Jp Morgan Case

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  • 1. JP Morgan Chase IBM Individual case write up Alejandro Fuhrmann Information Systems • IMBA P2 • March 7th, 2008 Professor: José Esteves 1 - Identify the critical success factors for a good IT outsourcing strategy. • Know your company: A good assessment of your company’s business processes and its core competitive advantages must be prepared prior to any outsourcing plan. Failure to recognize this important issue can lead to a bad outsourcing strategy. For example, thinking that some of your processes are unique, may lead organizations towards keeping those processes in house when other suppliers can do it much better than they do. On the other hand, not recognizing some processes or capabilities as strategic, may lead to outsourcing them risking loosing intellectual property or flexibility to leverage on them, etc. • Outsource based on long term strategy and not just cost reduction: Although most firms outsource to reduce costs, the most successful deals in terms of performance and value creation for vendor and outsourcer are those that allow the buyer to reach new efficiencies, higher volumes, improve service level and reduce operational risks. The key is leveraging strategic advantages. • Be open, communicate, communicate, communicate: If IT users within the company feel that no one cared about their ideas or concerns, they will probably backslash to the outsourcing plan. The decision to outsource involves so many stakeholder, from the board, top management, financial controllers to IT experts and users, it is really important to negotiate internally and then externally. • Outsourcing governance: One of the key success factors when selecting an external vendor of IT services is to approach the deal as a partnership and signing with a vendor who shares and values that mind set. Creating a collaborative environment and not a “we-versus-them” atmosphere can be very beneficial in the long run for both companies. In order to align both companies interests, the best practice is to create a joint management team that periodically oversees the Service Level Agreements and has very clear rules on how to handle all kinds of issues. • Keep investing in training even after outsourcing: This will not only keep the local workforce motivated but also knowledgeable and skilled throughout the entire outsourcing period. The benefits from this policy will clearly show up when ending a vendor relationship, since a much smoother in-sourcing will be accomplished. Transfer costs are lower and also very important, dependance risks are minimized, since capabilities can be easily restored. 2 - Elaborate the various risks associated with outsourcing IT management functions. Is it advisable to outsource IT management functions when technology plays a key role in an organization?s business? Explaining giving reasons. • Spilling your core competencies into the market: When IT plays a key role in an organization it is not advisable to outsource its management. Any other non core process, like payroll, facilities management and logistics, accounting & finance, web design, translations, etc, are much safer candidates to be outsourced. Why? Because core processes or functions are by definition those upon which the organization’s competitive advantage/s lie. This value-creating processes are the ones to protect as much as possible from competitors since you do not want others to replicate them easily.
  • 2. • Loosing company knowledge and expertise: As Wikipedia points out, one risk that arises when outsourcing is loosing or lowering the organization’s knowledge. Internal employees have access to close colleagues, internal information, procedures, etc. Once an outside company takes over the role, the situation will change, having vast implications to the quality of service provided, staff turn over, public opinion, etc. • Security: This is probably one of the key issues about outsourcing. Organizations loose a bit control on the way their critical data over customers identities, credit cards, behavior, etc, is handled. Adding to non ethical behavior from outsider employees, organizations must hedge against natural and geopolitical disasters. The way to manage this risk is by, among other things, having local backups, agreeing on security blueprints, running random due diligence, etc. • Other risks: Since most of the IT services firms are located in developing countries, with volatile economies, currency fluctuation and inflation become important factors to reckon upon, affecting directly the profitability level of suppliers. The way to manage this risk is by signing contracts in strong currencies. Nevertheless, some countries do not allow for this. Attrition can also affect service delivery standards. In some industries, like call centers, employee attrition tends to be high putting pressure on companies to re-train people fast and keeping service levels as agreed. It is important then to make sure the service company has some kind of incentive programs, career development policies, etc, to retain and motivate employees. 