THE DECISION to farm out back-office operations is one of the most wrenching a bank can make.
But when Hibernia National Bank's management made the move to outsourcing in 1989, it was not just shaking up its own business. As the first major bank to hire an outside firm to run its data processing shop, Hibernia set the stage for the industry's much-talked-about infatuation with outsourcing.
At the time, Hibernia was growing by leaps and bounds. It had logged more than 60 quarters of earnings increases, its stock was riding high, and it was gobbling up banks along the Gulf Coast. Hibernia's executives came to believe it would be in the best interests of the bank and its stockholders to shed the cumbersome data processing tasks that were not directly related to the business of banking.
They reasoned that, by bringing in International Business Machines Corp. to run their data processing operation, they would be free to devote more of their time and financial resources to the business of banking.
And free them up it did, said Kirk Domingos, the executive vice president who negotiated the IBM contract.
But a year into the arrangement, Hibernia began to be rocked by many of the problems that had already laid waste other banks. Its balance sheet smeared with red ink, the bank started looking for ways to control the damage.
Of particular concern was the prospect of losing the software development staff, a group whom Mr. Domingos described as superb, yet who were understandably concerned about their future with a financially faltering employer.
It was against this backdrop that Hibernia took what some have suggested was its biggest gamble. It farmed out to IBM its applications development shop. "It took a lot of soul-searching to do that," Mr. Domingos conceded. "It's really the brains of the operation."
Still, he is convinced that the decision to outsource software development was the right way to go. "The cost structure was such that we had to reduce expenses to get the bank back on track," Mr. Domingos said.
The new, expanded contract with IBM's outsourcing unit, Integrated Systems Solutions Corp., will save Hibernia "a considerable amount of money" over the next 10 years, he said.
Though he declined to elaborate on just how much money the bank will save, Mr. Domingos said the amount will climb into the tens of millions of dollars.
The expanded outsourcing contract is less than a year old, but it has had a noticeable effect. The second quarter was the bank's first profitable one in more than two years. At $500,000, the bottom line was modest but a profit nevertheless. In addition, employee morale is vastly improved.
"Today, people are walking around here with smiles on their faces instead of frowns," Mr. Domingos noted. "We're going to pop back and give the competition hell again."
The bank's agreement with ISSC is clearly geared toward helping it achieve that goal. "The real key [to rebounding] is capital, and to get capital you have to have a profit plan, and that means reducing expenses," said Mr. Domingos. "Every dollar you can cut in expenses adds to the bank's capital."
One way Hibernia is seeking to raise capital, in addition to outsourcing, is through the sale of its Texas bank. Hibernia has entered into an agreement with Comerica Inc. for the sale of the unit, which operates over 20 branches throughout the state. And ISSC is expected to play an integral role in that process, ensuring that the transition of back-office operations from Hibernia to Comerica comes off without a hitch.
"We are an important enabler," said Bill O'Connor, ISSC's vice president for systems services development. ISSC helps foster activities such as the sale and transition of branches, and it offers clients the ability to expand products and services without incurring the development costs they would if working on their own.
For example, Mr. O'Connor said ISSC recently installed a telephone voice response system at Hibernia. The system had originally been developed for another client, so all ISSC had to do was reconfigure it for Hibernia. Installation was accomplished at little or no extra cost to the bank, he boasted, yet it will help the bank expand its customer base.
In addition to new products and services, ISSC provides Hibernia with the opportunities for savings. For example, the bank's entire mainframe operation will soon be moved out of New Orleans to an ISSC site outside Denver -- a move requested by Hibernia officials after they decided not to shell out large sums to build a backup facility nearby, according to Mr. Domingos.
"We bring material benefits to shareholder value," said Peter Dance, vice president for systems solutions within ISSC's financial industry unit.
While officials at Hibernia and ISSC clearly view their relationship as a partnership, some observers fear that bankers use outsourcing as a quick fix for balance sheet problems. Ray Manganelli, president of Gateway Information Service Inc., a new York management consulting firm, said that many banks and other organizations which have entered into long-term outsourcing arrangements are mortgaging their future for short-term gains, and that now, three to four years into the contracts, some banks are regretting their decisions.
Mr. Manganelli said his firm has found that the vast majority of corporate executives are uncomfortable predicting technology and price/performance trends or head count, capacity, and capital needs more than two or three years into the future.
Yet, he noted, the average outsourcing contract is for 8.8 years. "If you can only understand all of the components of the work you do 24 to 36 months out, then why engage in an outsourcing contract that is 8.8 to 9.3 years long?" he asked. "It seems a major incongruity."
Mr. Domingos, however, said he has no reason to believe Hibernia will come to regret its decision to team up with ISSC. "If you negotiate the contract right, you always have the opportunity to renegotiate," he said.
Besides, he said, in the business of banking, technology is nothing more than a utility, like the electric company. To succeed in the business of outsourcing, ISSC has to stay on top of the technology curve, and that can only be to the advantage of Hibernia and its other clients.