BANK TECHNOLOGY budgets continued to increase in 1994, but investments in personal computers at the expense of mainframe computers haven't advanced as quickly as some experts expected.

That's the finding of an annual bank technology survey commissioned by the American Banker and Andersen Consulting and conducted by the Tower Group.

The study, based on questionnaires sent to 150 of the top bank holding companies in the United States, found that the U.S. banking industry will spend $16.3 on information technology this year, up 6.5% from 1993. The rate of growth was about the same recorded last year, still well ahead of the inflation rate.

But while investments in new systems were up about $300 million -- and accounted for nearly a quarter of all spending -- banks continue to devote the bulk of their technology dollars to maintaining existing systems. Some 63% of technology spending is earmarked for maintaining hardware platforms and the software that runs on them.

"I'd say it's embarrassing for the industry," said Robert E. Moll, a director at Arthur D. Little Inc. in Cambridge, Mass. "If the banks can't figure out how to redeploy their investments away from maintaining old legacy systems that merely maintain the status quo, they are going to lose ground to all the other serious threats that they have" from nonbank financial services companies.

William T. Gregor, senior vice president of Gemini Consulting Inc. in Cambridge, said he was pleased to see technology spending on the rise. But survey results ranking bankers' technology priorities, along with the actual spending reported, did not support what he expected to see: that bankers would already be redirecting more resources to cross-selling customers and developing new distribution channels.

"It sounds like we're attending to the basics with the current priorities -- standardizing products, digesting acquisitions, and reengineering basic processes," he said.

Spending on wholesale banking technology ($8.5 billion) continued to exceed retail spending ($7.8 billion). But investments in retail technology grew at a faster rate, 6.8% versus 6.3%.

On the wholesale side of the business, the top priorities listed were boosting fee income, growth by acquisition, improving product profitability, and releasing new products. Those are expected to remain the top golas through 1997.

On the retail side, the top three objectives identified for 1994 were standardization of products and services; growing by acquisitions; and restructuring back-office functions. Cross-selling customers -- an area that has been repeated in a mantra-like fashion by bankers in recent years -- ranked fifth in both retail and wholesale.

"The merger activity that is going on is forcing people to concentrate much of their energies to getting on common systems and squeezing as much as they can out of the staff in order to pay for the acquisitions," said Mr. Moll.

Indeed, retail banking priorities that seem to be most often talked about -- cross-selling and investing in alternative delivery systems to improve customer service -- were not expected to be top goals until 1997. Growing by acquisition and reengineering the back office would remain important in the foreseeable future.

Other survey results confirm this. Banks said that 15% of their new development budgets will go to consolidating systems this year. That figure is expected to decline by half over the next three years, suggesting that more work remains to be done in this area.

But others in the bank technology business are more sanguine. "Banks are getting a lot more for the actual dollars," said Joe Halpin, chairman of Earnings Performance Group Inc., a technology firm based in Short Hills, N.J. "And they are getting a lot more benefit having spent the dollars -- not only on the hardware and software but with the impact on service delivery and the expense side of the house."

"We're kind of at a plateau right now where people are catching their breath," said Charles Forbes, principal at the firm. "And then we're going to take off on the next upward curve. So a lot of what is being done today is preparatory to being able to take on more in the future."

And bankers interviewed said they are already making major moves in that direction.

Allen J. Gula Jr., a Keycorp executive vice president who is also chief executive of its data processing subsidiary, said the Cleveland-based company is increasing technology spending in areas that will give a payback to the bottom line.

"Generally, our investments are going to be in the service and sales areas," he said. Keycorp will boost spending on self-service banking and tools to give customer service representatives better, more intuitive information, he said.

But, Mr. Gula added, "My base costs are going down. They went down last year, they are going down this year, and they certainly will go down next year."

He said Keycorp spends about 40% of its technology dollars on maintenance, much less than the 63% industrywide figure reported in the study.

The remaining 60% of Keycorp's technology dollars "is heavily weighted toward new development," Mr. Gula said.

"I want to be as efficient as possible and invest as little as possible on what it takes to just keep running the basic business. There's no value-added there," said Mr. Gula. "Keycorp can't continue to grow if that's where we're spending our time and money."

To gain efficiencies, the bank is further automating its back office. "If it's a function that's people-intensive, I guarantee we're looking at it and trying to" make it more efficient, Mr. Gula said.

Earlier this year, Mr. Gula told American Banker he expected to wring out about $33 million in expenses in 1994.

Mr. Gula also said he would like to double the size of the bank with the same size staff.

While calling that a "pie-in-the-sky" goal, it's true that bankers are doing more without increasing employment.

The survey found that the total number of bank technology employees -- about 86,000 people -- has hardly budged for three years.

Keycorp itself already doubled in size earlier this year following its merger of equals with Society Corp. With combined assets of $58 billion, the merged entity became the nation's 11th-largest bank holding company.

Keycorp, mirroring an industry trend, is also planning more investments in networks of personal computers. "Almost all of our strategic systems development is in client-server," said Mr. Gula. "When we roll out new systems they are intelligent workstations, server based."

Industrywide, spending on microcomputers is expected to jump from $3.7 billion this year to more than $7.4 billion in 1997. In contrast, spending on mainframe computers will decline from $10.8 billion, or 66% of the total, to $10.0 billion, or 50%.

