Academic journal article ABA Banking Journal

Outsourcing Is Hotter Than Ever: Banks Are Willing to Let More Go outside, and the Traditional Fee-Based Deals Are Giving Way to "Partnering" and "Strategic Alliances." (Includes Related Articles on First Chicago NBD and Crown Bank FSB)

Academic journal article ABA Banking Journal

Outsourcing Is Hotter Than Ever: Banks Are Willing to Let More Go outside, and the Traditional Fee-Based Deals Are Giving Way to "Partnering" and "Strategic Alliances." (Includes Related Articles on First Chicago NBD and Crown Bank FSB)

Article excerpt

Banks are willing to let more go outside, and the traditional fee-based deals are giving way to "partnering" and "strategic alliances"

With all the attention directed lately on information technology outsourcing, newcomers to banking would think the concept had just been invented. They'd be at least partly right. Banks and thrifts have been outsourcing for at least 25 years, albeit under different labels. But the components of outsourcing arrangements--such as types of services provided, the nature of relationships forged and the players involved--are now as fluid as the financial industry itself.

Continuing consolidation and downsizing, increased pressure to boost revenue and heightened non-bank competition are just a few of the forces leading banks to question more closely what functions they should, and should not, hand over to external providers

Another primary driver of intensified interest in outsourcing is the mounting pressure on banks to deliver services whenever, wherever and however the consumer wants them. Such capability requires a complex and diverse set of technology skills which few financial institutions can amass entirely in-house.

These challenges are leading an increasing number of banks to outsource at least some pieces of the IT pie. The First Manhattan Consulting Group, for example, estimates that the major outsourcing providers are looking at growth rates in excess of 30% annually. The major national outsourcing companies with a heavy presence in banking include Affiliated Computer Services, Inc. (ACS); Alltel Information Services, Inc., formerly Systematics; BISYS Group, Inc.; EDS; Fiserv, Inc.; Integrated Systems Solutions Corp.(ISSC), an IBM subsidiary; and M&I Data Services.

Crafting a strategy

Unfortunately, there is no cookie-cutter approach banks can follow when trying to formulate an outsourcing strategy. But, there's advice. "Bankers need to view their business not as transaction processing, but as information management and distribution," said James Wells, managing director at Furash & Co., the Washington, D.C., consultancy. "Then," he continued, "they can see the cells, or sub-processes, that they can farm out to other people. The third party performs processing, but channels the information back to the bank, so that the information becomes the primary currency."

According to Austin Adams, executive vice-president at First Union Corp., the banks doing the best job of making outsourcing decisions are very disciplined and structured in their approach, and view outsourcing as a way to achieve their strategic objectives. "In the year 2000," he noted, "when we list the best outsourcing decisions, it will be those that were not based solely on whether the bank had poor performance in an area or wanted to enhance short-term profitability."

First Union's motivation for abandoning its in-house credit card system in favor of a new system currently under development by EDS--which will run the application off site--is long-term competitive positioning. Although he won't provide details on the expanded capabilities the new system will deliver, Adams indicates that First Union wants to ensure, at the least, an even playing field with its non-bank competitors, which have committed more resources to application development on the card front.

As Adams explained, "Partnering with a large technology firm that is willing to make a significant investment will give us a better system, at less cost and in a shorter period of time than if we had done it internally."

First Union--unlike an increasing number of institutions--outsources very little of its acquisition conversion efforts, since it views its high level of expertise in this area as a competitive edge. For example, when First Union acquired First Fidelity Bancorporation, it inherited a 10-year outsourcing contract with EDS, which included consolidating First Fidelity's multiple data centers, and running the single data center. …

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