Banc One Corp.'s Texas operation has expanded its outsourcing arrangement with Electronic Data Systems Corp., signing a five-year contract worth an estimated $200 million to $300 million.

The deal is somewhat unusual for Banc One, which prefers to run its own data-processing operations.

But the Ohio-based company concluded that outsourcing was the best route for consolidating its Texas empire, which is growing rapidly because of acquisitions.

Pact Set to Expire

Banc One inherited an outsourcing arrangement with EDS in 1989 when it acquired the failed MCorp banks, which are now the $13 billion-asset Bank One Texas.

But with that pact set to expire at the end of next year, Banc One had to decide whether to extend it.

Complicating the matter was its recent agreement to acquire the $5.5 billion-asset Team Bancshares Inc., which has a 10-year outsourcing deal with an EDS rival, Systematics Financial Services Inc. That arrangement is slated to end in the year 2000.

In choosing EDS to run Team Bancshares' operations also, Banc One will be forced to pay a multimillion-dollar penalty to void the Systematics contract.

Although not part of this outsourcing agreement, eventually EDS, a subsidiary of General Motors Corp., will convert the two Texas banks to a multimillion-dollar software system that Banc One is installing.

The system, developed jointly with EDS and Norwest Corp., will give the managers of all Banc One's subsidiary banks access to data on customer profitability and help point out cross-selling opportunities. No date has been set for the conversion.

Team Bank will add about 30% processing volume to the back-office work that EDS is currently handling with Bank One Texas, a source close to the deal said.

The new outsourcing contract also allows Banc One to move pieces of the Texas operations in-house, as it sees fit.

"We chose EDS to do the systems consolidation, so when we convert to common systems we'll be converting from one source," said Robert L. Barrett, president of Banc One Services Corp. "We needed to get this work done while our plate was full with other acquisitions."

Penalties for Early Exit

Sources close to Banc One said that in terminating its contract with Systematics early, the bank would pay over $5 million. Neither Banc One nor Systematics would confirm the figure.

"We had two outsourcing contracts to deal with, with penalties associated with each of them in getting out early," said Mr. Barrett.

The primary goal was to get the Texas banks, like all of Banc One's affiliates, onto common systems, and eventually onto the new platform, the Strategic Banking System.

Special Needs in Texas

But Bank One is handling Texas as a special case. In most other acquisitions, Banc One has let any existing outsourcing contracts expire, then convert the acquired bank to its own in house systems.

When Banc One bought the 20 failed MCorp banks in 1989 for $500 million, it was the largest single acquisition the bank had made. EDS was already running the operations as part of it 1988 purchase of MTech, MCorp's technology subsidiary.

After the MCorp deal, Banc One was able to renegotiate its contract with EDS without any penalty, because MCorp had been seized by the Federal Deposit Insurance Corp. That pact, for software maintenance and development, simply reflected the new ownership.

Under this most recent contract, some software applications that were previously managed by EDS will be brought in-house, including those such as fixed-asset accounting that provide valuable information to bank managers.

|Expediting Conversion'

"Banc One's other acquisitions were not as large as the one in Texas, and the bank didn't have any processing facilities there," said Lawrence A. Willis of First Manhattan Consulting Group. "Eventually, the bank is looking to EDS as the vehicle for expediting conversion" to the Strategic Banking System.

Systematics currently employs 134 people in Team Bancshares' Bedford, Tex., data-processing facility. A spokeswoman for Systematics said the firm would try to redeploy those employees to other processing sites.

"Team Bank has been a valued client," said Doris Krain, a spokeswoman for Systematics. "Transactions like these reflect the merger and acquisition environment."

Team Bank has over 800 of its own employees performing check processing and other operations in Bedford.

Mr. Barrett said the Bedford facility may stay open to handle some operations for the Texas unit.

In-House Revival Possible

A Banc One spokesman said that over the long term, the bank was considering setting up a processing center to handle all the financial institutions acquired in western states. He said Banc One wants to rely on outsourcing companies only as long as required to get merged banks through these transitional periods.

Eventually, Banc One plans to bring all operations in-house, including the Texas banks. "It's strategically important for us to do [data processing] inside," said spokesman John Russell.

Bank officials said they haven't made any final decisions on outsourcing the back offices of other recent big acquisitions, including the operations of Valley National Bank, based in Phoenix.

But Mr. Barrett said it was unlikely that Bank One would hire a third party to do the Valley conversion. "We've done a lot of the calculations to to see how [Valley National's operations] could be moved directly in-house," he said.

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