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Will More Banks Bet on Insourcing?

The worlds largest banks will be closely monitoring the progress of J.P. Morgan Chase & Co.’s IT operation following the company’s decision to end its $5 billion, seven-year outsourcing arrangement with IBM Corp. (NYSE: IBM). (See JP Morgan Ends IBM Outsourcing Deal and Outsourcing Is Not a Silver Bullet.)

”Certainly, people in the banking industry will be keeping an eye on this,” says Jamie Snowdon, research director at analyst firm IDC. "The banking community is relatively close-knit, and they will be keen to see what happens."

Execs at J.P. Morgan have opted to bring their IT back in-house following the bank’s merger with Bank One earlier this year. This is a bold move, which runs contrary to current trends in the IT industry. Outsourcing has become an increasingly popular option for firms eager to avoid the hassle and expense of running their own data centers, help desks, and networks. But Morgan clearly believes it's now capable of handling its own IT.

However, there is a history of "insourcing" within the organization. Back in 2002, Bank One ended outsourcing contracts with AT&T Corp. (NYSE: T) and IBM Global Services, reportedly shaving $75 million off of its technology budget in the process. If J.P. Morgan can emulate this success, then other financial institutions may even follow their lead.

But Andrew Efstathiou, program manager at The Yankee Group, warns that only the largest banks could even consider the possibility of bringing their IT operations back in-house. “Most are relatively small, so they cannot afford the staff to take it in-house. It would take a hell of a lot of money to pursue this strategy,” he says.

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