In the outsourcing business, where a single technological misstep can prove disastrous, Bisys Group Inc. has climbed into the top tier of firms that seek to be the operational backbone for financial institutions.

Before the banking and thrift industries started shrinking apace in the late 1980s, the computer-services business was scattered among a dozen or so national players and a few hundred regional firms.

But as their client base dwindled, many firms went out of business or were gobbled up, leaving more established companies like Electronic Data Systems Corp., Fiserv Inc. Systematics Inc., and M&I Data Services to divvy up the spoils.

Bisys, based in Little Falls, N.J., could have easily been a casualty as well. It wasn't part of the elite when in. 1989, it was spun off from its corporate parent, information services giant Automatic Data Processing Inc.

But since going out on its own, Bisys has grown rapidly -- through a steady stream of acquisitions and by picking off customers from ailing regional data processing firms.

This two-pronged strategy has put Bisys among the top five outsourcing firms that run financial institutions' core accounting systems.

Profitable Year

For fiscal year 1993, which ended June 30, Bisys reported earning of $17 million on revenues of $88 million, its first full-year net profit since breaking away from ADP.

But while these numbers are still a fraction of what EDS, Fiserv, or Systematics take in from banks and other financial firms, Wall Street has been enticed by Bisys' fattening operating margins -- a hefty 18.6% in 1993, up from 17.7% in 1992.

And even though other outsourcers have battled over the past three years to sign up bigger banks, Bisys instead chose to focus on a narrower market: community banks with up to $2 billion in assets and thrifts with assets under $ 10 billion.

According to chief executive Lynn Mangum, a key has been Bisys' "single product, single source" strategy.

One System for All

Unlike rival Milwaukee-based Fiserv, which as a byproduct of its rapid-fire acquisition spree of the past five years has accumulated a number of different software and hardware platforms, Bisys puts all its customers on a single software product, called Totalplus, that it runs from its six data centers in Houston, Chicago, Richmond, Cincinnati, and Philadelphia.

It wasn't always that way. In 1982, when Bisys still part of ADP, the company was running nine separate core accounting systems for its clients, an unwieldy mix that was expensive to maintain.

"We realized then that one of the major issues that needed to be addressed was how we were going to get an integrated set of application software that allowed our customers more flexibility," said Paul Bourke, president of Bisys.

Strategy for Growth

Bill Bracken, chief financial officer at $1 billion-asset Superior Bank, based in Oak Brook Terrace, Ill., agreed with Mr. Bourke's assessment. Two years ago, Superior was looking for an alternative to the regional service bureau it was using at the time.

"We did a fairly extensive review of [outsourcing] companies, and one of the things we were concerned about was if we went into a growth mode and started acquiring institutions across the country, we wanted a firm that could support us on the same mainframe software" at different processing sites, Mr. Bracken said.

"We looked at the management, talked to their clients to evaluate their support services, and quite frankly, [Bisys] was the only one who met all of our requirements."

Learning from Mistakes

"I think the management team at Bisys is very good," said Richard X. Bove, an analyst at Baird, Patrick & Co. in New York. "They figured out what they did wrong [when they were part of ADP] and came back at this industry with a superior product."

Bisys executives are quick to point out that they are continuing to enhance Totalplus, putting over $8 million this year into research and development. These improvements are closely tied to the suggestions made by clients, Mr. Bourke said. "The biggest mistake we could make is to try and sell technology bankers can't take advantage of" he added.

Some of Bisys' latest advances include being able to produce account statements with laser-printed images of canceled checks, and automated management reporting system using networks of personal computers.

These efforts are also part Mr. Mangum's plan to make Bisys a one-stop technology shopping center, and his recent acquisitions have been made to diversify the company's product line.

After an initial public offering of stock in 1992 to raise cash for acquisitions and to pay off the remaining debt associated with its leveraged buyout from ADP, Bisys bought a number of firms that Mr. Mangum believes complement his core processing business.

These acquisitions included check processing operations and, most recently, servicers of investment products.

Retirement Plan Gambit

Earlier this month, Bisys paid about $10 million to acquire Barclay Group. Ambler, Pa., a firm that specializes in record-keeping and account administration for the 401(k) retirement plans of about 2,000 companies. And on Sept. 13. Bisys agreed to pay $60 million for Winsbury Cos., Columbus, Ohio, a leading administrator of proprietary mutual funds for banks.

While sophisticated investment products like 401(k) plans and proprietary mutual funds were once thought to be the province of large institutions, Mr. Mangum sees an opportunity to help his clients compete. "More community banks are finding they need to be able to offer more competitive services," Mr. Mangum said.

Downside Risk

Mr. Bove agrees with this rationale, but he also warns of some downside risk in jumping into the business of managing investment-product portfolios for banks.

"Processing for the mutual fund industry makes a lot of sense, but the problem is [companies like Winsbury] are paid on a percentage-of-assets basis, which means if the stock market takes a spike down, revenues can be affected negatively," he said. "The key is grow assets in the face of a market decline."

Mr. Mangum said he is optimistic about the long-term health of the investment-products business because he is confident that baby boomers are poised to become more active investors.

And he added that the banking industry is in a better position to take advantage of this shift.

"In my travels meeting with bankers, I'm seeing a more aggressive group than was runnning the industry five years ago," he said. That is "a good sign if they expect to compete for the investment-products business."

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