Case Study in “On Demand” Computing: American Express Company
Posted October 9, 2009 by Bierce & Kenerson, P.C. · 
Print This Post
Motivations for an “On Demand” Computing Deal.
American Express Company is the world’s largest issuer of credit cards and provides financial services. Why did American Express Company decide in February 2002 to sign a $4 billion seven-year deal with IBM, the world’s largest information technology company, that the two companies hailed as “on demand” computing? The announcement says little about the structure of the deal, but is clear as to intentions.
American Express Company’s Cost Savings.
American Express calculated that this deal will save them “hundreds” of millions of dollars.
American Express Company’s Internet Initiative.
After 2001, Chairman and CEO Kenneth Chenault began pushing American Express to Web-enable its operations as much as possible. In a Web conference with investors on February 6, 2002, he noted that, “given the compelling economics of online servicing across all our businesses, several initiatives last year focused on shifting customer transactions to the Internet.” He asserted that self-service Web-enabled applications allowed the company to handle 78% of their customer transactions – from payments to disputes — via the Internet, with over 5.5 million U.S. cardmembers enrolled in this program, generating over 83 million logins in 2001, resulting in unit cost reductions of up to 60% for certain transactions, reduced rates of credit problems of credit card fraud (by up to 96% at certain merchants and overall by over 25% in 2001) and of customer disputes (by up to 50%). Other administrative chores have been permanently shifted to the Internet, such as employee and financial advisor processes.
American Express Company’s Restructuring Initiatives.
Due to a sharp decline in travel and in demand for financial services after September 11, 2001, the company accelerated its then current focus on cost cutting and restructuring. In 4Q2001, the company eliminated 5,500 to 6,500 travel-related jobs and took a restructuring charge of $240 to $280 million. In a news release on December 12, 2001, the company note that “reengineering initiatives being implemented or considered by the company include cost management, structural and strategic measures such as vendor, process, facilities and operations consolidation, outsourcing, relocating certain functions to lower cost overseas locations, moving internal and external functions to the internet to save costs, the scale-back of corporate lending in certain regions, and planned staff reductions relating to certain of such reengineering actions.”
Prior and Ongoing Business Relationships.
Announced in February 2002, MarketMile, an e-procurement service provider founded by American Express Company entered into an “e-business on demand” “alliance” with IBM to deliver to American Express’ customers the “benefits of e-procurement” and management of “indirect expense spending via the Internet. This service will be based on IBM’s “Leveraged Procurement Service,” IBM’s program for Web-enablement of a customer’s proprietary applications and supply-chain integration of the customer’s supplier network and customers. In March 2002, IBM and American Express announced an agreement to jointly develop a Web-based expense reporting and reconciliation software tool for reporting travel and miscellaneous business expenses and reconciling corporate purchases, to be marketed by American Express and hosted by IBM.
Interlocking Boards of Directors.
Good friends make good business, it seems. IBM’s Chairman Louis Gerstner from 1993 to March 2002 was formerly Chairman and CEO of American Express Travel Related Services from 1985 to 1989. American Express Company’s Chairman and CEO Kenneth Chenault is a member of IBM’s Board of Directors. This unusual bilateral interlock spanning 15 years of common business experience shows how aligned the interests of the companies have become. Could anyone say that this was the reason why IBM got the deal? (Or was it because of superior acumen, customer service and solid technology?)
IBM’s Investment in Changing Technology.
The selection process for a transaction of this size involves more than board-room and golf-outing relationships. IBM’s position as a manufacturer of computers gives it unique leverage in pricing. IBM’s “Project eLiza,” to deliver self-managing systems technology (including configuration, optimization, fixing and self-protection) across the company’s entire e-server product portfolio by 2007, offers customers the comfort of being with a market leader in hardware that supports e-business.
IBM Global Services: Are they the only game in town?
The promise of “on demand” computing requires a services provider to provide a “total smorgasbord” of services, even for third-party equipment, third-party software and third-party telecommunications. Who else could meet this challenge? Is this a challenge that makes sense for other services providers? Could a meaningful outsourcing contract be drafted that would overcome the inherent limitations of a narrow-scope services provider? Do equipment manufacturers (such as IBM, HP, Compaq and Dell) offer better terms than pure services companies? Or could a narrow-scope services provider compete effectively by becoming a better manager of third-party services than IBM? This deal opens these issues.
Deal Terms.
American Express will pay IBM Global Services about $4 billion over seven years to host its Web site, network servers, data storage, and help-desk support. According to IBM, this contract is IBM Global Services’ largest for utility-based service delivery. Payments are adds are based on actual usage of IT services rather than a flat fee. American Express projects “hundreds of millions of dollars” in IT savings during the life of the contract.
As part of the agreement, American Express will also move about 2,000 employees worldwide to IBM Global Services. The employees will continue to work out of American Express’ data centers in Phoenix and Minneapolis, as well as locations in England and Australia. In March, IBM will begin taking over American Express’ transaction-processing operations.
Utility Computing /On-Demand Computing.
While the concept of on-demand access to IT resources has been in the market for a few years, few large companies such as American Express have committed to it. Essentially, the services provider takes over responsibility for making all purchases, managing the technology and delivering technology as a service “on demand,” when and where needed, in scalable volumes. As a legal contract, however, the degree to which any service can be “on demand” involves prior agreement on the customer’s current and future technology plans, as well as any financial risks that the customer must shoulder to deal with changing customer needs, changes in technology and changing market conditions. The customer still remains responsible for IT strategy, planning and ensuring that it gets what it contracted for.