J.P. Morgan looks to IBM for outsourcing

The banking giant chooses to negotiate exclusively with Big Blue for a sweeping technology contract worth more than $5 billion, people familiar with the situation say.

J.P. Morgan Chase has chosen to negotiate exclusively with IBM for a sweeping technology contract worth more than $5 billion, people familiar with the situation said.

That marks a major potential win for the computer services giant and a blow to its embattled rival, Electronic Data Systems.

Under the terms of the seven-year, global deal, IBM would take over the global computing operations for J.P Morgan in a wide range of areas including retail banking, trading and securities processing, offering the bank an opportunity to cut its own spending on technology.

Many of the technology employees of the bank would become IBM staff under the deal, which is expected to be hammered out in wide-ranging talks over the next few months, people familiar with the discussions said.

The investment bank's decision to enter exclusive negotiations with IBM marked another costly setback to EDS, which had been in the early running for the J.P. Morgan contract.

On Thursday, consumer products giant Procter & Gamble opted not to sell its back-office operations to EDS, scuttling an $8 billion deal that had been hold on weeks.

A spokesman for Plano, Texas-based EDS said the company would not comment until a formal decision had been announced in the J.P Morgan deal.

IBM spokesman James Sciales said the bank had selected the computer services giant as the candidate best suited to begin talks on the global contract.

"They have sort of down-selected to us," he said.

J.P. Morgan also sent a memo to its own technology employees on Tuesday, informing them that it had chosen IBM, a person who had seen the memo said.

Adam Castellani, a spokesman for J.P. Morgan, had no comment Tuesday.

In arguing for the global deal, IBM said its own research division would ensure that the investment bank's computing operations remained at the cutting edge.

At the same time, the deal offers J.P. Morgan the chance to buy its technology services, much like industries that pay for utility services, such as electricity. The result is that the bank should be able to both cut costs and react more quickly to market changes, ramping up quickly on computing power, for example, without having to invest its own capital in massive computer systems.

IBM has promoted that model to banks, long seen as more reluctant than other industries to outsource key technology operations.

In February, IBM clinched a $4 billion, seven-year technology services agreement with American Express. The outsourcing deal would be the largest of its kind since Chase Manhattan bought J.P. Morgan at the end of December 2000.

J.P. Morgan Chase has seen its profits slump during the market downturn because of investment losses, bad loans to telecommunications and cable companies, and misplaced trading bets.

The bank has also faced fire for off-balance sheet transactions it set up for bankrupt energy trader Enron.

Shares of J.P. Morgan, which is second only to Citigroup in assets, have fallen some 43 percent since the start of the year.

Story Copyright  © 2002 Reuters Limited.  All rights reserved.

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