Systematics Information Services knows what it's like to be a growing fish in a shrinking pond.
"Sometimes I think the only thing holding the banking industry together is American culture: people put their money in the bank," said John Steuri, chairman and chief executive of the Little Rock, Ark., firm.
With its data processing, software development, and consulting services, Systematics provides the back-office structure that holds many of those banks together.
In an era of diminished profit expectations and cost control in banking, Systematics' pledge to reduce expenses in the typical data center by 10% to 15% annually has become increasingly attractive.
Steady Growth
The company's reputation and revenues have grown steadily since its inception 25 years ago. It was started by a former University of Arkansas professor named Walter Smiley with eight employees and $400,000 in capital from Stephens Inc., the Little Rock investment banking firm that still exerts a quiet but powerful influence on much of the business activity in the state.
Despite Mr. Steuri's worried prognosis of his primary market, Systematics' fortunes, as well as his own, have climbed higher still since he left International Business Machines Corp. for his current position in 1988.
Annual sales, restated to reflect Systematics' 1992 acquisition of Computer Power Inc., the country's leading processor of residential mortgages, more than doubled from $263 million in 1988 to $579 million in 1992. Operating profits climbed from $36 million to nearly $95 million over the same period.
Combined, Systematics and CPI have more thin 1,000 financial firm clients worldwide. In addition to its growing data processing business, Systematics also has been growing its software business. The company sells to banks the same core applications software it uses to run outsourcing operations.
Attracting Big Banks
And while most of its outsourcing customers are mid-sized institutions, Systematics recently has become more successful at selling software to the nation's largest banks. Citicorp, Chemical Banking Corp., and NationsBank Inc. all currently have software development contracts with the company.
As a result of Systematics' growth, Mr. Steuri, 54, who recently celebrated his fifth anniversary as chairman and chief executive, has been compensated at a level that would make most big bank chief executives envious. His total compensation in 1992 amounted to $4.5 million, most of which came from the exercise of stock options.
The company has clearly benefited from its 1990 merger with Alltel Corp., a telecommunications company also headquartered in Little Rock, which provided both financial resources and technical expertise.
|A Great Fit'
"It wasn't just a good fit, it was a great fit," said Craig Ellis, a telecommunications industry, analyst at Wheat, First Securities, Richmond, Va., of the deal, which valued Systematics at nearly $500 million.
"It's been a terrific acquisition, and I think the benchmark for other telecommunications companies," Mr. Ellis said, adding that Systematics' business has expanded dramatically. He maintains a |buy' rating on Alltel, calling it "the company the regional Bell operating companies wish they could be."
Some customers have already seen the benefit of the Alltel alliance. Integra Financial Corp., Pittsburgh, a $14 billion-asset holding company, recently, expanded its outsourcing arrangement with Systematics to include telecommunications services.
"We initiated that relationship, because Systematics' association with Alltel offered a level of technical expertise that we couldn't assemble on our own," said Gary Deschamps, senior vice president of operations and data processing at Integra. In addition to its sophistication, Mr. Deschamps said the new network also created tremendous cost savings, well in excess of Systematics' standard 10% to 15% claim.
"That combination of network management and back-office experience is something no other company can put on the table," said Mr. Ellis.
Outsourcing Still Key
As part of Alltel, Systematics has grown and diversified. In addition to Computer Power, it has made numerous acquisitions over the past three years, as well as initial steps into outsourcing for the telecommunications and health care industries.
For his part, Mr. Steuri down-plays the brand extension. "Our market remains the top 600 or so banks," he said. "We're not going to try to become an EDS or an IBM. We're a major player in banking, we're working the telecommunications side, and we're going to try some other things."
Even with the move into new markets, bank outsourcing, in the form of remote data processing and facilities management contracts, still delivers the bulk of Systematics' revenue.
Industry consolidation and tight economics at the beginning of the decade made a fad of outsourcing, and Systematics was a major beneficiary of that rush. Revenue booked under contract grew from $730 million in 1990 to $1.6 billion in 1992. That figure is important because the profit margins in an outsourcing agreement typically increase over the life of the contract.
With terms generally ranging between five and 10 years, outsourcing contracts also create a steady stream of long-term revenue. Once engaged in an outsourcing arrangement, banks are reluctant to leave it.
Advantage Is Evident
For example, Integra is the product of a 1987 merger between Pennbank and Union National, both of which had prior outsourcing agreements with Systematics.
Integra regularly re-examines its outsourcing relationship. But, according to Mr. Deschamps, Integra's alternative would be to bring the operation in-house, as the start-up costs for another outsourcing vendor to assume the contract would be too high.
"Every time we run that model [in-house vs. outsourcing], we see a 10% to 15% advantage for outsourcing," said Mr. Deschamps.
Gaining Control
Currently. Systematics has more than 60 facilities management contracts like the Integra deal nationwide, managing and staffing data centers located on the banks' premises.
"People tend to associate outsourcing with losing control of data processing," said Mr. Deschamps. "We think the opposite is true, that we've gained control of what is important.
"The only thing that we don't do is hire people," he continued. "We set the direction. We're just letting them manage the day-to-day functions."
Systematics is taking steps to broaden its outsourcing business. A new, 180,000-square-foot data center on the company's Little Rock campus will house so-called remote outsourcing services.
In such an arrangement, an institution's data center will essentially be moved to one of the remote sites, while critical employees, functions, and operations remain on-site.
Case in Point
One of the first customers for the new data center will be USAA Federal Savings Bank, a $4 billion institution located in San Antonio. USAA plans to move to a remote outsourcing arrangement next month.
USAA had been running Systematics core software in-house since the bank was chartered more than a decade ago. But there were several compelling reasons to make the switch, according to Harry H. Richardson, an assistant vice president at the bank.
"We were lagging several generations behind in implementing Systematics software, so there was always a constant backlog of work," said Mr. Richardson. By moving to an outsourcing arrangement, Systematics would automatically move the bank to the current generation of software, freeing up USAA staff for other tasks.
Mr. Richardson also said the latest release of Systematics software includes features that USAA was attempting to develop on its own. He estimates that the change may save the bank as much as $4 million over five years.
Selling Applications
The company also is making the plunge into check processing using imaging technology. It has begun implementing Unisys Corp.'s Infoimage Item Processing System in its data centers and marketing the service.
"Image technology is going to cause the economics of item processing to become different. That's the assumption we're making," said Collins A. Andrews, a Systematics executive vice president. To date, though, Systematics is delivering image item processing only to existing outsourcing customers.
The company has made inroads in selling its core applications software, the same software that it uses to run its outsourcing clients. Bankers, it appears, are acknowledging the value of using applications that have a 20-year track record.
"Bankers were arrogant to the economics of shared software development," said Roger Owens, president of Systematics Financial Services. "As a result, you saw a lot of cost overruns and failures in the larger IT shops."
NationsBank Deal
Foremost among Systmatics' large-bank agreements is its joint development project with NationsBank to revamp the delivery systems of its retail bank. The project involves nearly 300 developers from Systematics and the bank.
Such arrangements "are hard to manage and control. But the economics are compelling," said Mr. Owens.
NationsBank is looking to the project as a major component of its efforts to streamline operations and support in its retail banking operations. The development project will marry the time deposit, consumer lending, and demand deposit account applications of Systematics to the customer information system currently being used be NationsBank.
"We needed their expertise," said," said Rusty Rainey, an executive vice president at NationsBank. "This project dramatically simplifies our operating environment and reduces our cycle time for introducing new products."
Mr. Rainey said the project, known as the Model Banking Center, will be introduced in stages beginning in 1994.
