A bank's decision to outsource core data processing usually hinges on two issues: cost and control.

First National Bancorp is no exception. In 1992, the rapidly growing supercommunity bank based in Gainesville, Ga., decided to sign an outsourcing agreement with M&I Data Services, a unit of Marshall & Ilsley Corp., Milwaukee.

"We realized that, in order to support our growth and support our customers properly, we were going to have to make a change," said Sheila Ray, senior vice president, information processing and administrative services.

While $2.4 billion-asset First National was worried about controlling its destiny, executives couldn't ignore the numbers.

"Everything from the mainframe to the keyboards that our users touched had to be changed," said Ms. Ray. "We looked at our alternatives, and outsourcing seemed to be the lowest-risk and the lowest-cost way to make that transition."

Furthermore, she said, the arrangement with M&I enabled the bank to introduce products and services such as cash management and debit cards.

Bank outsourcing of data processing tasks has been on the increase. M. Arthur Gillis, president of Computer Based Solutions Inc., New Orleans, has estimated that about 45% of small banks use third-party data processors. And 26% of the largest banks in the country outsource most or all of their data center support functions, according to the 1994 American Banker/Tower Group/Andersen Consulting technology survey.

For First National, which now operates 17 affiliates, primarily in northeastern Georgia, the decision was driven by dollars and cents.

"We were operating in-house on a Unisys mainframe and had a host of legacy systems that had been greatly modified," said Ms. Ray. "As we started looking at cost and did vendor interviews, (we decided) that we were definitely going to outsource."

First National, which also did data processing for three unaffiliated banks, initially did an internal survey and queried user groups to determine what its data processing needs would be.

While outsourcing did result in higher costs - the bank's aging previous system had been inexpensive to operate - they were far less than if First National had replaced its system on its own.

"The initial capital investment was probably about a tenth of what we would have had to do" had the bank stayed in-house, said Ms. Ray. Over time, she estimated, costs will be roughly half what they would have been.

First National also decided it wanted technology from International Business Machines Corp. because of "the wealth of opportunity in software available to operate in that environment."

The bank narrowed down its choice to four vendors: Electronic Data Services Corp.; Systematics Financial Services Inc., now called Alltel Information Services; Integrated Systems Solutions Corp., a unit of IBM; and M&I.

EDS dropped out, and at the time, Ms. Ray recalled, ISSC "was going through a number of changes."

ISSC, she said, changed its initial proposal and instead offered to process First National through its agreement with Basis Information Technologies Inc., then a unit of First Financial Management Corp.

The bank's data would have been processed on Hogan Systems Inc.'s core banking software from the Basis center in Atlanta.

"If we had signed to do our processing through Basis, under the joint agreement between IBM and Basis, we would have been the largest bank they processed," recalled Ms. Ray.

She added that ISSC "could not give us references on large institutions using the Hogan loan system. We were uncomfortable with that and not willing to be a pioneer."

Further, at about the time First National was weighing options, Basis' parent had sued IBM for breach of contract. First Financial alleged that the computer giant did not supply the resources needed to meet its contractual obligations to install software and train employees at Basis.

At any rate, Ms. Ray said, First National chose M&I. The affiliate banks were converted in groups of two or three over a period of four months.

"The conversion went exceptionally well," said Ms. Ray. "We couldn't ask for a better business partner" than M&I.

Ms. Ray estimated that the banks spent about 7,000 man-hours preparing employee training courses and about 80,000 hours on the training itself.

However, she added, "there is still a learning curve after conversion."

Indeed, the gains are yet to be reflected in the bank's efficiency ratio, or noninterest expense per dollar of revenue. The ratio, which stood at 54.52% in 1990 - a low number for a supercommunity bank - has been rising. It stood at 64.57% in 1993, up from 60.32% the year before, when it decided to outsource.

Ms. Ray said the deterioration in the efficiency ratio reflects First National's acquisitions. She added that it also reflects spending on the infrastructure needed to support a growing organization.

"We've recognized the issues with our efficiency ratio and are addressing that," she said. "As I sit here today, I will tell you with conviction that you will see it come down."

That's so, she said, because "we are now to the point where we are going to start reaping the benefits of the base technology that we put in."

For example, the bank sees new revenue opportunities. She noted that the new system enables a customer service representative to open three products for a single customer in just four minutes.

Ken Dickens, first vice president, noted that the association with M&I has allowed First National to offer new products and services.

"One of the big benefits there is cash management," said Ms. Ray. "We are a group of community banks, and we do come in head-to-head competition with superregionals. Because of our association with M&I, we can match anything that those superregionals can offer in the way of technology."

And she added that the new system lets the bank control how routine deposit and loan products are set up.

While First National is pleased with M&I's service, the control question hasn't entirely disappeared. The bank, for example, prints its own customer statements using laser printers from Xerox Corp. that it already owned.

"We were able with M&I's assistance to set up the software and hardware necessary to drive those printers without much of an investment at all to create the printback here," said Ms. Ray. "We were able to design a statement that is unique to our market and unique to our customers."

"That would also be true on the items-capture and items-processing side," said Mr. Dickens, the first vice president. "We were able to use existing equipment."

First National is also working with M&I to improve the quality of its management reporting. "We would like more control, and M&I is working with us," said Ms. Ray. "We do have a report-writer function, which we have used to a greater extent than they ever anticipated."

She said she is confident that M&I will produce a solution to give First National better management information.

"Our opinion today is that we are kind of in a balance with our vendor," said Ms. Ray.

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