Further, banks anticipate deploying more staff to operate and administer their computer networks. Employment in those tasks is expected to jump 18% over the next three years, while employment overall will edge up 0.31%.

The lion's share of bank technology employees remain in developing applications for host-based systems.

And while Keycorp is directing more resources toward distrbuted computing, Mr. Gula said that the mainframe computers will be around for a long time. "There isn't any client-server technology that I'm aware of that can support the kind of transaction volume and processing needs that a company our size has," he said.

Mr. Gula is not alone in that view. Jeffrey S. Griffie, the executive vice president responsible for information technology at Edison, N.J.-based Midlantic Corp., has often said that there is a place for mainframe computers.

But the pace with which banks are moving functions from mainframes to PC networks has disappointed Mr. Moll of Arthur D. Little. "With PC and client-server technology at a point where it is today, we should be aggressively applying that to do new kinds of automation which improves productivity and quality of service," he said. "I just don't think the industry has figured out how to master the new technologies."

But some bankers say it's not a question of understanding technology.

Robert E. King, senior vice president of information systems at First Tennessee National Corp., Memphis, noted the bank has already invested heavily in systems -- such as its core deposit software from Hogan Systems Inc. -- that rely on the mainframe.

"We try to squeeze all the usefulness we can out of our systems," he said.

Mr. King said First Tennessee spends roughly the industry average of 63% on systems maintenance. Overall spending on technology was up between 2% and 3%.

The $8.3 billion-asset banking company is also devoting the bulk of its development dollars to new delivery and lending systems. Mr. King said First Tennessee has completed a major phase in redesigning its consumer lending operations and is moving forward on updating the commercial lending area.

And at First Bank System Inc., Philip G. Heasley said, "We virtually rebuilt our data processing capabilities as it relates to our applications."

The $26-billion asset bank has spent $250 million on information technology since 1990, even as it carved out $100 million in annual overhead expenses.

"We rebuilt our whole data centers. We updated our equipment. We updated our systems," said the vice chairman and president of the retail product group.

The Minneapolis-based company, for example, added a 24-hour-a-day phone center to handle customer questions, bought nearly 10,000 PCs, and revamped teller and branch systems.

"That came off not investing for 15 years," Mr. Heasley said.

"We are now concentrating all our efforts in building a decisioning and servicing infrastructure so that we can be organized by customer versus being organized by product," he continued.

First Bank is also in step with the industry with regard to boosting its spending on investment products.

The survey found that new software systems for existing lines of business -- including investment products -- are expected to edge up from 18% of all new development spending to nearly a quarter by 1997.

"We've really not exercised our opportunities fully as it relates to mutual funds and annuities," said Mr. Heasley.

Still, First Bank says its technology budgets will not rise in coming years. "By holding our spending flat we will actually get a lot more than we got three years ago."

He noted that prices for many technologies have dropped in recent years, giving the bank more bang for each buck.

Bankers agree that fact doesn't come through by just looking at the raw numbers.

Mr. Gula added that size also has its advantages, beyond simple economies of scale. By "negotiating the right kind of deals [with vendors] you can get more for your money. In fact, that's our strategy."

Banks also expect to save money by using more off-the-shelf software packages, as opposed to writing software in-house. This year, banks reported that 29% of new vendor software packages were extensively modified. Some 23% of the packages were installed with little or no customization. Those numbers are expected to reverse over the next three years.

Executives at Midlantic, for example, call the bank a "package shop."

"We would rather do that than go out on our own," Garry J. Scheuring, chairman and chief executive, has said. "We're not of a size where there is going to be a technical or customer advantage for us to try to rein vent something."

"For big institutions, it is a way to spread the risk and the costs, as well as to be able to have a strong say in meeting their own needs," said Gemini's Mr. Gregor. "It's kind of a halfway house between doing it themselves and taking it off the racks."

While industry observers agree that some costs are going down, some are skeptical that banks can hold the line on technology spending.

"There is also one of the fallacies of strategic planning at work, which is 'our major technology investments are behind us and next year our costs will go down,'" Mr. Gregor said. "Frequently, executives like to believe that's true. Less frequently is it actually true."

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How the Technology Survey Was Conducted

THE ARTICLES IN THIS publication analyze and report the results of the American Banker/Tower Group/Andersen Consulting 1994 Survey of Technology in Banking. The survey, containing many detailed questions on banking technology, was delivered in three parts to the chief technology executive, head of wholesale banking, and head of retail banking at 129 of the top 150 U.S.-based bank holding companies.

Fifty-three banks returned surveys, for a response rate of 41%. Responses were received from 31 of the top 50 bank holding companies in the United States. These banks represent 43% of the industry, as measured by noninterest expense. Noninterest expense was chosen as a measurement because, of all publicly known figures, it best correlates with technology spending. Both quantitative and qualitative responses were used to develop industry projections.

In calculating the industry projections, each bank's response was weighted according to the percentage of the industry -- as measured by noninterest expense -- that they represent. For the large variety of questions on this survey, the statistical validity of the results will vary based on the number of respondents who answered that particular question, the degree to which their interpretation of the question is consistent with others, the structure of the particular question, and the degree to which the distribution of the respondents answering the question is representative of the distribution of the industry as a whole.

The weighting ensures that, for example, if a large money center bank were strongly committed to Windows NT, it would be considered proportionately more significant for establishing an industry trend than a similar response from a smaller bank. All data represent an estimate for the U.S. commercial banking industry as a whole.

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