THERE IS a business alternative which sits outside the physical and traditional walls of a bank, promising reduced staff and operational expenses while returning a greater measure of flexibility over resources. That alternative is outsourcing.
Outsourcing is an alluring option, but not without disappointing results for the financial institution not committed to fully exploring and reviewing all the associated benefits and costs.
It seems more and more institutions in the financial industry today are considering outsourcing departments, functions, and units to outside vendors in order to concentrate on their "core" business functions. While primarily in the business of delivering information and services, financial institutions seeking to outsource specific functions must judge what effect it has on the customer. Banks exploring the outsourcing alternative can spend years struggling to define and measure that effect.
A major southeastern bank is a good example of an institution that avoided the inherent second-guessing and criticisms accompanying a decision on alternative ways for handling monthly data processing needs. After a lengthy review process, the bank decided on a facilities management agreement with a data processing vendor. With more than a few internal skeptics, the bank moved forward, taming over the mammoth operation to its outsourcer. Before the year ended, the bank experienced a 50% reduction in operating expenses and revised its initial five-year savings projections by several million dollars. The first step in reviewing the outsourcing option is identifying and defining what function or functions are best outsourced. The most commonly outsourced department is an institution's data processing operation. Data processing is a good example of the importance of clearly defining the outsourcing oppotunity.
Outsourcing data processing usually involves either a service bureau or facilities management solution. These solutions require the bank to mm over most phases of the operation to the vendor. Lower operational and personnel costs are the key motivators for outsourcing functions and departments. Additional benefits include greater access to current technology, shared expense, and risk reduction, and fewer staffing and training issues involved with turnover. And more than one chief executive has muttered about wanting to be "out of the data processing business and back in the business of banking."
However, without a clear definition of the outsourcing objective and a thorough review, many banks fail to meet projected benefits. Many factors contribute to this failure. Among the major factors are vendors who fail to maintain or update their data processing systems, shifting needs of the institution, and the necessity of having staff knowledgeable about the system. When coupled with periodic upgrades and enhancements, management can feel very much like it' s still in the data processing business. A service bureau approach outsources data processing operations to an off-site location. Via modem or on-fine network a bank' s back-room functions are transferred to a vendor for processing and downloaded to the institution in a real-time mode or the next business day. A facilities management solution can also mean an off-site solution, or keeping the data processing department inhouse, contracting a vendor for personnel and staff to operate and manage the system.
At the core of many a bank' s failure to meet intended objectives lies a poor or incomplete understanding of the function to be outsourced. Without a complete understanding of the data processing department and its effect on the bank, management' s decision on any outsourcing solution will inevitably fall short of projected savings. So it's critical to keep in mind that any outsourced department is still a function of the bank, regardless of who performs it.
While outsourcing presents an opportunity to lower overall costs, it also brings with it many indirect costs that must be addressed. Indirect costs can include limited flexibility in developing and delivering new products, less control over staffing and personnel, and a tendency to pay less attention to the function or department being outsourced.
Outsourcing specific departments such as data processing or marketing can impact a bank's flexibility in responding to customer needs with new products. When depending on an outsourcer for a product or support function, it can be difficult to tailor new services to meet a changing marketplace.
For example, a bank's ability to offer its own Visa or MasterCard credit or debit card is dependent on its data processing vendor's capability to handle the additional and specific needs of a new product.
Debit and alternative payment products continue to grow in popularity, and an institution must have a vendor flexible enough to meet the challenges of delivering these and other new products.
This outsourcing issue also extends to the institution' s history of delivering new products to its customers. If the bank has marketed and positioned itself as a "fast on its feet," full-service institution providing customers the latest products and services, it must be able to deliver on that promise. Choosing a vendor without the flexibility or technology to meet that goal can cost an institution customers. Whatever operational savings have been won with outsourcing a function are far outweighed by a negative customer perception.
A customer survey is an important tool for any institution seeking to gauge the perception customers have of its products, services, and delivery systems. With survey results, an institution can make better decisions on which functions are best outsourced and which should remain the sole responsibility of the bank.
When contracting out a function to a service bureau, an institution retains little or no control over staffing. In a facilities management situation, an institution has more of a say in who the vendor chooses to work at the site. Yet in either outsourcing solution, there is a trade -off for lower personnel costs and fewer problems associated with turnover. That trade-off is limited power over staffing decisions.
It' s imperative that an institution factor in this consideration when choosing functions to be outsourced. Even with these considerations and trade-offs, outsourcing still offers the most affordable opportunity an institution has to take advantage of the latest technology. While the cost of imaging and optical systems for check and item processing is prohihitive for most institutions, outsourcing vendors offer these technologies at a fraction of the initial capital investment normally required.
This is due in large part to the number of clients a service bureau has, enabling an institution to defray or share the expense with the vendor's other customers. As imaging and optical technologies become increasingly available through service bureau and management facilities environments, the operational efficiencies and benefits they provide become accessible by more and more institutions. That's important for the small community bank or thrift lacking the capital resources of much larger competitors. A good outsourcing partner can level the technology playing field.
Another technology emerging as a potential target for outsourcing is an institution's voice and data networks. With the advent of the personal computer, local and wide area networks, and image technology, institutions are searching for affordable access and entry points along the information highway. Finding the expertise necessary to implement home banking is difficult at best, and expensive in any case.
A major hurdle is how to connect the customer to the institution. Since the transaction information must be transported to and from multiple locations and be accessible by customers and bank personnel alike, the institution faces the burden of managing the voice and data networks, as well as its own delivery systems.
Voice-response and/or "loan-byphone" products are another potential outsourcing opportunity for institutions seeking to offer customers 24-hour access to consumer loan products. These products operate on either a local or 800 number, greeting customers with information about the products for which they may apply, using the telephone keypad for inputting information.
A customer is guided through the application process which captures the necessary loan information. In most cases a credit bureau report is pulled and forwarded to the bank. Some products even score the information against the institution's credit policy, and preapprove a candidate. Either solution enables the bank to accept or reject loans at the beginning of the next business day. Loan-by-phone and other customer-specific products are usually the best targets for institutions seeking an affordable way to offer customers unlimited convenience. And in many cases, the outsourcing vendor handling an institution's data processing and back-room functions provides these products as enhancement features tied into the system. The outsourcing option is a powerful tool in today' s competitive marketplace. However, the challenge will continue to be the selective use of outsourcing as a way to ensure an institution's strategic and long-term goals are met, while at the same time preserving the continuity of customer service.