3 - Suggest measures that can help organizations exercise more control over outsourced IT processes. What challenges will be faced when an outsourced operation is brought back in-house? • Structure the deal correctly: When companies began outsourcing back in the early 80’s, their main objective was to have low value jobs done cheaply. As deal volume and size turned bigger, deals have become more strategic, aiming to improve operational performance and service levels. As this becomes clear, managers move away from a procurement-type of deal into more M&A type of deals. Objetive of the deal Deal structure Features • Transfer assets (people, systems, IP, even buildings) • Cost cutting Divesture • Create obstacles to bring them back • Outsourcing a noncore function • Company looses flexibility since has relinquished control in return for service • Both companies share ownership and control • Improve performance of over assets, costs and improvements Joint Venture strategic function • Incentives both parties to make the deal work and create value • Safeguard the deal: Some legal measures can be applied in order to minimize the risk of vendors taking too much control over the outsourced processes and encourage them to perform as contracted. Linking suppliers fee to business volume will push the supplier to strive for great service. Having bonus/penalties linked to KPIs will also force them towards performance. Predetermine price reviews can minimize the risk of change in conditions. Finally, specifying a neutral auditor or consultant for 3rd party arbitration can help resolve deal performance conflicts. • Plan for transition: Depending on the type of deal used, bringing back outsourced operations might present different challenges. In a divesture type of deal, the company has to almost re build the entire capabilities. This is not the case if a Joint Venture type of deal was used. Anyway, after the contract is over and the decision to in-source again those functions is made, many additional challenges arise. CAPEX is the first to appear and the easiest to solve since it is solved with economic resources. Soft skills build ups are much more challenging. Retraining is one of those. Organization need to spend resources in management seminars, making clear new employees understand business processes related to their function, getting to know the org. structure, etc. Relocation also involves coping with additional stress coming especially from a cultural (company and country/city) shock, etc.
  • 3. 4- JPMorgan cancelled the IT outsourcing contract with IBM in august 2004. Comment on the reasons for this cancellation. Compare and contrast the outsourcing vis-a-vis in-house IT management strategy at JPMorgan Chase. JP Morgan decided to cancelled the IT outsourcing contract with IBM after merging with Bank One Corporation. Bank One was a heavy weight in consumer banking which had very efficiently centralized all its IT systems. Its management believed that “technology could be best managed in house” but most important, they believed that it was necessary to fully understand the impact that technology had in driving their business and that could be done if all IT operations were made in house. Following this belief, before the merger, Bank One’s chairman, right after joining the company decided to cancel their three year old IT service contract with IBM and AT&T and consolidate those services within the bank. So it was no surprise that right after announcing the mergers analysts immediately started wondering what would happen to Morgan’s IBM contract. Bank One’s chairman became Morgan’s CIO and took the same decision he took some years before: canceling the outsourcing contract to IBM. Another important reason for the cancellation, was that before the merger 40% of Morgan’s revenue came from Investment Banking, a set of services which are very intensive on variable data processing power, and one of IBM’s On Demand Computing capabilities. However, after the merger retailing became much more relevant in revenue terms and therefore the consolidated company’s reliance on On Demand Computing was much smaller. Morgan’s previous attempt to do in-house IT management proved unsuccessful. This happened in 2001 right after merging with Chase Manhattan. The challenge back then was integrating and centralizing a couple of thousands of applications. A technology council with the best IT people from both companies was formed and a subcommittee was put to advice the council. Morgan’s decision was to go for a decentralized configuration, leaving IT strategy development and execution to line management. IT sourcing was also decentralized, increasing dramatically procurement costs. This is how they came to outsourcing their IT infrastructure to IBM, keeping applications development in house. It was a decision not mainly driven by long term strategic planing but by cost reduction. Clearly this decision led Morgan to a loose control over its IT operations which for financial services organizations represent a strategic asset. Flexibility to timely create new products, efficiency and reliability in services and operations, key competitive advantage in that industry, were also diminished. Morgan should have followed Bank One initial approach and spend the necessary resources to properly standardize and centralize its IT systems. Of course, it’s easy to judge decisions looking backwards. References www.mckinseyquarterly.com www.hbr.com www.wikipedia.com http://news.zdnet.co.uk http://scholar.google.com/ http://www.outsourcing-best-practices.com/