The number of financial institutions choosing to outsource their data processing operations is leveling off after several years of rapid growth, according to research by a bank technology consulting firm.
In the first half of this year, the nation's largest computer services companies signed 29 contracts with U.S. financial institutions - roughly in line with the same period of the two previous years, according to figures from Computer Based Solutions Inc., New Orleans.
Size of Deals Declines
However, the average asset size of institutions involved has declined significantly this year, and some experts take this as a sign that the banking industry's voracious appetite for outsourcing may be abating.
"Outsourcing's still happening, but it's not the rage anymore," said M. Arthur Gillis, president of Computer Based Solutions, "The health of the [banking] industry and the growth of outsourcing are absolutely related, and in this climate, fewer bankers are being economically rushed into a decision."
"I think we're seeing the end of the big wave," said David P. Leibchen, a vice president and manager of contracts administration for Huntington Bancshares Inc., Columbus, Ohio. "There will be smaller waves of activity, of course, but the days when dozens of banks at a time were handling over their entire back offices to service companies seem to be gone."
Huntington once belonged to a group called the Bank Outsourcing Alliance, which was created to bring together bankers and technology service firms.
However, the alliance was recently disbanded because of organizational problems and declining banker interest, Mr. Leibchen said.
By Mr. Gillis' reckoning, the most likely candidates for outsourcing contracts in the next few years will be financial institutions with assets of $1 billion to 2$ billion.
Banks of this size often require expensive mainframe computers to do their processing but do not achieve the economies of scale found at larger banks.
And while many large institutions may hand over select pieces of their computer operations to third-party computer services firms, many experts believe the days have passed when a $10 billion-asset bank might farm out its entire data processing shop.
"It's clear that big banks are making more creative decisions these days," said an official at one of the nation's largest computer service companies, who asked not be named. "No one expects to get all of a Bank of America or Chemical, but we're all shooting for pieces."
According to Computer Based Solutions, 58 institutions with $314 billion in assets signed outsourcing contracts for the first time last year, meaning the average customer had $5.4 billion in assets. That average dropped to $2.6 billion in the first half of this year.4
Despite recent changes in the outsourcing market's dynamics, no one is suggesting that the demand for computer services is in danger of drying up.
Where the Bank Outsourcing Alliance sputtered in its attempts to bring bankers together, other companies, including the Key Consulting Group in Sherman Oaks, Calif., have attracted interest to the outsourcing concept.
Key has been holding bank outsourcing miniconferences around the country for more than a year, and banker participation is at an all-time high, Key officials said.
In addition, outsourcing is still viewed by many as an effective way to speed data center consolidations and migrations to new software systems.