Having spent billions of dollars reengineering front-line retail operations and back-office processes, executives at a small but growing number of banks are now working to recast the way they compete in the commercial lending arena.

The result has been nothing short of a reengineering of that business.

Propelling this reengineering craze has been an acknowledgement on the part of these bankers that their best chance of holding onto any meaningful share of the commercial loan pie lies in replacing the applications that have formed the technological underpinnings of the business for a generation or more.

"What we're seeing in high-end financing, which is very competitive and price- and service-sensitive, is that these older applications, mainframe-based applications, are becoming severely challenged in terms of keeping up with market demands," explained Bill Bradway, a consultant at the Tower Group, Wellesley, Mass.

It's like other trends in banking: Pressed by new players unfettered by antiquated technology and operating structures, and with market demands mushrooming, bankers are finding they can only compete effectively by overhauling their technological infrastructure.

Spending on commercial loan technology is up 4.9% this year, to an estimated $948 million, the Tower Group found. But Mr. Bradway noted that that figure was not corrected for mergers and so masks an even higher growth rate.

Those plunking down money for new commercial loan technology include some of the nation's largest banking companies, which have most at stake in this highly competitive business.

Take PNC Bank Corp. The nation's 13th-largest banking company, PNC boasts a $17 billion corporate loan portfolio. To support this business, until now, it had relied on a commercial loan application developed about 20 years ago by Fidelity Bank and bought by Pittsburgh National Bank, a PNC predecessor. This application was essentially a mainframe-based accounting system poorly matched with personal computer-based systems, said Jim Massengale, PNC vice president.

So in late 1994, Mr. Massengale and his colleagues began looking for a new system that could carry the bank's commercial lending operations into the future. The search ended in late 1995 at Advanced Information Resources, Del Mar, Calif.

The company is architect of the Advanced Commercial Banking System, or ACBS. The system, which PNC expects to begin using in the second quarter of 1997, is a complete reengineering of the way the bank runs commercial lending, Mr. Massengale suggested.

"If you look at this and compare it to the system we had," he said, "there's nothing in the two that makes them similar to one another."

For the first time, PNC will be able to gather, store, and analyze in a centralized way information relative to all commercial loan operations, noted Mr. Massengale. And it can support a plethora of new capabilities well into the future, he suggested, such as electronic commerce, image archiving, and remote loan origination.

"As we move forward, this system will allow relationship managers to attend to customer needs regardless of their physical location," explained James Mikula, senior vice president and chief information officer at PNC. The idea, he said, is to give relationship managers the tools they need to respond swiftly and efficiently to any customer's funding needs, whenever and wherever those needs may arise.

"We want the relationship manager making the decision who really knows the customer," explained Mr. Mikula. "It's in the client's best interest and the bank's best interest to have the relationship manager who knows the client best make that decision."

The core issue, added Mr. Massengale, is service. "We compete with banks and nonbanks," he said. "We need to be able to offer comprehensive service."

And that means not only having the products customers want but also offering those products at prices customers will pay. ACBS helps on that count, explained Mr. Massengale, with its tiered pricing capability - a function the bank's current system lacks.

"This gives the relationship manager the ability to add more bullets to the gun," said Mr. Massengale.

The considerations that prompted PNC to reengineer commercial lending were not unlike those that drove change on the retail side. Foremost among them were convenience and efficiency.

In the past, noted Mr. Mikula, retail customers, when they thought of PNC, thought almost exclusively in terms of the branch. For some, perhaps, the banking experience may have extended to the automated teller machine. Now, he said, retail customers can bank with PNC from their homes, using telephone or personal computer links; at an ATM; or in person. "We are not dictating to our customer set," he said.

PNC's vision for its corporate customers is similar. "Our customers don't need to think of themselves as falling into one division or segment of the bank," said Mr. Mikula. "They just need to know that, if they choose to use the corporate bank, any and all of our systems are designed to make it easy for them to do business with us."

The ACBS system PNC is installing was developed to run on an IBM AS/400 computer in a traditional host-centric, terminal mode. The system, however, incorporates a client-server architecture of networked PCs.

Development of the base product was a collaborative effort involving several large bank companies that are big players in commercial lending, said Chris Knebel, senior vice president for product planning and administration at Advanced Information Resources. Among them are: PNC, Chase Manhattan Bank, J.P. Morgan & Co., NationsBank Corp., and National Bank of Canada.

The intent, said Mr. Knebel, was to help those companies move away from a hodgepodge of systems that had been developed for commercial lending and into a more centralized operation.

Mr. Knebel noted that it is not unusual for banks to have two to three core lending and accounting programs surrounded by satellite systems that support specialized areas, each with its own management reporting function. The ACBS software, he said, puts all the disciplines of commercial lending under one umbrella.

"People want to consolidate these systems into one environment," he said; "it saves a lot of costs in terms of support."

More to the point, it makes it easier for a company like PNC to compete for commercial loan work.

Syndicated lending is a case in point. Substantial fees are available to a bank for assembling and servicing these types of deals. But in the past, loan syndication was left almost exclusively to money-center banks; the administrative details alone were enough to make smaller banks think twice about getting into the business.

"Today, with the right tool set, just about anybody who cares to take it on can do it," said Mr. Knebel. With ACBS, the entire process is automated.

Even more important, customer data and other information needed to support product development is centrally located and easily accessible.

Advanced Information's product strategy, suggested PNC's Mr. Mikula, fits well with the Pittsburgh company's corporate strategy. "We wanted a system that was capable of supporting the process of serving our corporate banking customers and focusing on best practices to meet the needs of those customers," he said.

In the past, he said, a customer who wanted a loan asked a relationship manager, who documented it in a memorandum to the bank's loan committee. There, the information was entered into a computer system. With ACBS, he said, all necessary information can be keyed in at the moment of the initial inquiry and passed electronically through the bank. The results: better information, fewer errors.

The conversion has required careful orchestration among many areas of the bank. Nearly two years in the making, the reengineering task required implementation teams focused on areas such as credit risk, information delivery, training, technology conversion, best practices, standardization, and implementation.

Oversight for each team, and for the project in general, was supplied by an executive management team consisting of Mr. Massengale, Mr. Mikula, and their peers from other areas of the bank.

The idea, said Mr. Massengale, is for PNC to excel as a commercial lender. And to achieve that goal, it had to look at commercial lending as more than simply a commercial banking function.

"The architecture provides PNC Bank and its customers with the ability to meet their changing needs," said Mr. Massengale. "We didn't want to constrain our customers with our operating environment; our operating environment should be subservient to our customers' needs."

Ms. Murphy is a regular contributor to Management Strategies.

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