Sunday, June 5, 2011

Strategic Outsourcing The Factor of Success

“Strategic Outsourcing” Today, I would like to introduce two companies that tried strategic IT outsourcing in the past. One company changed mind from outsourcing to in-house development. Another company succeeded and expanded the area of outsourcing. These cases must give us important implications.

First case is the outsourcing of JPMorgan Chase. In March 2003, JPMorgan Chase placed the contract in connection with the outsourcing with IBM. It was $5 billion, seven-year agreement, and the purpose of this outsource was to reduce IT cost, and it would enable JPMorgan Chase to focus on core business areas. Management of JPMorgan did not regard IT as their core business area. In addition, they transferred all systems and staff in IT section to IBM including core systems in strategic business areas.

In July 2004, JPMorgan Chase merged with Bank One. Bank One had cost cutting know-how. According to the Baseline[1], Bank One reduced headcount 12% from 2000 to 2003, and increased revenue 17% at the same period. In contrast, JPMorgan Chase reduced only 6% of headcount and increased revenue 1% during the same period. After the merge, management agreed that in-house development of IT systems using Bank One’s know-how would be more efficient than outsourcing. Based on this decision, the contract was cancelled in 2004.

Second case is the successful outsourcing of American Express. In March 2003, American Express signed the outsourcing contract with IBM[2]. The deal was $4 billion, seven-year. The aim of this outsourcing is to focus the in-house IT resource into core business areas. The scope of outsourcing was limited only peripheral areas such as Human Resource Management systems, Accounting systems, and so on. This outsourcing was succeeded. The management of American Express decided to expand the area of outsourcing. In December 2008, American Express close an outsourcing contract with EDS, and HP company in connection with desktop PCs, voice, and data networks[3]. Using the strategic outsourcing, American Express could allocate IT resources to core business and strategic areas.

In my opinion, the failure of JPMorgan Chase stemmed from the lack of self analysis and strategy development. In turn, the success of American Express was result from superior strategic decision making. There are two questions in the article, “What should you outsource?” and “How strong are your capabilities?” Aforementioned cases imply that these two questions would be crucial to Strategic Outsourcing.


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