Last Wednesday, on September 15, JP Morgan Chase & Company announced that it was canceling the $5 billion outsourcing contract that it had signed with IBM a couple of years ago. Instead, according to the bank's press release, the company would hire back the 4,000 workers it had sent off to IBM back in 2002.
Wow! Imagine being the IBM exec who screwed up that deal!
What IBM Should Have Done
Of course, a really clever IBM exec would have seen the signs of a problem early on and come up with a new solution. A really clever IBM exec would have said, "So! You want control of your own workforce? No problem! We'll outsource our commitment back to your company for a mere 20% fee!"
Alas, the bank managers were probably too smart to bite. Just two years ago, IBM touted the original deal as "the largest outsourcing contract in history."
Wall Street Reacts to the News! Not!
Meanwhile Wall Street analysts immediately discounted the bad news. From their perspective, the contract termination was hardly the end of the outsourcing trend. For them, it represented a small modification in JP Morgan Chase's business plan. Instead, they plugged the numbers into their Funny Math Calculators (FMC pat. pend.) and insisted that the outsourcing industry will continue to grow by at least 26% this year.
The Funny Math Calculator
JP Morgan Chase says it's going to rehire the 4,000 IT workers, so if they reassign the $5 billion toward those IT salaries, then each employee will get...$1,250,000 over seven years!
Well, that sounds fair, considering all the headaches they must have endured while they worked for IBM.
Now let's divide this salary allocation by the seven years of the contract to see what the average annual salary will be.... That's about $178,000 per year per employee!
Well, let's just state for the record that we think these people are worth every penny! After all, now they're all "former IBM employees," and that's an important resume bullet!
We all know that the average salary for the highest-level programmer in the New York Metro area is only about $93,000. Clearly, JP Morgan Chase isn't going to pay these rehired employees the exorbitant salaries that the FMC prescribes.
Instead, the combined expense of these 4,000 IT workers over seven years is actually going to be more like $2.5 billion. After all, that's what the current employment market will bear, so that's all those rehires are probably going to get!
Ah! But You Missed the Point!
What is the point? Well, if you plug those reduced salary numbers into the FMC, it reports that JP Morgan Chase will actually save about $2.5 billion over seven years! That's the amount of the original $5 billion contract minus the $2.5 billion of rehiring the staff! (Lawyer's fees not included, of course.)
So it actually makes good financial sense, according to the FMC, for the bank to scrap its outsourcing contract with IBM. It makes good sense now just as it made good sense two years ago, according to the FMC, to outsource that same staff to IBM for $5 billion.
The Public Relations Impact
Of course, we also have to look at the public relations angle! The officials at JP Morgan Chase aren't publicly saying that their decision is a cost-savings move, a very bad signal to send to Wall Street. Instead, they're insisting that their management thinks that an in-house IT staff is an actual strategic resource that can help to reposition the company since its recent merger with Bank One.
Imagine that! IT as a strategic resource! Well, we all know this is a bunch of malarkey, don't we? Everybody knows that an in-house IT staff isn't an asset! It's an expense! After all, Wall Street insists that it is, and they own the patent rights to the FMC, so they can prove it!
IBM Saves Face
Meanwhile, IBM's management is trying to put a bold face on an obvious calamity. The deal "is not the largest outsourcing deal that we've ever done and it's not the largest financial services deal we've ever done," said James Sciales, an IBM spokesman. Nonetheless, Sciales declined to identify any other larger deals that IBM had lost. IBM does have multibillion-dollar contracts with American Express and Deutsche Bank.
And after listening to Wall Street analysts' reassurances about the outsourcing trend, investors made only slight modifications to their strategies: By the close of business on the day of JP Morgan Chase's announcement, IBM's stock price had barely trembled, down only 35 cents a share to close at $86.37.
The FMC to the Rescue!
How is that possible? Well, the analysts whipped out their FMCs and showed investors how IBM was actually going to improve its balance sheet by losing the deal! "After all," they said, "IBM was only two years into the contract! That means they were still investing in building the staff or outsourcing the individuals on that staff! So, as a result, IBM's costs will actually diminish by the contract's early termination."
The only real casualty may be IBM's JP Morgan Chase account representative. He could not be reached for comment in time for this deadline. Rumor has it that he's hiding out in India. Or was that position outsourced too?
Thomas M. Stockwell is Editor in Chief of MC Press Online, LP.