Hundreds of IT staff at Zurich Financial Services are facing redundancy after an outsourcing deal with IBM collapsed.

Under the original deal, IBM Global Services was to take on up to half of Zurich's 1,800 IT staff, in a five-year contract. Zurich hoped to save about £60m in IT costs from systems development and contracts.

But the deal collapsed in September after months of negotiations because neither side could agree on the terms of the contract.

This has struck a blow to Zurich's IT staff, who were told their jobs would be safe under the outsourcing deal.

Zurich has now warned staff and their union representatives that there will be redundancies, although the insurer has not confirmed how many people will be shed.

A spokeswoman for the insurer said: "We have always been open and honest about the fact that we will need fewer people in IT across the business as we move forward and integrate our systems.

"Therefore we can't rule out the need to make redundancies."

Many of the IT staff employed by Zurich come from contract companies. Zurich would be looking at decreasing numbers of contract staff to minimise the number of Zurich staff redundancies, said the spokeswoman.

But she added that the company had not ruled out another outsourcing deal to replace the IBM contract.

A Union of Finance Staff spokesman said: "Zurich IT staff are very disappointed that this deal has fallen through because it was to safeguard their jobs."

Zurich's announcement comes just weeks after it shed 30 life insurance staff from its Swindon and Cheltenham offices. The redundancies were part of an overall 170 expected as part of a "strategic review".