Outsourcing at the nation's largest banks has come a long way, baby.
Just a decade ago, bankers looked disdainfully on the practice, then known as facilities management. A heavy stigma was attached to hiring outsiders for jobs the largest banks had customarily done in-house.
"It was seen 10 years ago as an admission of failure," said Stephen R. Bova, president of the global banking division at Electronic Data Systems Corp., Plano, Tex.
In the early 1990s, however, many big banks, looking to dress up unsightly balance sheets, turned to outsourcers. Since that early flirtation, banks have come to see outsourcing as a way not only to jettison unpleasant tasks but also to enhance strategic operations.
In the past three years, the growth of outsourcing among bigger banks has been dramatic. Of institutions with more than $4 billion in deposits, 84% outsourced in 1995, up from 52% in 1992.
Last year, outsourcing grew by 18%, more than double the growth for any other banking activity, according to Mentis Corp., Durham, N.C. Growth will likely top 18% this year, said James B. Moore, president of Mentis. Experts said the ingredients are in place to make 1997 the biggest outsourcing year yet.
Facilities management first gained the attention of the nation's largest companies in 1989. That's when IBM snagged a contract to manage Eastman Kodak Co.'s data center. The resulting publicity pushed outsourcing into the big leagues. But banks lagged behind other industries, according to M. Arthur Gillis, a Dallas bank technology consultant. When banks did begin to jump in, it was out of desperation.
The catastrophe in the thrift industry and faltering performance at commercial banks spurred executives to look for quick ways to cut costs. Outsourcing was the ticket.
The stigma of outsourcing is now almost gone, experts say. Mr. Gillis points to personnel changes. "The new breed of chief information officer has become more attuned to the corporate strategy of the bank," he said. Now, outsourcing decisions are based largely on financial and strategic analysis, he said. The executives see outsourcing as a business decision that allows them to stay competitive, he said.
EDS' Mr. Bova thinks the stigma persists among some bankers who still want the information and technology organization to provide all services to its parent, mostly out of a lingering sense of pride. He adds that more and more banks are looking at outsourcing before they consider building a business segment.
The follow-the-leader effect has also diminished the old-school thinking. "As you see healthy banks like Citibank outsourcing various pieces of their technology, that is helping the trend," Mr. Bova said.
Aside from changing attitudes, the largest factor in the surge of outsourcing by big banks has been the wave of bank consolidations and the resulting need to merge disparate technologies.
EDS, for instance, has capitalized on its knowledge of older systems that need to be merged or retuned as their owners merge. "We are very skilled at optimizing legacy systems to a point where they don't have to be replaced," Mr. Bova said. "We make a business of that and do it over and over again."
With the millennium approaching, and the problems associated with programming for 2000, business continues to be brisk in that area, Mr. Bova said. As bank consolidation has continued, alternative retail delivery channels, such as transaction processing for ATMs and point of sale terminals, have also evolved rapidly. That has put tremendous strain on the information technology groups, Mentis' Mr. Moore said.
Growing technologies and shrinking staffs made outsourcing more appealing to big banks looking to manage and maintain these new systems, Mr. Moore said. Ten years ago, banks thought they were deep into computer networking, Mr. Bova said. Today, they are doing 10 times as much. Technological advances in the area will continue at a rapid pace, and it requires a lot of work to stay current, Mr. Bova said.
But more importantly, the attitudes of bankers have changed. Now, outsourcers are viewed as partners who bring valuable knowledge to the bank. "The strategic involvement in assisting the bank's thought leadership is very much a factor today," he said.
Part of the attitude change has stemmed from the way banks now contract for services, Mr. Bova asserts. Ten years ago, they signed 5- to 10-year contracts that were fairly rigid, with stiff penalties for changes or withdrawal. Now, banks can get out of contracts easily and also can change the focus of an outsourcer's activities, he said.
That has resulted in partnerships that give bankers more control over the business they are farming out, he said. It has also made outsourcers more responsible and interested in doing a better job, he said.
Bigger banks are also looking at how they outsource business differently than they did 10 years earlier, Mr. Moore said. As products are disaggregated into smaller components, big banks look at giving much smaller pieces to outside companies, he said.
With mortgages, for instance, banks break the business into origination, servicing, and securitizing, he said. The servicing is seen as a commodity that lends itself to outsourcing. In its latest study, Mentis found that 44% of banks with more than $4 billion of assets outsource mortgage processing.
"As banks expand their product portfolios into insurance and other investment products, the management and processing will be outsourced from the very beginning," the Mentis president added.
Mr. Moore is a freelance writer based in Mt. Vernon, Maine.
