Continental Near Pact for Outsourcing

Continental Bank Corp. has decided to form a joint venture with one of two bidders to run its technology operation, a spokesman confirmed.

The Chicago-based bank, which spends over $100 million a year on technology and has 475 employees in its technology division, is considering proposals from Andersen Consulting, Chicago, and a joint bid by Ernst & Young and International Business Machines Corp., said sources familiar with the bank's plans.

The Continental spokesman said executives expect to make a decision by the end of the month on the contract to perform the bank's data processing and systems development, an arrangement known as outsourcing.

Outsourcing Goes Big League

Continental, with $27 billion in assets, is one of the largest banks to decide to farm out its technology operations.

Other large institutions, such as Chemical Banking Corp., which plans to merge with Manufacturers Hanover Corp., are said to be looking at outsourcing, but have not reached a decision.

One of the largest outsourcing contracts in the banking industry was signed last year between $29 billion-asset First Fidelity Corp. and EDS Corp. The 10-year contract is worth $450 million.

Continental's potential contract will be unique as far as outsourcing deals go: Few banks have hired consultants to run their technology operations, relying instead on established technology companies like EDS and IBM. Continental's preference for working with a consulting firm may explain why IBM is bidding jointly with Ernst & Young.

The planned joint ownership of the bank's computer operations is also a new twist on traditional outsourcing contracts. Sources say the bank plans to form a joint venture because such an arrangement would give Continental more control over the operation than a traditional outsourcing deal, in which a bank signs a multiyear contract for a fixed fee.

Profit-Sharing Possibilities

Another advantage of joint ownership is that it would allow the bank to share in profits if the operation chooses eventually to market processing services to other banks.

Senior Continental officials who asked not to be identified said previously that one of the primary drivers toward outsourcing was to speed the development of new technologies.

But cost cutting is surely another major expectation from outsourcing. Earlier this month, Continental took dramatic steps to slash costs and improve its balance sheet.

Plagued by problem real estate loans, the bank cut its dividend by 40% and set aside a $175 million special provision for loan-loss reserves. The result will be a $125 million loss in third-quarter 1991.

Andersen Enters Alliance

Neither Andersen nor Ernst & Young has landed outsourcing deals with any banks in the United States, although Andersen does facilities management for firms in other industries.

And this week Andersen allied with Systematics Financial Services Inc., Little Rock, Ark., for joint marketing of software and outsourcing services to banks.

Since Andersen's discussions with Continental preceded the formation of the Systematics alliance, the Little Rock company will not be part of the joint venture if Andersen is chosen.

IBM, which recently formed a separate subsidiary to sell processing services, has contracts with several institutions.

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