IBM Pact Prepares Wamu for Growth

Acquisition-hungry Washington Mutual Inc. has doubled in size in the last year, hopes to double again soon through its contested bid for Great Western Financial Corp., and states plainly that an acquisition strategy permeates its business dealings - even ones so remotely connected to buying banks as outsourcing agreements.

"One of our core competencies is acquisitions," said Liane Wilson, executive vice president of the Seattle thrift. "In going about a contract and a negotiation, we wanted to follow our acquisition format because it has served us very successfully."

Last April, Washington Mutual signed what was then a record-setting outsourcing deal: a 10-year arrangement worth $533 million in which International Business Machines Corp. would install and manage network computing systems throughout the organization and its growing branch structure.

(The record stood only until May, when J.P. Morgan & Co. signed a seven-year, $2 billion pact with a consortium of companies.)

A year later, much of Washington Mutual's system has been installed, all targets have been met, and both the Seattle-based thrift and its vendor are poised to incorporate the financial institution's widening empire.

"This is the fastest-growing contract that we have," said Mark Morin, general manager of global banking, finance, and securities services for IBM Global Services. "We honestly have several good business relationships in contracts, and I think what separates this one is the speed, how fast it is moving."

After the contract was signed, Washington Mutual acquired three banks: two small Utah institutions and American Savings Bank of Irvine, Calif., whose $20 billion asset size roughly equaled the Seattle company's.

Absorbing new business units is becoming old hat for the Northwest powerhouse - which has made more than 20 acquisitions in 14 years - but the size and scope of the American Savings merger put Wamu, as the thrift is known, under new technology strains and catapulted it into a new market.

Having signed the outsourcing agreement before the merger meant that Washington Mutual could synchronize American Savings' systems with its own in record time, Ms. Wilson said.

Moreover, Ms. Wilson said, the relationship with IBM's global services division "has also allowed us to be prepared for future growth beyond what we currently have on our plate."

This spring, Washington Mutual was seeking to become the "white knight" rescuing Great Western from a hostile takeover bid by H.F. Ahmanson & Co. If it succeeds in buying the $43 billion-asset thrift, which is based in Chatsworth, Calif., Wamu would double in size again and continue, among other things, to keep IBM on its toes.

To ensure that technology transitions run smoothly, Washington Mutual has written into its contract with IBM a process for handling work as the thrift grows. That way, "for every acquisition, the negotiation would be very fast," Mr. Morin said.

Washington Mutual began sniffing at the idea of developing a sweeping pact with a technology expert in 1994 and 1995, Ms. Wilson said, as the organization sought out ways to focus on its core competency of providing financial services.

From that analysis, "we decided that we did not want to do outsourcing in the traditional sense because that tends to be just a vendor relationship," Ms. Wilson said. "We decided that for essential noncore competencies of the bank, such as a network, we wanted a strategic partnership and alliance."

In choosing a technological partner, Washington Mutual sought a company with "staying power," Ms. Wilson said, one that would not regard the big thrift as a guinea pig. The requirements included installing a network system in all branches for both data and voice, training people to use it, and maintaining a help desk.

After the thrift chose IBM Global Services (which, for legal reasons, changed its name last January from Integrated Systems Solutions Corp.), the bare-fisted acquisition style of negotiation kicked in.

"There was a due diligence period," Ms. Wilson said. "The speed with which we wanted to put the deal together meant that people had to work long hours, seven days a week. The business objectives were being kept in everyone's mind - the lawyers, the technicians, and the managers - from the beginning, and that was very important."

Talks started in mid-January 1996, and the contract was signed April 3. It called for the "implementation and transition period" to be completed by yearend, including installing network systems in all branches and upgrading systems in all lending offices.

During the transition months, "I would get E-mail from managers and employees, thanking me for the training, thanking me for the smooth implementation of a system, thanking me for the speed with which a problem was resolved," Ms. Wilson said. "Before that, I would get the opposite: E- mails with the problems."

One key to the success of the arrangement, both sides agree, is that an IBM project manager was assigned up-front and was even involved in the contract negotiations.

Mr. Morin said Ms. Wilson's no-nonsense management style also played a role. "Please don't think that she's not demanding," he said. "She didn't recommend that we assign our project executive early - she demanded it."

Her demands also included a rapid-fire turnaround. "The time frames that they were looking at to get the contract completed and to go ahead and start execution were, candidly, faster than anything we had ever experienced before," Mr. Morin said.

As it turned out, IBM was able to meet its deadlines. Both sides credit communication, cooperation, and an "atmosphere of trust."

Along with the installation of network computers on every desktop, IBM has moved the internal help desk from Washington Mutual's premises to Boulder, Colo. The help desk serves 6,000 employees now and will serve 3,000 more in July, when the American Savings conversion is completed.

At a six-month review of the contract, targets were being met so neatly that both sides agreed to set higher standards.

"We raised the service-level objectives," Mr. Morin said. "There wasn't anything in the contract that said we had to get it to this level, but we got together and said, 'It looks like we're performing this way, and this is better than what we specified, so that's good. What's the next realistic target that we ought to have - something with some stretch in it but something that people can feel good about hitting.' "

For example, IBM is monitoring how many help-callers get answers to their problems within 30 seconds. "That's an important measurement we track, but the really important thing is, can you get to what's behind the phone call once it comes in?" Mr. Morin said.

IBM and Washington Mutual are also monitoring the types of questions asked, trying to clear up areas of confusion and to reduce the number of help calls.

Experts on outsourcing praised the alliance as a well-managed relationship that addresses a set of clearly defined tasks.

"Washington Mutual had a very specific need that was directly related to its technology infrastructure," said William Bradway, a principal at Meridien Research, Needham, Mass. "It's a very tactical use of an outsourcing provider because it eliminates the pressure on Washington Mutual to hire very technically oriented individuals who know PCs and networks and can install them and make them work."

Particularly for an institution that is bent on growing by acquisition, the arrangement makes great sense, Mr. Bradway said.

"When you use an outsourcing vendor like IBM, in this case, you can turn to them and say, 'Listen, we just picked up 80 branches in California, and we need to figure out how they can conform to the ones you've already done,' " Mr. Bradway said.

Henry J. Boucher, a vice president in the financial services consulting practice of Mercer Management Consulting in New York, said the fact that the contract spans a decade is significant.

"Most companies can get to the leading edge once every five to six years and then their appetite for those kinds of expenditures wanes," he said. "It becomes a leapfrogging type of phenomenon. But by having someone work for you continuously, you can achieve success by staying at the leading edge of these technologies."

As for the two companies involved, the relationship could not be happier, so far.

"Having a longer, 10-year contract insures that the partner is willing to stick with me for the long haul, that we will walk hand in hand to introduce strategic initiatives," Ms. Wilson said.

Mr. Morin at IBM agreed. "They've created an environment in which we can succeed," he said. "As a result of that, we do about everything we know how to to exceed what it is that we have committed to them. That's the business environment we have."

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