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JPMorgan Chase cancels IBM outsourcing contract

The termination of the $5 billion deal stands in opposition to a trend toward more IT outsourcing.

JPMorgan Chase announced on Wednesday that it will cancel its multiyear, $5 billion outsourcing contract with IBM, bucking an industry trend that has seen IT outsourcing grow by dramatic proportions.

The financial-services firm, which entered into the seven-year contract with IBM in late 2002, said its decision to cancel the contract stems from its recent merger with rival Bank One and the combined companies' ability to handle their own global-services needs. For Big Blue, the cancellation of the highly touted contract is a big loss to its portfolio of megadeals, though the financial effect is apparently less severe.

"Since this contract was still in the early stages of deployment, IBM was continuing to invest in the engagement. On a year-to-year basis for 2005, IBM anticipates that the cancellation of this contract will have a positive impact to IBM earnings per share--with no impact on our full-year model," IBM stated in a filing Wednesday with the U.S. Securities and Exchange Commission.

Still, the computing and services giant noted that the contract cancellation will affect its backlog of orders, which will be revised as part of its third-quarter earnings announcement. IBM is expected to report its third-quarter results sometime in October.

JPMorgan said IBM missed no milestones and that the bank was happy with the tech giant's service. The bank paid no termination fees to IBM and said the cancellation had no "material" financial impact.

Under the contract, IBM handled major IT tasks for JPMorgan, ranging from running its data centers and help desks to handling data processing.

In the first half of 2003, when the contract had just started, about 4,000 JPMorgan employees and contractors were transferred to IBM. And beginning in January, IBM will transfer roughly the same number of workers back to the investment bank.

"We believe managing our own technology infrastructure is best for the long-term growth and success of our company, as well as our shareholders," Austin Adams, JPMorgan's chief information officer, said in a statement. "Our new capabilities (from the Bank One merger) will give us competitive advantages, accelerate innovation and enable us to become more streamlined and efficient."

He noted, however, that IBM will continue to partner with the investment bank and provide services and products for several of its lines of business. IBM is one of JPMorgan's largest technology partners.