While most financial institutions have fled the business of managing data processing operations for other banks, M&I Data Services, the technology unit of Marshall & Ilsley Corp., has made a healthy living at it.

With Mellon Bank's sale of its business to Fisery Inc. this summer, Milwaukee-based M&I became the only financial institution among the top 10 processors of core deposit and lending transactions - a business that dozens of banks once saw as a lucrative source of fee income.

Though M&I is smaller than highly regarded competitors like hometown rival Fisery and Little Rock, Ark.-based Systematics Financial Services Inc., it frequently competes with these nonbank firms, and often wins.

|We're Profit Driven'

M&I attributes its success to constant technology investment and a hard-driving sales culture.

"We're profit driven, not expense driven," says Dennis Kuester, president of Marshall & Ilsley Corp., a veteran of International Business Machines Corp. who until recently headed the data services unit. "We're dedicated to having fun and to making money."

The data services unit expects $178 million revenue in 1993, about one-eighth of the projected revenues of the $7 billion-asset holding company. But the technology business is growing rapidly, at 22% compound annual growth rate.

The unit helps the bank's stock trade at a modest premium, about 12 times earnings.

Now M&I Data Services faces the task of maintaining its growth as the market it serves - community and and regional banks - consolidates. Analysts speculate this shrinking of the market could eventually lead M&I to spin off its data processing business, but thus far the bank has resisted such a move.

M&I's staying power in out-sourcing is viewed as an out-growth of its success as a bank. In the late 1980s, when other banks were wracked by problem loans, M&I barely stumbled.

"In terms of profitability, credit quality, and all key indicators, M&I is a superior bank," said Richard Strauss, a Salomon Brothers bank analyst. "When other banks had to shrink their balance sheets, M&I never had those kinds of problems."

"M&I is well managed, conservative, pristine - and the data processing function will continue to do a lot for earnings," said Michael Milunovich, a bank analyst with Robert W. Baird, in Wilwaukee.

Dealing from Strength

M&I's stable balance sheet has carried over to the quality of the processing organization.

In the late 1980s, Mellon decided to stop investing in its service bureau business in order to focus on problem loans. Meanwhile, M&I's chairman at the time, John A. "Jack" Puelicher, was deciding to devote more resources to its data business.

M&I is dedicating $36 million, or 20% of total revenues, to capital expenditures in 1993, bank officials said.

Much of the investment goes into developing new software. Although software sales account for only 10% to 15% of the unit's revenues, M&I views software as crucial to its continuing success in outsourcing, which accounts for 75% of revenues.

Nearly all its service bureau customers use M&I software. And M&I says it won outsourcing deals such as one to run Chase Manhattan Corp'.s Arizona bank on the strength of its software, which Chase already had installed to run its retail bank in New York.

"M&I is one of the most quality-oriented houses" in outsourcing, said Richard Leonardi, senior vice president Chase Manhattan Bank.

"M&I software is some of the best in the business," says M. Arthur Gillis, a New Orleans-based consultant.

The unit also has a reputation for marketing.

|Straight Shooters'

M&I Data Services is headed by Joseph Delgadillo, another IBM veteran who reports directly to Mr. Kuester. In addition to processing for over 400 banks with a total of over $80 billion in assets, the unit also does all the processing for M&I Corp.

"Their pricing is legitimate; they have that Midwest work ethic, and they're straight shooters," Mr. Gillis says.

By constant investment to keep its software up-to-date, M&I hopes to keep expanding its market share.

Now M&I is developing systems based on client/server technology to give service bureau customers more freedom to generate reports and access information with microcomputers while M&I continues to run their core accounting systems.

M&I also sells its software, called Reliance 2000, to other banks through an exclusive marketing relationship agreement with Software Alliance, Berkeley, Calif M&I is also working with Software Alliance to develop was is called a "data warehouse," a centralized electronic repository for customer and product information.

Software Alliance and a distributor in Switzerland that markets M&I's statement-formatting software in Europe account for about 40% of M&I's software sales. The rest are made by M&I's sales force.

Despite its revenue growth, industry consolidation has cost M&I some customers. When Pittsburgh-based Equimark was acquired by Integra Financial Corp. last year, the merged institution decided to hire Systematics to combine systems.

But M&I says it believes there are just as many opportunities for growth in a consolidating market.

"There's no doubt the market is shrinking in terms of the numbers of banks," says Mr. Delgadillo. "But we win just as many contracts as we lose because of consolidations. And as banks continue to look at cutting costs, the market increases for us in terms of potential revenue."

Last year the bank created a separate unit to market to $1 billion-plus banks. And it says it is coming to specialize in converting the out-of-state acquisitions of money-center banks like Chase and BankAmerica Corp. to common systems.

Facilities Management

Where M&I has not sought to compete is in large facilities management contracts, where an outsourcer agrees to manage a single bank's back office, usually hiring bank employees. Facilities management differs from service bureau processing where the outsourcer runs many banks' computers from a single facility.

While M&I has done some facilities management, it "is a commodity business," says Mr. Kuester. "We want to go after the large software opportunities."

As evidence Mr. Kuester said M&I didn't even bid on two of the biggest bank outsourcing contracts that were up for grabs in the early 1990s - with First Fidelity Bancorp and Continental Bank Corp., won respectively by General Motors' Electronic Data Systems Corp. and IBM's integrated Systems Solutions.

M&I Data Services prefers to run all its core processing at its data center in Brown Deer, Wis., where most of its 1,700 employees work.

The company works with the big facilities managers on some contracts. Signet Bank, for example, uses EDS to run its facility but has M&I software installed.

Careful Shopper

M&I is always looking for acquisitions, Mr. Kuester said. But it has less to spend than pure technology companies, whose stock commands higher prices.

That makes it a selective acquirer. This year it bought part of a service bureau business that Barnett Banks Inc. had put up for sale. The business was one that Barnett had picked up in an acquisition; M&I bought the piece of the business that ran on IBM computers, because the bank uses the same hardware.

But, although M&I evaluated the three processing units that Mellon Bank put up for sale early this year, it did not bite.

More generally, Mr. Kuester says, M&I doesn't believe it always makes sense to acquire the business of a competitor who has put it up for sale. Some of the business can be lured away without buying it, he says.

M&I did win two customers from Mellon: $1.2 billion-asset S&T Bank of Indiana, Pa., and Johnson International Inc., a as set bank holding company in Racine, Wis.

Mr. Kuester said M&I constantly evaluates whether it should sell a stake of its technology unit to investors, although he was quick to add that the bank has no current plans to do so. "Why should we give 20% of a growing company away?"

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