Mega-deal: American Express hires IBM for $4 billion

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Posted 3:23PM on Monday, February 25, 2002

NEW YORK - In one of a growing number of huge computer outsourcing deals, American Express Co. will pay IBM Corp. more than $4 billion to run its information technology operations for seven years. The companies announced Monday that American Express will transfer most of its IT duties to IBM -- along with 2,000 American Express employees -- when the contract begins March 1. By paying IBM to provide computing services as needed, American Express will save hundreds of millions of dollars, said spokesman Tony Mitchell. "This is a core competency of IBM," Mitchell said. "They can provide technological capability in a much cheaper way than we'd be able to do it ourselves." IBM will operate American Express' data centers, where the computers that operate the company's worldwide network are housed, as well as host the company's Web site and provide help desk and technical support, said Bob Zapfel, manager of strategic outsourcing for IBM's Global Services division. The contract includes upgrades to American Express' computer hardware -- servers, mainframes and storage units -- on an as-needed basis, Zapfel said. American Express, a 150-year-old company long known for its travelers checks and credit cards, wants to use IBM's expertise to help it quickly lower spending during economic downturns. "We refer to it as a utility-like service, like electricity," Mitchell said. "You're not paying for electricity when your lights are off in the house and you're not home." Zapfel said the contract is one of a handful of multibillion-dollar deals signed in the past few years by IBM's Global Services division, the company's information-technology services arm. "It is definitely one of the mega-contracts," said Bruce Caldwell, an analyst with Gartner Dataquest. Previous IBM contracts with Lucent Technologies and AT&T Corp. are as big as or bigger than the American Express deal, Zapfel said, declining to release contract specifics. Other large outsourcing deals include a five-year, $6.9 billion contract to provide computers and services to the U.S. Navy and Marines, won in 2000 by Plano, Tex.-based EDS Corp. Zapfel said the deal was the "largest ever" between a financial services company and a technology outsourcer. IBM's Global Services unit is the world's largest technology outsourcer and IBM's biggest revenue-earner, accounting for half of IBM's 330,000 employees. Caldwell said outsourcing contracts were beginning to show signs of shortening from the typical 10-year deals of the past few years. He said some companies are hedging on hopes of a new technological breakthrough that could reduce costs and are loathe to be locked into a long-term deal. "It's difficult to project what new technologies will arise next month, let alone 10 years out," Caldwell said. "People don't want to be stuck in a contract that freezes yesterday's prices." Overall, American Express plans to cut about 2,025 technology employees from its payroll, part of a previously announced 16 percent cutback from its current work force of 89,000. All but 25 of the technology workers will be transferred to IBM, Mitchell said. Some 1,500 of the workers are based at American Express' U.S. data centers, where its computer servers are stored, with most stationed in Phoenix and Minneapolis. The remaining 500 workers are scattered at American Express facilities overseas, Mitchell said.