A subsidiary of International Business Machines Corp. announced last week it has agreed to use banking software from Jack Henry & Associates Inc. for financial institution outsourcing.

The "technical services alliance" allows the unit, Integrated Systems Solutions Corp., to use one of Jack Henry's core accounting software packages, called Silverlake, in technology service contracts with banks, officials at the two companies said.

Silverlake runs on IBM's AS/400 midrange computer, a hardware platform that has become popular with many community banks. IBM officials said the outsourcing deals using Jack Henry software could be in the form of service-bureau arrangements - in which multiple banks operate out of a single data center - or so-called facilities management contracts, in which IBM installs and maintains a computer system at a bank's own location.

The deal with IBM breaks new ground for Monett, Mo.-based Jack Henry, which has grown from its founding in 1976 to become one of the largest vendors of software to banks with assets of less than $2 billion.

Jack Henry's success has been based on its ability to persuade banks of the feasibility and efficiency of operating their computer systems themselves, as opposed to hiring a third-party data processing firm.

"From our day of inception, we always focused on in-house banking solutions, and we have been wary of getting into (outsourcing) because it's not what we do, which is write and maintain software," said Michael E. Henry, chairman and chief executive officer of Jack Henry.

Mr. Henry noted, however, that about half of U.S. banks currently outsource some part of their technology operations. "In order to expand our market, we felt we had to enter the service bureau and facilities management arena at some point in time," he said. "What ISSC brings to the table for us is that we still get to concentrate on what we do best, which is the software side."

From IBM's perspective, the outsourcing alliance is a natural extension of a longstanding relationship, said George Samenuk, vice president of finance industry marketing at Integrated Systems.

"Jack Henry has been one of our premier AS/400 business partners, with over 1,000 installations," Mr. Samenuk said. "Bank customers have asked (us) to provide . . . an AS/400-based outsourcing offering, and this was a great opportunity to expand our partnership with Jack Henry."

Mr. Samenuk also said another impetus for the deal was the fact that the AS/400's processing power has been improved dramatically since its introduction in the late 1980s - to the point where banks with up to $10 billion of assets could use the Silverlake system.

Today, banks of this size usually rely on mainframes for their core processing, systems that are generally more expensive to operate and require larger technical staffs than midrange computers like the AS/400.

"The growth (in the processing capacity) of the AS/400 opens up opportunities for clients who want to move off a mainframe and into a more friendly AS/400 environment," Mr. Samenuk said.

Jack Henry's largest Silverlake customer has slightly more than $1 billion of assets, Mr. Henry said. Working with IBM "gives us a little more corporate clout to get into larger banks."

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