One thing to keep in mind when mulling a "make or buy" decision on technology is that volume matters in the commercial banking efficiency equation - particularly in rationalizing technology options.

Piggybacking on the operating economies of others is increasingly important for smaller banks. Community bankers understand the value of outsourcing; many share or rent operating services and have for decades.

But in today's highly competitive environment, community bankers should expect their outsourcers to supply more than operation capabilities. Even large banks rent state-of-the-art third-party processing for specialized activities such as mortgage servicing, credit card operations, and mutual funds processing.

Outsourcers can supply product, delivery, and service options community banks cannot afford to manufacture. Technology executives at high- performing banks must strive for the right combination of installed and outsourced capabilities to support customer needs and priorities. In today's financial services world, community bankers must be smart about the use of technology, not about owning computing boxes.

Does the investment plan for technology stop with the decision to outsource or make? Not if you expect the investment to pay off on the bottom line.

While the right strategy is important, quality of execution has an enormous effect on investment returns. Large banks do not have a corner on execution quality. In many ways it is easier to execute quickly and more consistently in a smaller bank than in a larger one. Fewer people and fewer sites lead to better communication of strategy and more effective and timely performance monitoring.

But deciding how to spend technology dollars begs the question of whether to spend at all.

Should small banks spend more on technology to protect and enhance franchise value? Our research shows that banks can be more efficient by not spending on technology. Nonetheless, it is difficult to argue that no investment is needed to protect long-term competitive positioning. How can smaller banks find the right balance between today's investment expense and tomorrow's value?

First, recognize that market needs and opportunities should be the first considerations, not the dollars to be spent. What is the nature of the bank's targeted customer base? How is it expected to change over time? And what delivery, service, and product options do customer groups want?

Understanding the desired mix of low-cost and value-added requirements for a particular bank is the first step toward designing an effective long- and short-term technology strategy. Once this understanding is achieved, protecting the company's earnings value becomes a question of affordability and timing.

But there is no question that much uncertainty exists regarding the prospective needs and wants of a customer base that is changing rapidly. How can the small bank protect its options?

In part, the answer starts with a clear understanding of and commitment to a concept of competitive positioning and brand value. Put simply, how is the bank going to be different in its markets? Value-added? Low-cost? Quality of its people? Target market or niche expertise?

Technology spending should center on building long-term capability to protect and enhance competitive positioning. This is the core capability that builds franchise value today and over time.

What are the lessons for community bank technology strategies from Wharton's research?

*Spending on technology is not the same as investing in functionality and differentiating capabilities. Identify the difference before you approve your technology budget and implementation programs.

*Define the bank's competitive advantages and the way it intends to create brand value. These imperatives should be enhanced by any and all technology choices, regardless of the amount to be spent.

*Set priorities for investing and spending based on a complete analysis of the needs of the bank's target customer groups and their expectations for sales and delivery expertise.

*Rent technology expertise and sophistication if expected volumes do not justify in-house capabilities. Recognize that what the bank owns is the customers' satisfaction and shareholders' confidence. Its mission is to protect and enhance both, not build computing boxes.

*Make technology managers key members of the executive team.

*If investment returns on technology cannot be managed effectively, do not make the investment. Keeping the bank's technological infrastructure simple may be a better strategy for both customers and shareholders.

There is no single right answer to the technology challenge. Bankers have enormous opportunities to acquire sophisticated technological solutions, but these options are not without risk. Each bank must find the solution that fits its strategy, market, and capacity to execute.

Ms. McClave is managing director of the Wharton Financial Institutions Center at the University of Pennsylvania.

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