Effective marketing is critical to success in the financial services industry, and institutions are increasingly turning to outside specialists for help instead of relying solely on in-house expertise. A recent survey suggests that a significant percentage of marketing activities is already outsourced by banks of all sizes and that the trend is growing. The survey of banks and other financial institutions in California indicated they are discovering that such outsourcing is not just less expensive, but also more effective.
The survey, conducted by Wilcox & Associates in the spring of 1994, shows that many respondents use outside firms to perform marketing activities and that they expect to continue or increase the practice. What's more, the larger the bank, the more likely it is to outsource these activities. Institutions were classified as large ($5 billion in assets or larger), medium ($1 billion to $5 billion) and small ($500 million to $1 billion).
Nearly half the institutions surveyed outsourced marketing activities. Large banks outsourced the most (55%), followed by midsize (45%) and small banks (30%). On average, the marketing budget represented .08% of total assets for a typical institution. Large banks, on average, spent 40% of their budget on outsourcing marketing functions, midsize banks 45%, and small banks 30%. Large and medium banks expect to outsource more in the future, while small banks expect the percentage to remain the same.
The services for which institutions most often used outside vendors included product promotion, advertising, direct mail, market research, and corporate literature. Activities usually performed in-house include market planning, product development, recognition programs, sales support, and strategic planning, although outsourcing for these activities is on the rise.
Why the increase? Acute economic and competitive pressures precipitated the increased use of outside specialists to perform key marketing activities. Over the years, protected by regulation and a sound economy, banks drifted complacently along, overstaffed and inefficient; success was measured by the size of one's empire rather than the effectiveness of the effort. Financial institutions venturing into new areas of marketing typically staffed up in-house departments. With the economic crunch, banks began to scrutinize every business practice, every expenditure, and discovered that using outside firms for many activities was much more cost effective than maintaining the overhead of a large internal staff.
The survey pointed to both the benefits and drawbacks of outsourcing. The advantages bankers listed include creativity and new ideas, specialization, quicker turnaround time, wider resources, objectivity, flexibility, quality of work, market knowledge, accountability, and freeing up staff to focus on project management.
But the clearest advantage of outsourcing marketing activities is cost. Banks acquire marketing services at prices established in a highly competitive marketplace. They get the guidance of specialists who know what to do and don't waste time. The costs of using outside firms are incurred only as needed, and they free staff to focus on managerial responsibilities.
When outside specialists are used, costs are incurred only as needed and banks benefit from great flexibility in selecting the types of services and the timing. Overhead is considerably reduced; salaries and benefits are immediately lessened, as are requirements for office space, furnishings, equipment, supplies, and utilities, all of which ties up capital.
Two other advantages contribute to cost effectiveness but deserve separate recognition. First, outside specialists provide creativity and new ideas, entities that are difficult to generate from within, particularly among those who have worked in an institution for many years. Second, there is an enormous incentive for suppliers to do an excellent job, as it means keeping or expanding their business; once again, this is a force that is apt to dissipate within an institution.
Potential drawbacks that respondents cited include As the benefits to be reaped depend both on the quality of the supplier and the ability of the bank to manage them, so too do the disadvantages. These can include lack of understanding of the institution, concern for data security, and reduced control. However, the figures indicate that banks are learning how to manage and get the most from their consultants, and are using them for more marketing activities.
Once financial institutions have defined their needs, they must select the right suppliers. The first step is finding them. According to the survey, institutions learned about vendors in a number of ways. Although vendor calls is ranked as the most frequent way, many rely on personal networks to obtain information. Other avenues include trade associations, referrals, trade shows, and advertising.
To select vendors, institutions surveyed generally used a formal bidding process (60%), while 15% awarded the contract informally. One quarter used both methods. Because the formal procedure is time consuming, many institutions preferred informal awards after the initial vendor selection, establishing a long-term relationship that is reviewed on a periodic basis. For the awarding of specific projects, 40% used an informal process, 30% a formal process, and the remaining 30% a combination.
Institutions cited a number of criteria used in selection of vendors. The most important consideration, cited by 60% of respondents as very important, was the firm's experience, followed closely by price (50%). The size of the company and its location were least important, although location was comparatively more significant to small banks because of their community focus.
The probability is that outsourcing will continue to grow as financial institutions identify marketing activities where outside expertise, objectivity, and cost effectiveness can help them do a better job. Some activities will remain in-house, particularly those that are very sensitive or routine. But more and more banks will be working jointly with outside firms on activities that enhance their competitive position, including strategic planning, product development, market segmentation, and merger communications, to name just a few examples.
Edward L. Lynch is senior vice president in the San Francisco office of Wilcox & Associates, a marketing communications and management consulting firm.