Rick Lieb uses logic when confronted with people who are queasy about outsourcing.
Mr. Lieb, president of SEI Corp.'s investment services and systems group, stresses that outsourcing lets its customers focus on what makes money.
Banks' strength, he said, is in building relationships, which is all they have when they compete against sales-oriented, nonbank competitors like Merrill Lynch & Co. or Fidelity Investments.
"The only way the industry can survive is to change," Mr. Lieb said, "and the way they are going to change is to focus on their core competencies."
Indeed, banks are working increasingly with specialized outsourcers that perform such niche functions as call center management, automated clearing house processing, mortgage processing, and desktop-computer management, among other functions.
SEI is one of these niche providers. Based in Wayne, Pa., it is a 30-year-old company that supplies trust services, proprietary funds, and asset management to more than 200 banks, brokerage houses, and insurance firms.
Mr. Lieb said that bankers can't engage in relationship building "if their day is loaded with internal meetings and internal cost allocations."
He likes to recount his dealings with a recalcitrant bank customer who was receptive to the cost reductions and relief from back-office operational burdens but nonetheless would not relinquish control.
That issue quickly became moot as the bank discovered its inability to run its trust business. The reason: A senior official suddenly retired, taking with her 35 years of experience in running the back office. "What were they to do?" Mr. Lieb asked. "She knew everything."
Resistance to outsourcing notwithstanding, observers say the number of outsourcing contracts is at an all-time high. What outsourcing offers in cost reductions and relief from operational burdens can't be ignored, Mr. Lieb said.
Furthermore, Mr. Lieb's trust unit spends more than $100 million a year on research and development, an amount he said would be hard to justify in most bank operations.
Vendors, for their part, say they recognize a demand for more specialized offerings and are changing to accommodate their customers. The vendors are developing new products and services and, in some cases, forging marketing relationships.
For instance, Fiserv Inc. recently formed an alliance with Carreker- Antinori, National Processing Co., and UPS Worldwide Logistics Inc. to pool their cash management talents.
Norman Balthasar, executive vice president at Fiserv, said he too has noticed a need for more specialized services, which he said was the basis for the alliance, called Infiteq. "I think we have identified certain products that we believe are in high demand," he said.
Besides Infiteq, another Fiserv unit is growing: The company's payroll and benefits processing unit, called HRIS, recently renewed its contract with Citicorp, a customer since 1991.
Fiserv has increased its marketing efforts for this service, and landed customers such as Republic National Bank of New York and Milwaukee's Firstar Corp.
Another example of outsourcers' diversifying is Electronic Data Systems Corp., Plano, Tex., which said it was winning business through its World Wide Web development services, most notably at Sovereign Bancorp, Wyomissing, Pa.
In that deal, EDS manages the technology of the bank's Internet site and intranet systems, Web hosting, and support services.
Marshall Kern, senior vice president at Sovereign, said it is willing to outsource nonessential operations whenever possible. The bank has even hired a facilities management company to do simple maintenance, such as changing light bulbs at its 136 branches.
"More and more, people are taking advantage of other people's successes," Mr. Kern said. "Financial institutions do not necessarily have the expertise to keep up with all the changes and the expertise to manage those things."
Bobby Grisham, president of EDS' banking and securities business unit, noted an uptick in the amount of project consulting, business reengineering, and data center consolidating business of late.
"Clients are choosing to pursue relationships with providers of technology like ourselves on an unbundled basis," he explained. Customers are more comfortable with their vendors because they have proven themselves "within the context of a 10-year outsourcing agreement."
F. Mark D'Annolfo, an equity analyst at Adams, Harkness & Hill, Boston, said businesses are willing to farm out more special projects to traditional outsourcing firms through arrangements he called "out-tasking," a hybrid form of outsourcing.
These projects may be short-term but highly complex, and thus a bank may find them too costly to carry out in-house.
Other vendors are simply introducing new services in emerging electronic transaction processing, such as Checkfree Corp.'s offer last year to provide automated clearing house processing.
Clearing house payments, like other forms of high-volume processing chores, require operational resources that banks may find too challenging.
However, said Matthew Lewis, vice president at Checkfree, "whoever processes the transaction can't add any value."
"We say, 'Let us do the ACH piece,' " Mr. Lewis said. "Take those resources you've been using to process ACH and devote them to something that can actually add value."
Andrew Dresner, senior engagement manager at First Manhattan Consulting Group, agreed that there have been movements toward certain forms of specialized outsourcing, particularly in operations such as telecommunications management, internal auditing, and desktop support.
But he said these trends may be short-lived if technology costs come down, which he said would prompt banks to move certain functions back in- house.
Bankers would "feel vulnerable to price increases and horrendous termination fees," he said, when entering a long-term deal with an outsourcer. "People do not want to lock themselves in when they do not know what is going to happen down the line."
That does not concern SEI's Mr. Lieb. He pointed to a 1990s event that he said was a wake-up call for bankers: Continental Bank's decision to outsource virtually every in-house function to International Business Machines Corp.'s global services unit.
The Chicago banking company had suffered from years of financial ailments, primarily the more than $1 billion of bad loans it accumulated, thanks largely to energy-related investments.
Many steps were taken to lift the bank out of its hole, including the decision to outsource nearly all nonessential operations.
But segments of the multiyear, multimillion-dollar deal were canceled soon after BankAmerica Corp. bought Continental in 1994.
Still, Mr. Lieb said, the deal remains a testament to the competitive benefits of outsourcing, and he said current vendor efforts hold much promise.