CalFed to Farm Out Processing, Joining Trend by Big Institutions
California Federal Bank is turning over its technology and communications operations to Systematics Financial Services Inc., the Los Angeles-based thrift confirmed Thursday.
The unit of CalFed Inc. is the third-largest institution in the country to choose an outside company to run its data-processing operations, an arrangement known as outsourcing.
Board Approval Needed
California Federal, which has $19.8 billion in assets, is the latest big institution that has turned to outsourcing to reduce expenses. Until recently, hiring outsiders to run systems was seen as an option mainly for banks with assets of less than $5 billion. But cost pressures have changed the picture.
California Federal plans to sign a 10-year contract within 60 days, chief executive William L. Callender said in an interview. An announcement was expected today. The agreement must be approved by the thrift's board, which meets next week.
CalFed did not disclose the value of the deal, but industry sources estimate it is worth several hundred million dollars over the contract's life. The bank will shave 22% a year off data processing expenditures and will save millions of dollars in communications and branch automation costs, say sources familiar with the terms.
Problem Real Estate Loans
The outsourcing deal is the bank's latest move to cut costs. California Federal is attempting to rebound from a $257 million loss last year, which resulted from a before-tax writedown of $500 million in problem commercial real estate loans. CalFed has sold several holdings including insurance units, real estate development divisions, its credit-card portfolio, and its former headquarters building in downtown Los Angeles.
The nation's fifth-largest thrift in assets, the CalFed has 193 branches in California, Florida, Nevada, Georgia, and Arizona.
Systematics, whose parent is Alltel Corp., an independent telephone company, will acquire the California bank's computer and communication systems, employ 300 of the bank's technical employees, install new banking software, manage the bank's voice and data communication networks, and overhaul branch systems.
Replacing Inefficient Systems
CalFed officials say the sale of equipment and transfer of staff to Systematics will not impact the bank's ability to meet its capital-ratio requirements. But the arrangement will result in cost savings because inefficient computer systems and software will be replaced.
"Our decision hinged on whether we thought that, in our current situation, we could afford to spend the kind of money necessary to beef up our technology, as opposed to having the expertise of an outsourcer doing it," Mr. Callendar said. "Running computers is not our business. Our business is banking."
The arrangement does not include the bank's check-processing operation, although Mr. Callender said CalFed may also outsource that in the future.
Focus on Real Estate
The bank currently runs two mainframe computers - one from Unisys Corp., that supports all core banking operations, and another from International Business Machines Corp. Systematics will phase out the Unisys system and convert all the processing to its own software, which runs on IBM mainframes.
Systematics will also replace an 18-year-old branch automation system with a personal computer-based platform and teller system. The new branch system will play a key role in helping the bank transform itself from a commercial lending bank to a consumer bank with a focus on real estate. Industry sources say the bank will save $47 million in branch costs over the life of the contract.
Systematics will also take over the bank's voice and data network operations and acquire its communications equipment. The Little Rock, Ark., firm has subcontracted with Northern Telecom, a telecommunications firm, and Alltel Corp., to install new equipment and telephone lines. Sources say California Federal hopes to save over $1 million in voice and data expenses.
Table : A Growing Club Largest institutions that farm out operations AssetBank size VendorRepublic $30.0 SystematicsNational billionFirst 29.0 EDSFidelity billionCalifornia 19.8Federal billion SystematicsHibernia 7.3 IBM billionBank 5.5 IBMSouth billion