A few years ago, a rap song topped the charts with lyrics that went, "Don't believe the hype," a line that bankers embarking on blazing new technological frontiers may want to memorize. No one knows this better than the executives at Pacific IBM Employees Federal Credit Union, a $350 million-asset institution based in San Jose, Calif. In 1991, Pacific IBM stunned the financial services community when it announced that it was moving its operations off an IBM mainframe system and onto a local area network of personal computers. It was one of the first credit unions in the country to base its entire operation around client-server architecture. Although the installation was a success on many fronts, the credit union ran into huge snags with its technology partner, Telos, a software firm formerly located in San Jose. According to the credit union's president and chief executive, Daryl Tanner, the disputes with Telos stymied product development and led to increased costs. We had an unfortunate experience, Mr. Tanner said. Telos, the group that developed our software, was taken over by Newtrend, and basically they stopped supporting us. We were left to develop the software on our own, and costs naturally went up. To compound the situation, Newtrend last year was itself acquired by Computer Associates International Inc., and the credit union operation was in turn sold to Electronic Data Systems Corp. How EDS will support Pacific IBM Employees Federal Credit Union is still subject to negotiations, Mr. Tanner said. More and more financial institutions are looking to outside partners to get on the learning curve with new technologies, said Bill Kirwin, vice president of Gartner Group, a consulting firm in Stamford, Conn. There are risks, and financial institutions must carefully construct the language to mitigate them. Here's where the credit union stands right now: Its new client-server system links 150 PCs running Microsoft Corp.'s Windows operating system and processes data for 44,000 members. It also drives 11 automated teller machines and enables the credit union to participate in a shared branch system with other California credit unions. With PC-based systems, employees have more information at their fingertips. System response time has improved, and customers are generally better served a critical concern for credit unions that face competition from big banks. Using the Windows-based PCs, IBM Pacific employees push a button to obtain access to the credit union's credit card or mortgage servicing systems, Mr. Tanner said. This way, if you walk in and want information on any of your business with the credit union, you can get it from the same person, said Mr. Tanner. But he admitted the system isn't operating up to its full potential. The credit union planned to bring credit card processing currently provided by outsourcer by First Data Corp. in-house, but this isn't possible yet, he said. The system was also expected to be upgraded to handle the portfolio management of a collateralized loan program. This would entail tracking the value of members' IBM stock holdings in relation to their loans. In addition, without upgrade support from Telos, the credit union spent four months developing its own Truth-in-Savings module. Putting all our developers on this kind of project exacted a high cost, said Mr. Tanner. What exactly happened with Telos? In 1991, it was a three-person firm with an excellent track record and promising future. It had successfully written software for a Canadian credit union with $1.3 billion in assets. It came highly recommended to Mr. Tanner, a CEO who is known in the industry as an astute user of technology and as an executive steeped in the challenges of converting to new systems. Before coming to Pacific IBM Employees Credit Union, he led successful conversions at the Atomic Workers Credit Union in Idaho Falls and at Litton Industries Credit Union in Los Angeles. In the beginning of the Pacific IBM Employees Credit Union project, developers from Telos and programmers from the credit union worked closely together. As is common in these kinds of arrangements, the credit union underwrote a significant amount of the development in anticipation of getting everything they needed plus a royalty reflecting future sales. At first the Newtrend relationship didn't seem to pose a problem. When Newtrend stepped in to buy the marketing rights, we saw it as a positive, said Mr. Tanner. Newtrend has a good reputation, and I talked to some of the credit unions that were using their package and they felt their business sense was good. Then the surprises began. Mr. Tanner said that the Telos programmers moved to Orlando, Newtrend's headquarters, without first alerting the credit union. The credit union's vice president of information services went over to Newtrend as well. Coding then became a huge headache, said Paul New, the president of Share One, a systems firm in Memphis. Mr. New served as a consultant on the credit union project. With programmers on either coast, what resulted was a product that didn't work. The elements were incompatible, he said. Mr. Tanner added that during this period, Newtrend began aggressively marketing an enhanced version of the Telos software. The credit union was paid a royalty but was left without product support. The credit union programmers had to struggle to fix a version of the system that had become outdated. We quantified several hundred bugs, said Mr. Tanner. The loan collections system, for example, never worked adequately. Bringing the system down twice weekly for repairs wasn't uncommon. Enter Edward Gardner, the new vice president of information services, a computer scientist whom Mr. Tanner describes as a very gifted individual who came on board with the mission to help us pick up the pieces, create stability, and improve capacity. Mr. Gardner was formerly with the Jet Propulsion Laboratory at Pasadena. He also taught at the University of Oregon, where he was the head of data processing services. In addition, one of his most recent projects was overseeing the installation of the client-server system for a U.S. military hospital in Saudia Arabia during the Gulf War. That battle-tested experience may come in handy now. My mission is to make some reasonable improvements and reorganize the information services area with new development, testing, and quality assurance methodologies, Mr. Gardner said. So much used to be done 'on the fly,' and systems were changed very quickly. With the vendor out of the picture, I set up an infrastructure so we could move forward. The Telos problem exacted a price on the entire staff. We got the staff involved early on, and it almost comes back to bite you in situations like this, said Mr. Tanner. Their expectations were vivid, and now there's some adjustment. One of the ways that Mr. Tanner addresses employee concerns is through a company newsletter that was started during the conversion. He also uses e- mail to send bulletins to his staff. Additionally, Mr. Gardner's work at the credit union has been critical to improving morale. He basically has been charged with creating internally the support services that the credit union employees had expected from a vendor. The staff is losing that shell-shocked look, he said. We have methodologies in place to handle problems. In our situation, anywhere from one to five system breakdowns happen each day. These problems no longer overwhelm the staff. The staff knows what to do. They are more confident. Reorganizing the staff has also helped. Jobs are more clearly defined, and people who weren't trained by the vendor now attend special classes. Situations like the Telos problem invariably raise the issue of contracts, an area that Mr. Tanner is reluctant to comment on because of his pending discussions with EDS. But the coming months should be telling, especially since the credit union wants to upgrade its software to use Microsoft's Windows NT platform. We've had positive discussions with EDS, said Mr. Tanner. We are hopeful that they may provide us with an upgrade path to NT. But the disparities between our version and theirs are great. That's what poses the problem. Who knows what will happen, said Mr. New of Share One. They may strike a deal with EDS or they may convert to Windows NT on their own. Being first, getting out there, and trying something new is never peaches and cream, he added. I've worked with Daryl Tanner for years, and he knows more about technology's risks and possibilities than any financial services executive I've met. I have no doubt the credit union will come out stronger for the experience.

Ms. Sullivan is a freelance writer based in New York.

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