and economies of scale. At least for very large companies, we now have one data point suggesting this claim is hollow.

This cost argument will no doubt be sending shivers down the spines of executives at IBM, Accenture, EDS, CGI and other large outsourcer companies. But perhaps it’s the CIOs, or more correctly the CEOs, of competing banks who should be doing the shivering, on two counts.

First, what if J.P. Morgan Chase is correct? Then their cost structure has just been improved, relative to that of banks who continue to outsource IT. Second, what if, despite all the hoopla about IT not providing competitive advantage, a major player in an industry has decided it actually does? That also leaves its competitors scrambling.

The point is if you outsource your IT functions to an organization such as IBM, which is quite happy to sell identical services to all your competitors, you give up much of the opportunity to derive competitive benefit from those functions.

Many executives were so spooked during the Y2K run-up and subsequent debacles surrounding ERP implementation that they convinced themselves IT was not a core competency of their firm (probably correct), and never should be (maybe incorrect). Just because you aren’t good at something doesn’t mean you shouldn’t be or can’t be. The real questions executives should have been asking were: First, what is the strategic architecture, the portfolio of core competencies, that will allow my firm to succeed? And second, how can these be combined into a distinct capability that allows the firm to outdistance its competitors?

Granted, the answers to these questions may not be the same for all organizations in the same industry. But it has been quite jaw-dropping to see bank after bank — over the last 10 years — decide IT was not a core competency when the financial services industry is close to the ultimate example of an industry where information-processing is an essential function. And an industry, one could argue, where IT ought to be a competency. These banks were simply limiting their future options for creation of new products and services, while simultaneously setting up their future competitors, just as IBM did when it outsourced PC operating system development to Microsoft.

It’s refreshing to see J.P. Morgan Chase going the other way, regardless of its motivation. I like to believe the bank’s decision to regain full management control of its IT assets makes it a bellwether for a new focus in the economy on revenue generation rather than cost-cutting.

For many firms the new revenue will come from products and services enabled by information technology, but only if the CIOs are prepared with the foresight to identify their firms’ strategic opportunities.

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