Outsourcing Can Be a Way Out of Trouble

The industry's chief information officers are faced with a computing nightmare.

After regulatory changes under the Reagan administration, institutions engaged in a buying frenzy. The mandate then was systems integration: Autonomous financial institutions, once acquired, had to report to new headquarters.

Where data-processing compatibility was daunting with just one acquisition, it became nearly insurmountable with institutions that gobbled up smaller banks like so many jelly beans.

Operational costs skyrocketed. The new systems integration overhead was compounded by the demand for new, competitive services.

Consumer organizations also faced the task of implementing leading-edge, cost-cutting technologies such as image processing, voice processing, and system downsizing. Meanwhile, the change in banking laws required the government to receive more audits and reports.

An Age of Agendas

During the merger-and-acquisition craze of the mid-1980s, many information system agendas were drafted as financial institutions grappled with the consolidation and modernization of their computer and telecommunications systems.

Chief information officers mapped out plans to standardize processing, estimate conversion costs, and create new services. Unfortunately, many strategic plans were paralyzed by ruptures surfacing from the slew of disparate corporate cultures.

Solution at Hand

The chief information officers found that they had to do more complex work with a proportionally smaller staff.

Today, financial regulators and owners are stepping in to save struggling institutions. However, they have less money and are under more daunting time and political pressures.

Immediate cost savings can be achieved without decreasing service and support to customers by outsourcing some or all of their computer activities.

A recent technology survey of the nation's largest commercial banks by the American Banker showed that 20% of all noninterest operating costs can be attributed to information systems. The largest 200 commercial banks, with deposits over $2 billion, spend an average of $36.3 million annually on information systems.

The Swing to Outsourcing

It should come as no surprise that a survey by Input, a market intelligence firm in Mountain View, Calif., showed that outsourcing of facilities management in the banking industry will increase to nearly $1.5 billion by 1993 from $230 million in 1988.

To meet the demand, major consulting firms have already added an outsourcing practice within their firms and are actively working with suppliers such as ACS to fulfill those needs.

In an era of chaos for financial institutions, outsourcing brings fixed versus variable costs, predictable costs, experience, and expertise, as well as flexibility.

With a typical outsourcing arrangement, the supplier will often assume the full range of data-processing functions for the customer. The outsourcing firm can even assume the payroll of the in-house staff and manage the customer's management information system.

In another variation of outsourcing, the customer can sell off the computers and migrate to the outsourcing supplier's computer systems.

Rapidly Changing Operations

Cost savings are virtually assured in outsourcing because the customer is being relieved of a complex, expensive operation.

Outsourcing lets management focus strictly on the business issues of recovery. Outsourcing becomes ancillary to the daily operations through a contracted vendor. Often a customer will designate a staff of one to five people to act as liaison with the outsourcing provider. This enables top executives to concentrate on the turnaround of the institution.

While most financial institutions continue to be mainframe-based, the proliferation of networked PCs is the underlying drive to distribute improved services while cutting costs. Image processing as an alternative to manual check processing is being accepted by the banking industry, despite its leading-edge components such as massive scanning equipment and optical storage - all networked into existing computer systems.

Another new technology, the integrated services digital network (ISDN), combines voice, image, video, and data over a single telephone line. It promises to deliver new services such as video ATMs. A video ATM will improve customer security and actually help process automated check cashing by transmitting to centralized computers the scanned-in signature of the customer.

Meanwhile, as the digestion process continues from the mergers-and-acquisitions of the last decade, several standards are emerging for multivendor, distributed processing.

Rapid Recovery Needed

Customers are not going to wait for the innovation and prompt service that information systems have been delivering.

The external pressures, combined with the internal realities of a need to integrate systems and deploy new technologies, make outsourcing a salvation for financial institution executives now confronting the professional crises of their lives.

Mr. Gates is president of ACS Commercial Services Inc., Dallas, a unit of Affiliated Computer Systems Inc.

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