IN AN EFFORT to reduce costs and improve use of technology, many banks are turning to outsourcing - contracting with an external firm to assist with daily data processing activities. While outsourcing can be of substantial benefit and convenience to a bank, it does not relieve a financial institution of its innate responsibility to manage its information technology.

Successful outsourcing involves a partnership between the bank and the contractor organization. The arrangement should meet the long-term information needs of the bank, but not at the expense of letting the outsourcer dictate the bank's technological direction.

To achieve this balance, the bank's senior management - as well as the operations management responsible for the actual outsourcing conversion - must be committed to a new set of individual performance standards and evaluation criteria.

These should focus on three areas:

* Prerequisites for successfully converting to outsourcing.

* Service level requirements for meeting the bank's data processing needs.

* Development of technological plans that support the strategic business direction of the bank.

Outsourcing is an inherently risky strategy. To mitigate this risk, banks should develop detailed project plans outlining the entire conversion process. Such plans should detail the tasks, resources, work effort, time frame, dependencies, and milestones required to successfully convert to outsourcing.

A product of the conversion planning process should be standard documentation that includes such items as:

* Detailed tasks - duration, work effort, resources, and dependencies.

* Start and stop times for the major phases or functional categories of the conversion.

* Tasks by week - activities that must be started or finished in a given week to keep the conversion on schedule.

* Milestones - benchmarks identified by responsible individuals, including the completion date.

Savvy negotiators develop the detailed project plans before entering contract negotiations, and also insist on linking the conversion plan and its critical milestones to tough penalties for inadequate performance. This provides the vendor with a monetary incentive for a successful conversion.

Management should also offer incentives to key members of the bank's conversion team by incorporating those same critical conversion activities into individual performance plans.

This action will not only motivate staff to complete critical conversion activities, but also provide management with ownership of the conversion inside the bank.

Conversion plan items that would typically be incorporated into the operation manager's individual performance plan include:

* Gaining agreement from the user departments, vendor, and other parties as to the resource requirements, time commitments, and milestones specified in the conversion plan. Adherence to the conversion plan's milestones and critical completion dates can provide measurable criteria for the operations manager's performance plan.

* Collecting from each department an idea of what it expects from the vendor and facilitating the agreement of those capabilities in the contract between the bank and the vendor.

* Reviewing, documenting, and gaining user department agreement on operational changes needed to take full advantage of new system features. If productivity improvements are anticipated, the quantitative improvements should be specified in the user department and operations manager's individual performance plans.

* Developing training programs for the operational changes necessitated by outsourcing and planning a training schedule. To quantify performance in this area, the measurable items can be the training schedule itself, attendance records for the training sessions, and policy and procedural changes to the organization's set of user documentation.

* Developing and using test scripts, bank control records, and software acceptance tests. These tests are needed to verify system integrity before, during, and after the outsourcing conversion. Again, to quantify performance in this area, the measurable criteria can consist of the published test scripts and audited use of these materials during the development and implementation phase.

The most important measurement, however, is successful completion of the outsourcing conversion.

Achievement of this criterion should be rewarded by a significant bonus for the operations manager, as well as for the staff responsible for the conversion.

The riskiest part of outsourcing is the uncertainty that surrounds meeting the bank's data processing service levels. Outsourcing, by its very nature, implies reliance on the outside supplier. However, use of the outsourcing strategy does not eliminate the bank's responsibility to meet its service level requirements. Management cannot simply point a finger and blame the outsourcer for nonperformance.

As noted earlier, the most successful outsourcing relationships are approached as partnerships. As with any partnership, incentives for performance should be applied to all parties involved in the outsourcing relationship.

Once again, savvy negotiators develop a detailed list of service level requirements and insist that the vendor's preprinted contracts be modified to include them. This same list of requirements can be used to enhance motivation inside the bank, by incorporating major items into the performance evaluation plan of the operations manager.

Elements to be incorporated into the operations manager's individual performance plan include:

* Delivery to the user departments the functional commitments they specified.

* Tracking of such key measures as system up-time, terminal response time, and related matters to ensure fulfillment of contractual service levels.

* Tracking problems and solutions to those problems: keeping a log of problem notification, steps taken to address the problem, and date the problem was solved.

* Responsibility for developing, scheduling, and ensuring attendance at training programs. (As with the conversion, training is important in maintaining operational proficiency for the line staff with the new system.)

* Report production and on time distribution of reports. This includes the many standard daily reports that the bank relies on for operation, as well as the specification, development, and turnaround time needed to deliver custom ad hoc reports requested by management.

Because successful outsourcing is a partnership, the bank must continually work with its outsourcing vendor in charting the bank's technological future. The best way to accomplish this is to make the operations managers responsible for jointly developing the technology plan with the outsourcing partner.

Examples of observable criteria that senior management can apply to the operations manager's individual performance plan include:

* Scheduling, conducting, and documenting annual technology assessments with the outsourcing vendor. This assessment should be a department-by-department review. The objective is a functional-capabilities audit to determine the level of proficiency with the current system, enhancements needed to improve productivity or customer service, and future training requirements. Including the operations manager in the loop will ensure that the audit is completed in a high-quality fashion.

* Conducting an annual user-satisfaction survey. Completing such a survey and reporting the results to senior management is an easy, verifiable way to gauge the operations manager's performance. After all, the ultimate measure of how well the outsourcing vendor is managed is the perception by end-users of the system's worth.

Outsourcing a company's data processing functions requires the same vigorous effort and continued management of any critical outside supplier relationship.

Too often, however, banks will outsource with the intent of fully delegating the responsibility of information technology to an outsider, and will wash their hands of any data processing responsibility. This is a very risky approach that can put the bank at a competitive disadvantage.

The best way to ensure effective use of an outsourcing vendor is to incorporate key performance evaluation criteria into your operations manager's personal annual performance evaluation and review. When operations managers have some skin in the game, they are more likely to act as a motivating partner with the outsourcing vendor.

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