Continental Seen as Latest Big Bank Planning to Farm Out Operations

Continental Bank Corp. plans to farm out its technology operation within the next few months, according to sources within the bank and consultants familiar with its plans.

The $29 billion-asset Chicago-based institution would be one of the largest banks in the country to hire a company to run its computer operations.

Continental's technology executives are in the throes of deciding how to structure the "outsourcing" arrangement, according to knowledgeable sources.

The bank is considering whether to form a strategic partnership involving its technical staff and consultants from a firm such as Andersen Consulting or Ernst & Young, which would be responsible for running the bank's computer operations and developing future banking systems, sources said.

The sources said Continental, which spends nearly $100 million a year on technology, is leaning toward such an arrangement because it would let the bank maintain much of the control over it back-office operations.

At the same time, working with a consulting firm would give Continental the ability to merge the unit back in-house over time. Other large banks have chosen to turn the entire technology staff and computer center over to a third party, such as EDS Corp. or International Business Machines Corp., for a fixed fee over long periods, usually five to 10 years.

The arrangement would rival First Fidelity Bancorp.'s 10-year, $450 million pact with EDS Corp. last year to run its technology centers. However, the size of the Continental deal could be smaller because the bank may farm out parts of the technology operation, such as software development, over a shorter period.

William C. Murschel, a Continental spokesman, said, "It's unless and until any specific decisions have been made" about outsourcing. Word of Continental's plans first appeared in Chicago newspapers this week.

Senior bank officials who asked not to be identified said an in-house task force had been working on a plan to outsource all or part of the technology operation for the last two-and-a-half months. The bank hired consultants from A.T. Kearney to help put the plan together. The bank expects to complete the plan by the end of the month, after which it will request bids from vendors.

FDIC Has Sold Its Stake

The news comes follows the sale by the Federal Deposit Insurance Corp. of its 26% stake in the bank, which it acquired as part of the agency's $4.5 billion rescue in 1984.

Specializing in commercial banking and cash management services, both of which are computer-intensive businesses, Continental has invested heavily in technology over the past few years. The bank spent $11.5 million on a recently completed technology center in Chicago, including $3 million on a lock-box operation. Continental employs 475 people in the technology division.

Sources at the bank say that while cutting costs is a primary objective, senior managers have been increasingly frustrated with the time it takes to enhance existing technology-based cash management services or create new ones. By hiring an outside firm, they hope to speed systems development.

"We need to be able to turn around projects a lot faster. They always take twice as long as we think," said a senior bank official. "And the cost to be at the forefront of technology goes up exponentially every year."

Sources say that the bank's technology is about on a par with that of institutions of its size. Continental runs its core banking systems on IBM mainframes, and has a mix of software programs that were developed in-house or purchased off-the-shelf.

The bank has farmed out a number of support functions recently to cut costs, including the legal department, mail distribution, and corporate communications.

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