Chemical, Hanover Weigh Farming Out Data Systems

As part of their planned merger, Manufacturers Hanover Corp. and Chemical Banking Corp. are in discussions about handing off a significant piece of their computer operations to an outside company, sources close to the talks said.

Turning to a third-party computer services company could help the combined bank achieve substantial back-office savings.

Executives at the banks said they expect to cut $650 million in annual expenses as part of the merger, with $200 million coming from the elimination of redundant computer systems and support operations.

An "outsourcing" arrangement could also help speed the banks' consolidation into what would be the nation's second-biggest bank, consultants said.

EDS, Systematics Mentioned

Several sources close to the banks described the discussions as preliminary. No data processing company has yet been asked to bid for services. But the banks are known to be talking to EDS Corp. and Systematics Financial Services Inc., two of the biggest providers of outsourcing services.

If consummated, the deal could become the largest such arrangement in banking. Until now, regional banks have been seen as the prime candidates for outsourcing. Money-center banks, though similarly pressured to lower costs, have been reluctant to turn over core banking systems to outsiders for competitive reasons.

First Fidelity Bancorp. in New Jersey entered into the largest outsourcing contract in the industry last year, paying EDS $450 million over 10 years to run its computer systems.

Although it is too early to determine the size of an outsourcing contract for a combined Chemical-Manufacturers Hanover, the merged bank will be more than four times the size of First Fidelity, which has about $29 billion in assets.

A Manufacturers Hanover spokesman declined to comment on the talks or whether a deal is imminent. "It is premature to speculate on a matter like that," he said.

Manny Hanny's Deal

Manufacturers already has a contract with Systematics, under which the Little Rock. Ark., company provides technical help and retail software that the bank is now installing.

The two banks have already outsourced some of their back offices. Manufacturers Hanover uses First Data Resources Inc., a unit of American Express Co., for credit card processing, and Chemical is moving its Visa and MasterCard operations to the Omaha-based firm as well.

Observers said the wave of mergers between big banks may be followed by a wave of outsourcing.

"I see some outsourcing for the mega-institutions in the future," said Lawrence A. Willis, a consultant with First Manhattan Consulting Group in New York. "Because of the major consolidation effort, banks need support in getting there."

Speeding Consolidation

By turning to an outside company, a merged bank can speed up the pace of consolidating its resources and computer systems. Mr. Willis estimates that an outside services company can lop six months off a merged bank's conversion to a single set of systems.

Under a typical outsourcing contract, the service company takes over the data processing functions for five to 10 years, hiring many of the bank's former operations employees. However, for a merging company, the contract's time frame could be shorter.

An outsourcing vendor could take over some computer operations and consolidate them, then return them to the bank to run after as little as 18 months.

Banc One Corp., for example, has hired outside companies to ease the data processing side of some of its acquisitions. The Columbus, Ohio, company uses EDS Corp. to run its Texas data processing operations and Systematics to run banking operations in Wisconsin.

Observers say the most likely candidates for outsourcing at the new Chemical will be the bank's data centers, two of which are next door neighbors in lower Manhattan. The bank could also outsource the implementation of retail systems like branch automation or automated teller machine processing.

Retail Software

Manufacturers Hanover's current contract with Systematics includes technical assistance to convert the bank's retail systems to new software from the technology company.

Chemical Bank, on the other hand, has a mix of homegrown and purchased software for retail banking. The bank has an extensive branch automation project under way for several years, based on a computer system it developed with Digital Equipment Corp.

The new Chemical may also seek other avenues to cut its processing and back-office costs. Before the merger was announced, Chemical and Manufacturers had held discussions with other New York banks about forming a consortium to process checks. Bankers say the discussions on this subject continue among New York banks.

Before the two banks can reach a decision on whether to outsource any part of their operations, the two banks must first analyze their data processing resources and determine a timetable for consolidation, observers said.

After the two banks figure out how much they can save by consolidating systems themselves, they can then compare bids from outsourcing vendors.

"I wouldn't preclude something happening in the future with this merger," said Mr. Willis. "There are so many integration issues to be dealt with first."

PHOTO : A Big Consolidation Job

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