Outsiders Have Inside Track Handling Data
For more and more companies trying to manage huge amounts of information flowing through the global economy, the “in” thing is contracting out.
Just look at American Express Co. The financial services giant has turned over the operation of its worldwide information systems to International Business Machines Corp. Under a $4-billion, seven-year contract signed in February, IBM is processing American Express’ credit card and banking transactions and is responsible for adjusting its information needs to changing competitive conditions.
Similarly, banking firm J.P. Morgan Chase is negotiating an agreement with IBM that could be worth $5 billion over seven years. IBM would take over Morgan Chase’s information resources, along with thousands of its employees.
In return, the Armonk, N.Y.-based computer concern would be Morgan Chase’s information provider on demand, processing millions of daily transactions, maintaining all of its accounts and updating the bank’s systems with the latest technology.
The phenomenon of companies handing over their confidential records and strategic information to others for processing -- with security safeguards, of course -- reflects not only the continuing advances of information technology but also the evolution of the corporation itself.
In place of the centralized corporate organization that prevailed for a century, the model today is “moving toward confederation,” management scholar Peter F. Drucker wrote last year in a landmark article, “Will the Corporation Survive?”
In Drucker’s eyes, outsourcing represents a healthy development in a business world that is more cutthroat than ever and where executives are required to be extraordinarily nimble, often making bet-the-company decisions on tight timetables.
Under such conditions, Drucker advised, “the most productive and most profitable way to organize is to disintegrate.”
Indeed, by farming out their information technology needs, companies can concentrate on what they do best, be it manufacturing or marketing.
Hiring an IT partner, says Rick Belmonte, the Los Angeles-based head of management consulting for the Gartner Group, allows a corporation to better “shoulder the strain of processing flows of money and orders and supplier contracts and hundreds of other operational details 24 hours a day, 365 days a year in every corner of the world.”
IBM is not alone in tapping this burgeoning market, which offers an avenue for growth in an otherwise difficult high-technology environment.
Just a couple of weeks ago, Computer Sciences Corp. inked a $700-million contract to provide all information services for Bombardier Transportation, the rail equipment division of Bombardier Inc. of Canada. Under terms of the deal, El Segundo-based CSC will hire more than 600 Bombardier IT employees and operate rail service centers at 200 sites worldwide.
CSC was founded 44 years ago to help the aerospace industry cope with the data requirements of weapons development. It received its first IT outsourcing contract in 1994 from General Dynamics Corp. Today, CSC has 130 such pacts that bring in $5 billion in revenue a year. Its client roster includes entities as varied as United Technologies Corp. and Childrens Hospital in Los Angeles.
Also heavily into the field -- which the jargon-happy technology industry calls “IT Infrastructure” -- are Electronic Data Systems Corp. and Accenture Ltd.
For those doing the outsourcing, there are certainly risks involved. It is possible, for instance, that an IT company doing work for a bank won’t pick up on some particular nuance in the credit market that insiders would have noticed.
Skeptics also wonder whether the services being provided are worth the money.
Yet those who have signed IT contracts maintain that the potential for a payoff is great.
The costs of operating the networks of computing and Internet communications at a big corporation today are 3% to 4% of revenue for a manufacturer, experts say, and 8% to 10% for a financial-services firm. At both American Express and J.P. Morgan Chase, spokesmen say, the money saved by going with IBM could amount to hundreds of millions of dollars a year.
Samuel Palmisano, IBM’s chairman and chief executive, said in a recent speech that the best way to think of his company these days is “as a utility.” In other words, customers will pay only for the information resources they use -- not for the computing and Internet capacity they don’t.
IBM, which now relies on services and software rather than hardware for most of its $86 billion in annual revenue, paid $3.5 billion in July to acquire the 30,000-strong information technology consulting practice of PriceWaterhouseCoopers.
In the coming decade, IBM intends to spend $10 billion more on acquisitions to support its information outsourcing efforts, Palmisano said.
Notably, PriceWaterhouseCoopers is the same consulting practice that Hewlett-Packard Co.’s chief executive, Carly S. Fiorina, tried to acquire two years ago. But HP shareholders vetoed her attempt, sending a clear signal that they wanted the company to stick to its roots of making electronic instruments and other equipment.
So who was right, HP shareholders or Fiorina?
Time will tell. But just as with successful species in the natural world, adaptability is the hallmark of successful companies in the business world. And today, that means do what you do best -- and outsource the rest.
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James Flanigan can be reached at jim.flanigan @latimes.com.
