Schroders initially contracted with JPMorgan in 2000 to outsource the administration of its £75 billion of UK custody and fund assets. One of the largest lift-out deals of its kind, the contract was seen as offering a critical leg-up to the US invesment bank as it sought to build a scale model for back office outsourcing.

The discontinuation of the project will be viewed as a major blow to JPMorgan's ambitions to become a leader in investment operations outsourcing.

In killing the deal, JPMorgan and Schroders have agreed a bland statement saying that that their operating models are "no longer sufficiently aligned to justify the continuation of the project".

Despite the reassurances from both sides, the project has been plagued by implementation problems from the outset. Many of the difficulties are understood to have stemmed from the original demanding RFP from Schoders. Market observers believe that in its eagerness to land the contract, JPMorgan failed to fully appreciate the complexity and difficulty of the implementation and negotiate a more flexible deal.

Under the terms of the handover, Schroders staff and technology assets ousourced to JPMorgan will be brought back inhouse by the end of the third quarter 2005. JPMorgan will make a £20 million payment to Schroders to cover the estimated £10 million per year additional running costs accrued as a result of the insourcing. Schroders management say it expects the increase in costs to be absorbed over the next two years.

JPMorgan is putting a brave face on the loss. The firm says it recently achieved the successful completion of other outsourcing transactions in the marketplace, and views the full scope of outsourcing services as a critical component of its offering to clients worldwide.