Banks plan to spend more for outsourcing, even though there are fewer of them to buy it, according to a study by Mentis Corp., Durham, N.C.
"The business of outsourcing is expanding over a smaller customer base," said James B. Moore, president of Mentis.
The study found that banks expect to spend an average of $318,000 for outsourcing in 1996, 3.2% more than last year. Even greater expenditures are predicted for 1997.
The largest banks - those with more than $4 billion of assets - will spend the most, according to Mentis, because the consolidations that have reduced their ranks have led them to seek outside help to merge disparate technologies, operations, and data centers.
"Acquisitions have put increasing demands on technology capabilities, making outsourcing services more attractive and of more value," said Ray Maturi, division vice president of banking and securities at Electronic Data Systems Corp., Plano, Tex.
Dean Schmelzer, an executive vice president at Fiserv Inc., Brookfield, Wis., called bank consolidations a "double-edged sword" for outsourcers.
"When our client is acquired, it obviously impacts us," he said, "but we also have clients that do the acquiring, giving us the opportunity to handle systems conversions or run remote operations.
"It balances out over time. One year you may get hurt, but the next year may be better."
One of the ways outsourcers have responded to the decreasing number of large customers is to offer a broader range of services to new and existing clients.
Outsourcers are no longer sticking to handling most or all of a bank's core processing operations, as they did in the past.
"Today, there's more interest from larger institutions in having outsourcers do portions of work," said Mr. Maturi.
The applications most likely to be outsourced, according to Mentis, are those related to alternative delivery, for example, transaction processing for automated teller machines and point of sale terminals.
Outsourcers are now also offering such services as loan processing and networking.
"Our existing customer base has become our primary market for new services and growth opportunities," said Collins Andrews, president of the financial services division at Alltel Information Services Inc., Little Rock, Ark.
The company has expanded its services by supporting the installation and maintenance of distributed computing environments and by providing network management and telephone center outsourcing.
The latter service, Mentis said, is a segment of one of the fastest- growing areas being outsourced by banks - telecommunications.
The company's research shows that telecommunications accounts for more than 13% of information technology expenditures at banks and is one of the fastest-growing technology budget components.
"Banks are buying less of their own equipment and relying more on public switched services," said Mentis' Mr. Moore.
"As a result," he said, "telecommunications companies will become more dominant in terms of strategic significance to banks. Outsourcing companies will increasingly find themselves partnering with telephone companies, as well as systems vendors, to provide banks with total solutions."
In addition to changing the menu of services being offered, bank consolidation has modified the marketing practices of many third-party vendors, said Mr. Moore.
"Since much of the buying power for outsourcing services now resides at the holding company level, outsourcers - which traditionally sold into the middle management level of an organization - must recognize the need to cross-sell to the business units, where requirements are established and where budget dollars reside," he said.
"They must also reach up to bank steering committees, where strategy formulation occurs," he said.
Helping to forge a bank's technology strategy puts the outsourcer in a better position to seize opportunities, agreed EDS' Mr. Maturi, which is why the company has changed its marketing approach by developing a relationship philosophy.
The company offers not only a variety of technology management services, he said, but also consulting services that play a role in determining the banking client's technology requirements.
Ms. Tucker is a freelance writer based in Hazlet, N.J.
