Banks Turn to Outsourcing So They Can Focus on big Picture

Outsourcing historically has been viewed as a way to let banks focus better on their core business. And such focus is perhaps more important now than ever, experts say.

The pace of change, driven by technological advancements, has increased to the point that bankers cannot afford to be distracted from planning and implementing new business strategies.

This is particularly true in the retail arena, where choosing to emphasize the right alternative delivery channels could mean the difference between life and death for some institutions.

Such concerns have contributed mightily to the rising acceptance of outsourcing among even the largest banking companies.

"It's rent-a-brain time," said Edward Furash, president of Furash & Co. of Washington, D.C. "It's employee leasing."

Observers agree that banks big and small have changed the way they approach outsourcing in the last few years.

Instead of hoping that outsourcing will cut costs or remove computer expenses from a balance sheet, bankers increasingly use it as a way to free their hands for more strategic work.

The movement toward client/server systems has had an impact as well, forcing even some of the biggest banks to bring in outside talent to help on complex systems projects.

Mr. Furash and others say a technology "talent shortage" clearly exists in the banking industry. Hiring an outsourcer is seen as a smart way to avoid the effort and expense of searching for and retaining good technology people.

Aside from easing this burden, banks for the past three or four years have moved to farm out more nontechnical functions, such as mail room and purchasing operations.

Mr. Furash sees this as the second phase of bank outsourcing, which he said will give way to a "new form of correspondent banking."

"The drivers (to outsource) are moving more into the strategic area, as opposed to what I would consider just tactical issues," said Robert N. Gilmore, the chief processing services officer at CoreStates Financial Corp.

Philadelphia-based CoreStates stands on both sides of the issue, as a banking company that outsources and also owns an outsourcing subsidiary.

CoreStates outsources its trust processing to SEI Corp., Wayne, Pa., but handles its own lockbox and check processing through its Cashflex and Transys units. These units also process for 70 other financial institutions.

Mr. Gilmore reiterated that outsourcing allows his bank to "reallocate time more directly," but added that the bank does intend to keep a firm hold on some of its more important operations, such as credit approval.

Certainly, many banks have been feeling the need to loosen their grasp of some mission-critical parts of their business.

Lawrence A. Willis, a systems outsourcing specialist with First Manhattan Consulting Group, sees outsourcing growing at the rate of 30% a year.

He pointed to service implementation and the support of client/server systems and communications networks - such as local area networks and call centers - as the most rapidly growing areas.

James Moore, president of Mentis Corp. of Durham, N.C., agreed that use of outsourcing is on the rise. He noted that contracts related to alternative delivery channels, such as automated teller machines, are becoming as common as those for more traditional areas, such as check and mortgage processing.

And he said he expects outsourcing to extend to other technologically advanced areas, such as data warehousing.

"The whole nature of outsourcing is changing, but now the real momentum is in terms of professional services," Mr. Moore said.

The outsourcing firms themselves recognize the new opportunities this opens up, and also the renewed pressure it creates.

Banks "have found that they cannot retain the caliber of people that are required on their own payroll," said David Huber, president of Bisys Group's fund services unit.

First Manhattan research indicates that banks realize an average 20% cost savings from outsourcing scale-driven businesses such as mortgage, check, and credit card processing. They can save as much as 40% in other areas, such as telecommunications, said Mr. Willis. He attributed this to a change in banks' perception of outsourcing, as well as the cost savings.

"The stigma attached to outsourcing - that you outsourced because you couldn't do it - has gone away," he said.

Still, some banks fear giving control of their operations to a third party.

"To outsource, you outsource the freedom to be a technology-oriented marketer, to use the strategic advantages inherent in technology," said Philip G. Heasley, vice chairman of First Bank System Inc., Minneapolis. He noted that most of the major banks that have outsourced their entire data processing operations have been acquired. Prominent examples include Continental Bank Corp. and First Fidelity Bancorp.

But this does not mean outsourcing is bad. It means only that it must be done for the right reasons.

For instance, one of the most popular reasons for outsourcing is to get help in digesting acquisitions. Notable examples of this include BankAmerica Corp.'s use of M&I Data Services Inc. and KeyCorp's work with Alltel Information Services Inc.

To be sure, cost pressures still affect outsourcing decisions.

Daniel Reilly, group executive vice president in charge of support services for BankAmerica, said many banks feel "competitively constrained" and turn to outsourcing as a way to provide relief.

"I look at outsourcing as an economic decision. Everything's on the table," he said.

Patrick C. Foy, president of M&I Data Services' outsourcing business division, added that pressure to deliver is not only coming from the retail customer, but also from shareholders.

"Clearly there's a competitive earnings pressure that has banks looking for every alternative that would reduce expense," Mr. Foy said.

However, where only a few years ago, many banks needed assurance of at least a 25% cost savings before they would outsource, Mr. Foy said many now will commit for only a 10% savings.

Mr. Furash agreed that the reach of outsourcing will spread as banks feel "greater imperatives to keep costs in line." And in turn, even critical and unconventional operations are now on the table.

Banks "generally did not outsource the core thinking and implementation activities," he said. "It's only recently that banks have begun to outsource the creative part."

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