The evolution of bank outsourcing demonstrates that Charles Darwin's most famous theory does not apply only to the animal kingdom.

In recent years, the smallest and weakest of outsourcing vendors have been dying off and ceding market share to larger players. And the reason is simple: The larger vendors have adapted better to the changing demands of the business.

Banks increasingly are asking for more specialized services, and the largest outsourcing providers have made sure to meet those demands.

Once focused almost exclusively on core processing, vendors now are mining for business in call center management, data warehousing, and a myriad of nontechnical back-office pursuits.

The banking industry is rewarding this kind of responsiveness by outsourcing more than ever.

From 1992 to the beginning of 1996, the percentage of financial institutions letting a third party handle at least one computer application rose to 89% from 67%, according to Mentis Corp.

Though reliable figures on outsourcing spending are hard to come by, experts say it is a virtual certainty that banks have been increasing their outlays.

This is especially notable in light of the fact that the huge-dollar deals seen in the early part of this decade have all but dried up in recent years.

"Two, three years ago, when things were slow, people were asking, 'Is outsourcing dead?,' and I said, 'No, but you're not going to see these explosive deals all the time,' " said Barry Wiegler, managing director of the Sourcing Interests Group, Bell Canyon, Calif.

"Outsourcing is well and growing," he added, "but what's happening is that managers are looking at it selectively, for smaller and different areas of the business."

One reason for the trend away from blockbuster deals is the improving health of the banking industry.

In the early 1990s, the outsourcing of huge swaths of computer processing functions tended to be aimed as much at quick boosts to balance sheets - from selling off computer equipment - as at operational improvements.

Now, with banking profits at lofty levels and competition intense, many institutions are thinking more long-term. They are looking to rid themselves of every possible distraction from strategic planning and core business operations.

In many cases this has meant contracting for third-party help in areas that rarely would have been considered for outsourcing a few years earlier.

Vendors clearly are pleased at the rising acceptance of outsourcing. Not too long ago, the business was throttled by a view among bankers that only institutions incapable of managing themselves farmed out operations to third parties.

Outsourcing has shaken that stigma, but another problem for vendors has risen in its place.

As banks grow more familiar and comfortable with outsourcing, they have become more sophisticated about setting performance standards and haggling over prices. This has begun to cut into the profits to which vendors had grown accustomed.

"Core system processing has become commoditized, and the vendors' ability to get good margins on it has pretty much evaporated," said Carl A. Faulkner, managing director at M One Inc. a Phoenix-based consulting company.

The search for new profits is, in part, responsible for the appearance of new types of niche outsourcing.

Most of the top vendors say their newest services are having the intended effect. For instance, M&I Data Services Inc., the Milwaukee-based unit of Marshall & Ilsley Corp., in the last 18 months has sold its data warehousing services to 65 bank holding companies, and it is signing new customers at a rate of about three per week.

"We see both existing customers and new prospects looking for core competency in the transaction processing side of things, but they are also looking for creative solutions in the area of information management," said Rick Roy, vice president at M&I Data.

The other top vendors - Alltel Information Services Inc., Bisys Group Inc., Electronic Data Systems Corp., and Fiserv Inc. - also are having success with niche offerings.

But the news is not all good for outsourcing vendors.

Competition is intense among the big players that have come to dominate the business. More than 90% of bank outsourcing now is handled by a group of about a dozen companies, according to Computer Based Solutions Inc.

For the largest banks, the competition among these leaders is good. It means lower prices and access to a wider array or services as service providers scramble to differentiate themselves. For smaller banks, though, processing through a large service bureau can mean getting lost in the shuffle.

Nonetheless, banks of all sizes seem to have warmed to outsourcing, because it often can translate into cost savings.

In scale-dependent pursuits, such as check processing, there often are clear benefits to running through a service bureau, because the outsourcing facilities handle huge volumes. That can translate into low per-item costs.

The prospect of expense reductions increasingly is attracting the attention of bank executives outside of the technology areas.

"Today in many cases it's the CEO and the boards of directors that are saying, 'Have you looked at outsourcing in this area or that area,' " said Mr. Wiegler.

Mr. Roy and others pointed out that as the array of available outsourcing services expands into new areas, such as electronic commerce, banks will have even more opportunities to cut costs and to improve their focus.

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