Back-Office Contracts Gaining Flexibility
In New Generation of Outsourcing Deals, Banks Retain More Control
Heated competition among providers of bank data-processing services has led to much more flexible agreements than the traditional long-term contracts.
In the past, the vast majority of outsourcing deals were 5-year to 10-year facilities management contracts, in which a service provider takes over a bank's existing computer operations.
But as more service providers enter the market and banks gain more negotiating power, many companies are beginning to offer services that allow a bank to retain more control.
"The days of the canned approach to outsourcing are numbered," said Jonathan Blankmeyer, chief executive of Software Alliance Corp., based in Berkeley, Calif. "Banks have the power to demand a little flexibility, and they are using it."
|Middle Products' Moving Up
Officials at Systematics Information Services Inc. refer to the new wave of agreements as "middle products." The Little Rock, Ark.-based service provider has struck several deals of this type in recent months, and company officials said they expect the activity to continue to increase.
The most recent example of the flexible contracts at Systematics is an agreement with Liberty National Bancorp, Louisville, Ky. Systematics originally hoped to sign the $4 billion-asset bank to a long-term facilities management contract. But Liberty National, like many institutions, had some misgivings about ceding control in such an arrangement, Systematics officials said.
So the company struck an agreement in which it will install and run applications software at the bank for three years. By that time, bank employees will have been trained by Systematics' staffers and will take over the operation.
Systematics said the arrangement is profitable from its side. But it also hopes the bank will choose some sort of longer-term contract in the future.
Keeping the Customers Happy
"For a while there, it was either [a bank running systems themselves] or facilities management -- with little in between the two," said Dodd Miles, a senior vice president at Systematics Information Services Corp.
"But under the heat of competition, you've got to be willing to do what's necessary to make the bank happy."
Several other companies are adopting the adaptable approach as well. Mr. Blankmeyer's Software Alliance, for example, has struck several deals in the past year to manage a bank's hardware conversions, train its employees, and leave the bank to run its own operations after a few years.
Software Alliance is encouraging banks to move computers using the Unix operating system, a design that has yet to catch on at most banks. Unix-based computers allow banks to run a greater number of software programs in tandem -- with no complicated programming to link them, Mr. Blankmeyer said.
According to figures from Computer Based Solutions Inc., New Orleans, the number of major players in the outsourcing business has mushroomed to 13 today from two companies in 1986. And, since the number of contracts being signed each year has remained relatively constant, financial now have the power to play the vendors off one another for better prices and services.
"It's definitely a buyer's market out there, and it looks like it will stay that way for some time," said M. Arthur Gillis, president of Computer Based Solutions.