Magazine article American Banker

Big Banks Choose Targets Carefully When Farming Out

Magazine article American Banker

Big Banks Choose Targets Carefully When Farming Out

Article excerpt

Outsourcing, once seen as a practice suited mainly to community banks, has become increasingly popular with the nation's largest institutions.

According to Computer Based Solutions Inc. of New Orleans, 26% of outsourcing contracts signed in 1994 were with financial institutions with more than $10 billion in assets. Only 6% of the contracts were with banks in that category in 1993.

Though numbers for 1995 and this year are not available, indications are that banks bigger than $10 billion in assets have continued to look to third parties for processing.

The fact that large banks outsource is not news. In the early 1990s, the mega-outsourcing deal became almost commonplace. First Fidelity Bancorp. signed a $450 million contract with Electronic Data Systems Corp. in 1990. In 1991, Continental Bank Corp. inked a $500 million deal with Integrated Systems Solutions Corp., International Business Machines Corp.'s outsourcing unit.

What is new, however, is that the outsourcing deals of the past few years have not typically covered entire core processing functions. Instead, the largest banks are picking specific applications to farm out - leading to a demand for outsourcing not seen for two decades.

"There's been a transformation in the philosophies of the typical chief information officer," said M. Arthur Gillis, president of Computer Based Solutions. He said that more tightly focused deals are becoming the norm.

However, the fact that huge core processing contracts are less common does not mean the mega-outsourcing deal is dead.

Just last month, IBM signed a $533 million contract to provide one of the nation's largest thrifts, Washington Mutual Inc., with a variety of strategic services, including desktop and network management.

Given the size of this deal, many experts were surprised that it did not include core processing.

But as mergers among banking companies create larger and larger banks, it stands to reason that even deals for very specific services will be big.

Experts said the mergermania among banks has other effects on the bank outsourcing business. For starters, mergers can significantly change existing deals.

Examples of this abound. First Union Corp. and BankAmerica Corp. both promptly revised outsourcing arrangements of their respective acquisitions, First Fidelity and Continental, upon merging. And Chase Manhattan Corp., which merged with Chemical Banking Corp., canceled altogether a check processing deal it had struck with Fiserv Inc.

The fact that banks continue their relationships with outsourcers indicates that they are mostly satisfied with the services, said industry experts.

"As banks focus more on reorienting their customer focus and product offerings, they're looking for ways to do things better and cheaper," said Richard Dole, a Houston-based partner at KPMG Peat Marwick.

"Outside companies provide the expertise for banks to reposition themselves to attract and retain customers."

All of this illustrates the change in attitude toward outsourcing that has occurred over the last several years. Industry observers said there is no mystery to why it is becoming more popular among large banks.

"Outsourcing brings new technology, product functionality, and economies of scale," said Lawrence A. Willis, systems outsourcing specialist with First Manhattan Consulting Group.

"It makes sense to purchase services externally" if they're not part of a bank's core competencies, he said.

Applications that are not part of a bank's expertise or that do not provide it with a competitive advantage are usually the ones farmed out to third- party providers.

This is a change from several years ago, when many banks outsourced all or most of their core processing operations.

Some of the more popular applications being farmed out are loan processing, check processing, and electronic transactions, according to Computer Based Solutions. …

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