With one eye on cost cutting and the other on the latest technology, bankers are increasingly looking to outside firms to handle at least some portion of their information processing burden.

While many banks have tapped the resources of outside vendors to augment areas that are not strategic to their core businesses or where internal capabilities are lacking, there are indications that the nature of outsourcing may be changing.

Statistics from the American Banker/Ernst & Young 1993 Survey of Technology in Banking indicate that banks increasingly favor partial outsourcing, rather than the all-encompassing agreements that were in vogue a few years ago.

"Banks have realized that by outsourcing certain functions or lines of business they can get economies of scale without outsourcing everything and giving up control over their operations or their ability to differentiate themselves to customers," said William T. Gregor, senior vice president, financial services practice, Gemini Consulting Inc., Cambridge, Mass.

The argument in favor of outsourcing remains clear. A bank involved in a number of different lines of business faces the arduous task of developing software and expertise to support each one. Instead, many banks have found they can achieve significant economies of scale by hiring outside firms to handle these tasks for them.

Staying current is another concern. Staffing each operation and stocking it with the latest in technology can be a hefty drag on a bank's bottom line.

Survey results, which cover the 300 largest banks, show that 15% are currently outsourcing all data center operations, a scant increase over 1991.

Outsourcing by line of business, meanwhile, showed stronger growth, including credit cards, mortgages, trust, and automated teller machine support.

This shift in strategy may have to do with the tough lessons of the recent past, when many banks signed long-term contracts with vendors and later regretted it.

"With a lot of outsourcers you get the plain-vanilla version," said Fred Gronbacher, senior vice president of operations at Pittsburgh-based PNC Bank Corp. "Your flexibility is restricted when you outsource anything."

Given that perspective, a bank may be reluctant to sign away control of its data center, even with the prospect of large cost savings. Instead, banks are outsourcing bits and pieces.

One institution that maintains such a mix-and-match strategy is Republic New York Corp.

"For a major financial institution outsourcing everything would be a mistake and would create an uncomfortable situation," said John M. Scopaz, president of Republic Information and Communication Services, the bank's technology arm.

The $37 billion-asset bank is no stranger to outsourcing. Republic has been outsourcing data processing of its retail banking area to Systematics Information Services Inc., Little Rock, Ark., since 1982.

More recently, the bank enlisted Electronic Data Services, Plano, Tex.,to operate its national telecommunications and network management services.

PNC has blazed a similar trail with regard to outsourcing. The $51.1 billion-asset bank has turned over its mortgage processing tasks to Computer Power Inc., Jacksonville, Fla.

"We will only outsource areas we consider to be nonstrategic and noncritical components of the bank," Mr. Gronbacher said.

Customer satisfaction also is a hurdle that some vendors have traditionally had trouble clearing.

While bankers are generally loath to call an outsourcing decision a mistake, they are equally unwilling to express complete satisfaction with their vendor arrangements.

"We're moderately satisfied with our agreements," Mr. Gronbacher said.

The survey indicates that just 10% of those outsourcing were very satisfied" with the cost savings realized from their agreements, while 7% were "very dissatisfied."

In the area of new enhancements, slightly more banks were dissatisfied than satisfied, with 6% "very dissatisfied" and 5% "very satisfied."

Republic places itself in the satisfied group. While the bank has no immediate plans to hire out other processing functions, Mr. Scopaz said it would probably stick with Systematics and EDS.

"We're not looking to expand the scope of companies in the future," he said.

With a cooler business climate, vendors have had to pay closer attention to the diverse needs of their clients.

"In the last couple of years we've been pretty flexible in making contracts," said Coley Clark, corporate vice president and group executive at EDS. "We've done a lot of readjusting on the fly."

Systematics has taken a similar tack. "We're positioning ourselves to be able to offer a variety of services, from complete to one application at a time," said Doris Krain, a vice president.

Computer Power Inc. also is on the bandwagon. According to Linda Simmons, executive vice president, the vendor has come up with systems that provide for continuous updating, to take advantage of future hardware and software innovations.

There also are banks which have paid little heed to outsourcing's naysayers. Perhaps the best example is Continental Bank Corp., Chicago, which raised eyebrows three years ago when it outsourced all of its information technology processing to Integrated Systems Solutions Corp., a subsidiary of International Business Machines Corp.

Prior to that arrangement, the $22 billion-asset bank outsourced its legal operations, internal auditing, warehouse, courier service, building administration, and cafeteria.

Continental seems to have no problem entering into longterm agreements with vendors either. The bank's contract with ISSC is for 10 years.

"Our search for outsourcing has been for efficiency, better quality of service, and to save money," said Richard L. Huber, vice chairman. "We know that concerns have been raised about the loss of control when you outsource everything but we looked for a firm who could do the job. We matched up cultures and figured out who could do the job."

Hibernia Corp., New Orleans, is another institution which has found reasons to go the outsourcing route. Hard times in 1991 put the bank on the lookout for ways to cut costs and improve efficiency.

The $4.6 billion-asset bank hired ISSC to manage its mainframe systems and handle deposit-account and loan processing. M&I Data Services handles trust processing.

"For us it's a cost issue but the question is do you have the faith that the deliverer of the products will keep it current and deliver you the service that's going to enhance your services or damage your services? We're comfortable," said Kirk Domingos, executive vice president.

There also are banks looking to get in on the outsourcing action. Survey results indicate that 75% of banks offer some type of outsourcing service.

Los Angeles' First Interstate Bancorp, for example, offers corporate cash management and treasury services to other banks. "We offer these services as a full service bank to our downstream correspondents," said Jan Cloyde, executive vice president.

Also offering cash management services to other banks are Citicorp, Chase Manhattan, CoreStates Financial Corp., and Mellon Bank Corp.

With lean and mean looking increasingly like the shape for the 1990s, banks are likely to continue to tap the skills of third party providers.

"With outsourcing becoming a more attractive means to do what banks need to do, banks should increasingly look for it," said Mr. Gregor.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.