When it comes to choosing a method of operations, bankers have faced the buy-versuus-build decision at one point or another.
Traditionally, outsourcing has been the bailiwick of smaller banks; larger banks have relied mostly on proprietary systems.
And when bigger banks outsourced, they usually outsourced only specific lines of business -- not their entire data processing operation.
In recent years, however, a number of bigger banks have jumped on the outsourcing bandwagon, citing the potential cost savings to be had by letting an outside organization handle data processing.
The Business at Hand
Another potential reason to outsource is that it allows bankers to concentrate on the business of banking and avoids the investing in new technology that may soon become obsolete.
First Fidelity Bancorp., Lawrenceville, N.J., is now in the fourth year of its 10-year outsourcing contract with Electronic Data Systems Inc., Plano, Tex.
When the $450 million deal was signed in 1990, it was called a highly unusual one for a bank of First Fidelity's size. But sources said that may start to change.
"I see a lot of outsourcing activity among the superregional banks," said M. Arthur Gillis, president of Computer Based Solutions Inc. in New Orleans.
Operations Versus Cost-Cutting
First Fidelity's Paul Levine stressed that the bank's decision to outsource had more to do with its business objectives than cost.
"The incentive was operational, not so much cost-cutting," Mr. Levine said.
Since signing on with EDS, the bank has grown to $34 billion in assets.
Mr. Levine said that the contract with the vendor aided in the bank's growth.
"EDS has 50,000 employees," he said. "That is an enormous resource."
Other large banks with growth objectives that have recently signed on to the various services offered by third party vendors include the $8.9 billion-asset Amsouth Bancorp, Birmingham, Ala.; the $4.8 billion-asset Hibernia National Bank, New Orleans; $11 billion-asset Harris Trust and Savings Bank, Chicago; and $4.3 billion-asset Astoria Federal Savings and Loan, New York.
But outsourcing is not for everybody.
There is another aspect for banks to consider when deciding to outsource. Banks with built-up in-house systems, known as "legacy systems" because of their long-term history with the bank, often can't simply walk away because the investment in the systems is too big.
Their Own Way
But with in-house systems, bankers retain control over their operations and can offer distinction in their products and services.
In addition, they don't have to rely on the stability of their vendors.
"Some banks have been forced to convert to other systems because their outsourcer withdrew from the business and left them stranded," Mr. Gillis said.
Q: Are larger banks more likely to outsource in the future?
M. ARTHUR GILLIS
President, Computer Based Solutions Inc. New Orleans
In the past, to turn anything over to a third party was an admission of incompetence.
That's hogwash today. Outsourcing today has become a nice word. In old days, smaller banks would outsource, large banks would not.
That's not going to change overnight.
Banks will not necessarily give their whole processing to an outsourcer, but it's perfectly appropriate to outsource a piece of the pie.
I see a lot of outsourcing activity among the superregional banks with assets between $1 billion and $10 billion. Above that is a whole different world.
There are 60 banks over $10 billion, and they play by their own rules. That's OK.
But a $5 billion bank is an excellent candidate for outsourcing.
JERRY SCOTT
President, Redwood Empire Datacorp Santa Rosa, Calif.
Outsourcing is a new word for an old concept.
Fifteen, 20 years ago there were a number of service bureaus that gave the industry a black eye.
In core processing systems, [large banks] have a huge amount invested in their operations as well as their corresponding staff.
I think they have a lot of opportunity to outsource, but that doesn't mean that they will.
It's largely political, because their bureaucracies are looking out for themselves.
The way I see it, major banks have a big problem.
They have millions invested in their technological solutions, and they have the big bureaucracies that will keep them from outsourcing.
Small banks don't have those issues to deal with.
MARTIN W. McALEER JR.
Special projects coordinator, Roosevelt Savings Bank Garden City, N.Y.
Only if it makes business sense will it help. If it helps the business line, it makes sense. I feel not every thing should be outsourced. I'm not a believer in going down the line and outsourcing everything. I'm not comfortable with outsourcing mortgage processing. There are many software providers with good support.
I see outsourcing through mergers and acquisitions as means of consolidating a number of systems. However, there is a bottom line to a bank. Service bureaus do have the horsepower and the manpower, but the whole thing is not being too quick to give up control. The glamour of outsourcing has changed, and it shouldn't be a quick-fix expense by getting the hardware off their books when banks get in trouble.
DIOGO TEIXEIRA
President, Tower Group Wellesley, Mass.
The industry's largest banks are moving toward virtual banking. They must choose the best sources for their technologies, including both external and internal. Externally created and maintained packages, specialized systems integrators, and service bureaus for select product processing are becoming common. There are now more people who create banking technology who don't work for banks than who do work for banks.
However, banks with the available skills will still seek competitive advantage through proprietary systems. These may be mainframe or client-server based. The larger the bank and the more critical the technology to the business strategy, the more it makes sense for the bank to pursue proprietary options. This complex mix of technology sourcing will require new skills on banks' parts in the future.
