Information Technology in Financial Services
It is worth examining at this stage, the generic value of IT in and business of financial services. Strategic choices in IT lie outside top management prerogatives in financial services, because it is a matter for domain expertise and awareness of new technology trends (Fincham, 1995). Functional experts at lower levels of organization may wish to build their own empires, but people such as Austin Adams have relatively little to contribute for the key strategies which will determine the future profitability and market shares of JPM.
Technology is better developed for hardware, operating systems, and popular programs, than for specialized applications. New hardware and global competitiveness dominate the IT scene (Kemerer, 1997). IT so drives down costs that it becomes a kind of minimum infrastructure required to stay in business. It also supports alternative market and distribution structures. Few companies can build sustainable competitive edges on IT alone (Kemerer, 1997); many advantages are or become generic over time.
JPM would be better served by a long term alliance with a reliable service provider, which can offer cutting-edge hardware and systems at optimal costs, leaving JPM’s own management free to protect its existing revenue lines from threats, and to leverage the myriad new opportunities fully. In-house IT has security advantages for financial services, but the outsourcing option is better for cutting-edge technologies (Fincham, 1995). Outsourcing also brings innovation in systems development.
Collaboration between business and IT expertise is inevitably required in all set-ups (Fincham, 1995). This dilutes some of the back-sourcing advantages that JPM seeks. JPM is liable to construct an enormous and unproductive infrastructure to deal with the complexities of IT, and with the coordination issues of having a large number of distant service providers. It would certainly be better served by a turn-key arrangement with an organization of similar values and lineage. It appears that JPM is aware that back-sourcing from IBM is only a transient phase.
It will have to eventually be outsourced once again, though this activity may be spread over a relatively large number of service providers, rather than consigned to a single entity. Modular corporations of strategic business partners with similar values lead to more sustainable value deliveries, than loose arrangements with a large number of suppliers (Kemerer, 1997). Coordination costs do not support a large number of service providers. It is apparent that the JPM decision to back-source from IBM is against the conventional wisdom in literature, as far as IT outsourcing in financial services is concerned.
There are no discernible benefits from the facts of the case, given that a strategic alliance with IBM would not pose any incremental security risks for JPM, over the proposed outsourcing to unknown service providers in emerging markets. The management resources expended in back sourcing and subsequent outsourcing will produce no returns, or offer no competitive advantages in a transformational market, quite apart from loss of morale in an organization which values its human resources