Blue-chip organisations have long recognised the cost-saving potential of IT outsourcing. Not the financial sector.

Traditionally, the world’s big banks have run shy of the notion of entrusting their technology requirements to third parties, preferring to keep tight control of the major data centres that run their day-to-day operations rather than hand them over to a third party.

But this is changing fast. In recent months, several major banks have taken the plunge into outsourcing, signing deals that together total more than $10 billion.

First up, Netherlands-headquartered investment bank ABN AMRO announced that EDS would be handling its IT over the next five years for a fee of $1.3 billion. Then, in December came a slew of high-profile deals: Bank of America agreed to

pay EDS $4.5 billion over 10 years to run its IT; Deutsche Bank signed an EU2.5 billion contract with IBM Global Services for a similar term, as did JP Morgan Chase in a monster $5 billion deal.

“Obviously, outsourcing IT is nothing new. But the banks have been particularly slow at coming to the party,” explains Anthony Miller, an analyst at services specialist Ovum Holway. Although banks have routinely outsourced non-core tasks such as PC maintenance, says Miller, they believe that core account processing functions are simply too critical to consider outsourcing to a third party.

JP Morgan Chase is a partial exception, in that it has had some experience of handling outsourcing deals. Before JP Morgan’s merger with Chase Manhattan in September 2000, its IT infrastructure was managed by a consortium of services vendors, led by Computer Sciences Corp (CSC) under the umbrella of the Pinnacle Alliance. After the merger, however, the bigger merger partner, Chase Manhattan, opted to keep IT in-house.

IBM claims that the increased interest in outsourcing by its two customers is driven by new flexibility in how their IT will be handled – as well as additional opportunities to cut costs. That, says IBM, will stem from its deployment of utility computing, the emerging systems architecture that consolidates, centralises and ‘virtualises’ servers and storage so that they can be treated as a single, flexible computing resource. Under utility computing, organisations can switch applications and data processing workloads from one device to another, responding to fluctuating demand. In this way, outsourcers can efficiently divide computing capacity between different clients according to variations in demand and exploit economies of scale.

Deutsche Bank chief operating officer Hermann-Josef Lamberti, at least, is convinced. Under the terms of his company’s deal with IBM, the bank will convert “what until now have been fixed costs of operating our own computer centres into usage-based, variable costs”, says Lamberti.

But Ovum analyst Miller sees a certain measure of marketing spin in such claims. Outsourcers have always shared as much of the hardware infrastructure as they can between customers in a bid to minimise costs, he says. He believes that outsourcers are simply becoming more imaginative in the usage-based element of the contracts they are now offering. “What it sounds like to me is something that IT services companies have, to some extent, been delivering for years. That is basically usage-based computing,” he says.

Furthermore, because of the highly bespoke nature of major banks’ systems and the fact that many applications will be running on old mainframe-based hardware, the scope for rationalising this sort of complex infrastructure using utility computing is limited, he believes.

However, these deals do reflect a change in attitude by the major outsourcers and a new willingness to take risks in order to win new business. It is only in recent years that usage-based pricing has become an element of outsourcing deals, previously almost all deals were done on a fixed price basis.

Miller suggests that the major outsourcers are pulling out all the stops to win business from the big banks, because they consider them to be second only to national governments in terms of their long-term security as customers.

Outsourcers are more aware than ever of the risk of big clients running into financial difficulties. EDS, for example, was stung by clients WorldCom and US Airways after those companies were forced to file for Chapter 11 bankruptcy protection in the summer.

But if there is any consolidation in the finance industry, it is likely to be led by banks such as JP Morgan Chase, itself the second largest bank in the world in terms of assets.

“Basically, the race is on to win the IT outsourcing business at the major financial services organisations,” says Miller. “There will be a slew of these mega deals, but there are very few suppliers that can reasonably go after them,” he says.

That is why the same names keep cropping up, with the bulk of the business shared out between just four vendors: IBM Global Services, EDS, CSC and Accenture, with SchlumbergerSema, Cap Gemini Ernst & Young and Siemens Business Services struggling to play in that league.