As bankers we've been bludgeoned by articles about how we have failed to keep pace with the changes our customers are demanding.

Over time these articles begin to sound pretty similar, and we may find ourselves settling into habitual defensiveness, or "analysis paralysis."

But bankers are customers, too. And the same changes that chronically besiege us as providers of services also affect our demands as the customers of the outsourcing/service bureau business.

By looking at how the economics and technologies of the outsourcing/service bureau business are changing, perhaps we can better understand what strategic steps we need to take as customers. Possibly, the shortcomings we see so clearly as customers might help us improve the way we provide services to our own customers.

There have been three major changes in the outsourcing/service bureau industry over the past 10 years: consolidation, price competition, and technological stagnation. The net result of these changes is that the target market continues to narrow, forcing more customers to find independent, innovative solutions.

Consolidation. In the past decade competitive pressures have spawned substantial consolidation among the service bureaus. This consolidation has resulted in a greater market share being controlled by a small group of major providers that includes EDS, Fiserv, Marshall & Ilsley, and Systematics.

Price competition. Throughout this consolidation and, in fact, fueled by the need to garner more market share, service bureaus have aggressively priced their services and continue a downward pricing trend today. This competition puts increasing pressure on margins.

Status-quo technology. The major service providers have little current incentive to invest in new technology. All of them have made substantial investments in large mainframe platforms, which must be amortized over a long period, and they have incurred major development costs to build applications based on mainframe languages and technology.

Currently, the major providers are engaged in a heated "zero sum" game as they attempt to steal market share from competitors with very similar systems capabilities and, so far, undifferentiated commitments to innovation and service. No competitor has jumped ahead of the others as an innovator of new technology. As a result, no new systems have been developed and sold to fully exploit new technologies.

Although this is slowly changing - EDS SBS, for example, has built a new system, which has been sold and installed at U.S. Bancorp - there remains little incentive and little innovation among the service providers.

The net result of these factors is that, to remain profitable, service providers must continue to raise the minimum asset size of banks with whom they contract. This demand for increasing volumes with narrowing margins means that banks with less than $150 million are not strongly courted by the major service providers, and must seek new, innovative solutions. The rise of AS/400 turnkey solutions are evidence of this industry shift.

Given the glacial response by the service bureaus, banks have taken real steps to meet the service needs of their customers. Increasingly, banks are focusing on five interim solutions:

Using more local PC applications. Banks are using more and more local PC-based applications for a wider variety of business. This often results in a patchwork quilt of nonintegrated applications which demand more staff training and technical support.

Developing more local databases. Banks are increasingly taking ownership of their data by developing more local databases. By establishing their own warehouses of information, banks can more easily integrate information from other sources, update, and control the distribution and access of that information in very targeted ways.

Networking more PCs. Banks continue to invest in PCs and local area and wide area networks (LANs and WANs) to improve the communication among operations and branches so that the power of accessible, useful and timely information is moved to the local desktop - and closer to the customer.

Building more custom applications. As the development tool sets for the PC have become more visually and object oriented, more and more custom applications are being developed by users and low-tech bank staff. One result of this is that the people designing the solution are the ones who are closest to the real business need.

Financing investment with lowered service bureau costs. Many banks are earmarking the savings they accrued during the service bureau price competition to finance the technology investments they need to make to meet their own evolving customer needs. In essence, the service bureaus are underwriting their own obsolescence.

Service bureaus must embrace the reality of the PC-client in fundamental ways and build the pathways to link local, PC-based applications with a wide range of service bureau platforms and data. These providers also need to build stronger interfaces to third-party systems, such as mutual funds, credit cards, and trust systems.

The interface to mainframe systems is antiquated, character-based and cumbersome. At a minimum, these existing legacy systems need new front ends to reduce the training time, incompatibility and pain associated with their use. As part of an architecture like the Information Roundhouse model developed by M ONE, banks need their vendors to provide for a consistent interface across all application platforms.

The real legacy of these disparate legacy systems is the inability to truly integrate account and relationship information in a format that is useful, complete, accessible, timely, and accurate. Service providers need to recognize the need for a client/server-based, local database that integrates customer information from all external and internal systems. Solutions which meet this real need will go a long way to extend the useful life of these older systems.

Banks have created more and more nonintegrated, custom applications to meet specific information needs that were not met by service providers. While this was a necessary interim solution, there is a real need for integrated enterprise management suites that utilize a common database engine to drive applications like profitability reporting, asset/liability management, investment management, planning and budgeting.

Banks still do not have the imaging systems that would allow them to extend full back-room functionality to the branches or to other points of sale. Banks' dependence on paper severely limits how we get information back to the customer. Whether that information is a needed signature card, loan application or image of a canceled check, the lack of imaging systems is a major hurdle in the creation of virtual banks and the extension of newer technology to consumer banking.

It has taken much longer than promised, but the consumer infrastructure to really support home banking may be taking shape. The number of PC users - both commercial and consumer - has reached a critical mass. While home banking was never compelling enough on its own merits to propel consumer investments in the infrastructure, it has great appeal as a value-added convenience.

Service providers need to take some very specific and decisive actions if they want to maintain their current business while positioning themselves for future survival. There are five actions they must take to realign their efforts with their customers.

Bite the bullet. First, service providers must honestly assess where the market is, where the technology is heading and the gap between the services they currently offer and the evolving needs in the marketplace. For service bureaus, the truth is plain if painful - accept the need to retool existing systems to the new platforms. These service bureaus must recognize that their competitive differentiation will be driven by the richness and power of the "front-end' in the new architectures - not the traditional, operational "back-en" of the legacy systems.

Integrate services. Systems integration products and services are the foundation to growth in the new technologies. The highest margins and market share gains will accrue to the service provider who can help clients quickly and cost-effectively build the "virtual bank", that is, a bank that uses information strategically to dramatically improve its productivity and service delivery .

Package solutions. Service providers need to develop generalized front ends, reporting and information access tools and sell them as packaged suites of integrated solutions. These vendors must realize that their customers do not want to be in the system integration business.

Move the information closer to the customer. The new technology is based on a very different paradigm in which customers are much closer to their data and the information it provides. For service providers the lessons are basic - migrate the existing legacy systems to message-based transaction processors, and work with customers to move strategic data and all user interface to the bank site.

Add real value. Service providers have the opportunity to increase the demand for technology services by adding real value to the strategic growth of their bank customers. For service providers, this means more than technology. These vendors must embrace the responsibility for making their clients more profitable and more competitive by augmenting their systems with technology planning, consulting, and training services.

It will not be easy for the outsourcers/service bureaus to embrace these recommended steps but we, as customers, can verify that these steps are as needed as they are painful. The remaining articles in our series examine the specific vendors who are working to move banks into the world of Virtual Banking and the Information Roundhouse.

Hopefully, we, as bankers, can be just as objective about the need to dramatically redefine our own business and service delivery standards.

Editor's Note: The second article in this series about how technology will keep changing the banking industry runs next Wednesday.

Ms. Seymann is president and chief executive officer of M One Inc., a Phoenix-based consulting firm specializing in bank management and technology. Mr. Williams and Mr. Faulkner are managing directors.

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