Continental's Outsourcing Is Biggest Yet

Continental Bank Corp. said Thursday that International Business Machines Corp. will take over its computer operations in the banking industry's largest outsourcing arrangement to date.

Continental said it awarded a 10-year contract worth more than $450 million to Integrated Systems Solutions Corp., a newly formed subsidiary of IBM. It will manage Continental's technology group, purchase or assume the leases for all computer hardware and software, and hire most of the bank's 450 technology employees.

First Money-Center Pact

Continental, with assets of $25 billion, is the first money-center bank to join the move toward outsourcing, which many sizable institutions are considering as part of cost-cutting and restructuring plans.

The Chicago institution said it would save $100 million over the life of the contract - or more than 20% of the bank's technology costs for 10 years. Analysts said the $100 million estimate is conservative.

The agreement is structured like a traditional outsourcing agreement but has elements of a joint venture. For instance, Continental will retain ownership of its recently built, $11.5 million technology center. But Integrated Systems can use the facility to serve other banks. Continental would share in the profits of any additional contracts.

Sharing in Fees

Sources said the deal will also give the bank part ownership of technology systems developed at its facilities. Continental would get a share of fees generated through licensing those systems to other banks.

Another unique element of the agreement allows Integrated Systems to subcontract software maintenance and development to the consulting firm Ernst & Young.

Ernst & Young "will maintain all our current software, but as part of the arrangement, major systems upgrades will be done in the very near future," said Richard L. Huber, Continental vice chairman. "They include integration of various data bases, a new gateway project for our Confirm system [a corporate cash management product], and a securities trading system."

Terms of the agreement were not announced. Mr. Huber said the contract's value will exceed the banking industry's previous outsourcing period - a $450 million, 10-year deal signed last year by the $29 billion-asset First Fidelity Bancorp., Lawrenceville, N.J., and EDS Corp., Dallas.

Andersen Consulting Loses Out

The Continental agreement does not include check processing and lockbox operations, but bank officials did not rule out spinning off the unit later.

Integrated Systems, formed by IBM this year after competitors raised antitrust questions about the computer manufacturer's direct involvement in data services, won the Continental bid over Chicago-based Andersen Consulting.

The agreement is a coup for IBM, which desires to build a strong outsourcing business and win contracts with large banks. IBM has several outsourcing agreements with regional banks.

For profit-squeezed Continental, the agreement, to be finalized this year, will bring much-needed cost savings and speed the development of new banking systems.

"It's a smart move and part of an overall strategy to streamline operations and cut costs to generate a decent return on equity," said Arthur Soter, a banking analyst at Morgan, Stanley & Co. "It's all part of a broad effort to improve profit, not dress it up" for acquisition.

The bank has turned over other internal operations, including legal services, properties management, and employee food services, to outside providers. It also dropped its status as a primary dealer in government securities after deciding that was not a "core business."

Thomas C. Theobald, Continental's chairman and chief executive officer, has said in recent published reports that the bank's focus on corporate banking means technology is less important than it is for retail banks with heavy transaction volumes from automated teller machine networks or branch automation systems.

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