How can banks enforce performance standards set up in outsourcing contracts?

John Jones

Regional vice president

Newtrend

Orlando

IT IS IMPORTANT to have the right level of commitment to the oversight process. A lot of institutions take a hands-off approach, but that does not mean you can completely ignore the details. One of the first things bankers should do is establish a fixed meeting frequency with the outsourcer, who can then present statistics and go over other management issues.

Those who take part in the meetings should have at least enough technical expertise so that they can evaluate the performance of the outsourcer. They don't necessarily have to be techies, but they should have some kind of management experience.

As well as having a fixed meeting, them should be a clearly stated agenda. Know exactly what statistics will be reported and what issues need to be discussed. The objectives must be clearly stated with measurable results, something that is attainable and that can really happen.

Once the performance standards are set, there must be incentives built in to ensure they are met.

Jack Fidler

Vice president of operations

Grove Bank

Boston

One of the most important things you can do is participate in a regional and national user group where you have the opportunity to address your concerns directly. An issue or concern ay not be significant when it come from one institution, but when a number of users are having difficulty, we can work together to get an outsources to toe the line.

It is also immensely important that you build in "measurable" performance standards. They are not much good if they can't really be measured.

You also need to verify that the information you are being given is accurate. After all, that is usually what you are being billed on.

But the performance of an outsource is really more dynamic than day-to-day measurements. yes, you do need to know certain information. But those numbers can often obscure the bigger issues, such as if your outsourcer is proactive or reactive. yes, we want them to keep us up and running 100% of the time, but we also want them to help us stay competitive and ahead of the game. We want them to be our partners. That is something that can not be measured by performance standards. It is a relationship that only comes from working with people. These are the things you know intuitively when it comes time to renew the contract.

Some people thank having an outsourcer means you can wash your hands of the whole operation. Realistically, that is not the case.

Richard T. Powers

Chief operating officer

North Fork Bank

Mattituck, N.Y.

Banks must set up very specific benchmarks on the level of service expected and quality assurance issues. The more specific the agreement, the easier it is for both pardes to measure performance standards. In addition, remedies need to be specified in case the outsourcer fails to meet the standards. Penalties do no good if there is not an agreed-upon way to make sure it doesn't happen again.

Standards can be monitored through reports, which should be generated on a monthly basis, minimum. I would recommend weekly reports if someone was starting a new relationship. Our reports are downloaded and then interfaced with different statistical software. We outsource our automated teller machine processing, so the reports go to the head of retail banking and branch operations.

I always tell my staff to keep the reports to a minimum, with one page of key statistics. If I need more, I can always request it, but I don't want to drown in information.

And to keep everyone on top of things, we keep contract lengths to three years.

DANIEL R. PFAU

Partner

Andersen Consulting

Boston

WHEN ESTABLISHING service level agreements, particularly standards of performance expected, spell out all the key areas that the bank will monitor. The contract should stipulate penalties for not meeting the standards as well as incentives for doing a good job.

Don't just rely on penalties. The most successful relationships are those when the two parties are working together and not as adversaries. If you set up bonuses as well as the standard penalty clauses, a feeling of partnership develops.

For instance, if an outsourcer can improve performance so that it benefits the bank, such as uptime levels of an automated teller machine network, there might be bonuses for exceeding set standards.

The outsourcer should be contractually obligated to provide reports at appropriate periods.

ANDERSON CHANDLER

Chairman

Fidelity State Bank and Trust Co.

Topeka, Kan.

WE OUTSOURCE all of our loans and deposit work. To make sure we are being served in our best interests, we receive daily, weekly, and monthly reports. We don't just file the reports away. One of the first things we do is review the information that is sent. Then we compare h to past reports to see ff the numbers and figures are in line. We also check the billings to make sure they are reasonable and correct.

We also keep on top of the number of employees that are working. One of the main reasons we outsource is to make sure our employee count stays under 50 people. If it goes over that number, the bank must comply with the Family Leave Act, which would be very costly to our institution.

RICHARD L. PARK

Chief financial officer

Western Farm Credit Bank

SacramentO, Calif.

WE PUT SEVERAL key performance standards in our contracts, most of which are very visible to the user, so it is easy to determine whether or not the outsourcer is complying.

One of the main requirements is a daily delivery of reports; other obvious measurements are the availability of the on-line systems and the response time of those systems. Those are three key areas that users can zem in on right away to see if the contract is being fulfilled as agreed.

There are other services being rendered that are much less visible, such as programruing objectives and the general working relationship. But they are just as important-- if harder to qualify.

We have a group of contract administrators whose job is to act as the liaison between the outsourcers and the user. These are the people who really have a sense if the relationship is working or not.

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