Academic journal article ABA Banking Journal

The Future of Outsourcing: Ten Factors Govern the Direction Core-Processing Outsourcing Will Take in the Next Decade. (It Trends)

Academic journal article ABA Banking Journal

The Future of Outsourcing: Ten Factors Govern the Direction Core-Processing Outsourcing Will Take in the Next Decade. (It Trends)

Article excerpt

In recent years, patterns and trends in outsourcing have remained rather consistent, and trends should be noted by decade rather than by year. Bankers are not quick to change strategic direction, but they are quick to purchase a new gadget or stand-alone technology. Outsourcing is a strategic direction, not a technological gadget, and from time to time, there are temporary industry and economic conditions which cause a moderate spike in the decision to outsource. Following is a characterization of how outsourcing looks in the banking industry, and where it is apt to be ten years from now.

Size of the bank is a major factor

Large banks do not typically outsource their core processing, and in my opinion, that won't change anytime soon. Of the top 85 banks in the U.S. (over $10 billion in assets), only 15 outsource their core applications. Technology is considered a major differentiator among the large banks. If a large bank were to outsource, it would look as if the bank was giving up its uniqueness, control, competitive advantage, and influence. The idea of "giving up" can be argued, of course, but perception is extremely strong in this debate. And certainly, one strong argument in favor of large banks keeping their work in-house is that there may not be an outsource company strong enough or big enough to handle the challenge. For example, the largest bank in the U.S. spends more money on technology than the top three bank outsource companies (Fiserv, Alltel and Metavante) generate in revenues. And because knowledge of banking and ownership of applications software are extremely important, it is unlikely that the generics (IBM G lobal Solutions, EDS, Computer Sciences Corp., or Accenture) would have an impact on large banks in the core applications arena. In the U.S., the only generic outsource company to contract core applications outsourcing with a large bank was CSC, when it created an alliance with JP Morgan under the name of Pinnacle. Now that JP Morgan is part of Chase, the uniqueness of that decision seems to be waning as Chase practices the in-house attitude of its peers.

At the extreme other end of the size spectrum, very small banks (under $100 million) prefer easy-to-use in-house turnkey systems. The community bank group as a whole (up to $500 million in assets) is mixed, with 58% using in-house systems. The in-house approach is growing modestly each year as bankers embrace the idea that on-site technology is affordable, reliable, friendly and doesn't require expensive technicians on the bank's payroll.

In the mid-tier category, in-house is strong at 66%, and, in my opinion, that's a mistake. Even though one might argue that current technology (hardware and software) is scalable to fit the need, when a bank exceeds the $500 million mark in assets, technology becomes more complex and bankers become more demanding in their quest for uniqueness, thus leaning towards custom solutions. This type of technology environment requires caring and feeding from technical staff as well as support employees. That raises the cost significantly which makes outsourcing look better. But bankers don't change quickly, and that's why outsourcing trends don't change quickly, regardless of reasoning and analysis.

The next decade--how much change?

First, I don't believe there is a right or wrong answer regarding the in-house/outsourcing debate. It's a matter of fit. Outsourcing is right for some banks, just like in-house is right for some banks. What is certain, however, is that very large banks will continue to use in-house systems, as detailed above, and nothing is going to change that. At the other end, very small banks will favor in-house systems also, but for entirely different reasons from the giants. Large and small in-house systems are as different as a Boeing 747 and a Piper Cub, but they each have their place.

What's up for grabs is the tier in between, and that market consists of over 14,000 financial institutions, including credit unions. …

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