Shift to Data Processors Slows Down
Banks and thrifts seem to be signing fewer major contracts this year for outsiders to process their data.
The decline is surprising in view of the industry's need to cut costs fast.
According to Arthur Gillis, a New Orleans consultant who tracks data processing in the banking industry, only 12 financial institutions so far this year have signed contracts to turn over their data processing operations to an outside company. Such arrangements are commonly referred to as outsourcing.
If the same number of contracts are signed in the second half of the year, the total for 1991 will fall short of the number of the 1989 and 1990 levels.
The numbers for those years, were 27 and 34 respectively, Mr. Gillis said.
Seen as a Way to Cut Costs
For the past two years, as banks have run into financial difficulties, outsourcing has been trumpeted as a way to cut data processing costs and boost competitiveness. Bankers that have signed these long-term contracts said they will save as much as 30% a year over projected costs.
"The industry is in the process of digesting a number of major transactions that have occurred," said Lawrence A. Willis, a vice president with First Manhattan Consulting Group in New York.
Companies that provide outsourcing services, including Systematics Financial Services Inc., Little Rock, Ark., and Dallas-based EDS Corp., are putting their efforts into working with recently signed banking customers. Among the bigger banks that signed outsourcing deals in 1989 and 1990 are $29 billion-asset First Fidelity Bancorp. and $11 billion-asset Signet Banking Corp.
Opinion Divided on Prospects
Data processing companies disagree about the prospects for outsourcing deals in the second half of the year.
"I don't see us signing a rash of deals by yearend," said Coley Clark, a vice president with EDS Corp., which is a unit of General Motors Corp. and a leading provider of data processing services to banks.
Nonetheless, all observers say more banks than ever are interested in exploring outsourcing.
"I have more prospects than I can work on," said Michael Montgomery, executive vice president at Systematics, the biggest provider of outsourcing services to banks. Mr. Montgomery said he has signed deals with three banks this year, and expects to sign as many as eight more banks before yearend. That is about the same number of deals as last year for Systematics.
But the company's recently signed outsourcing deals are bigger. Those three banks will bring in more revenue than the dozen signed in 1990, he said.
Some Big Banks Sign
This year, big institutions have continued to sign, although the most common size of banks that choose outsourcing ranges between $1 billion and $5 billion, Mr. Gillis said.
Banks known to be in discussions with outsourcing providers include Continental Bank Corp., Chicago; MNC Financial Inc., Baltimore; Crestar Financial Corp., Richmond, Va.; and Dime Savings Bank, New York. Contracts could be signed this year.
Not all banks that have examined outsourcing opt for it. Bank of New York Co., for example, decided not to hand over its data processing operations.
In other cases, troubled banks that wanted to outsource their operations have not been able to execute a contract. Southeast Bank Corp., for example, has suspended a deal with International Business Machines because Southeast is a likely takeover target.
An Unexpected Trend
The slackened rate of outsourcing was not expected by data processing companies.
"Because it has picked up in the last couple of years, we thought we were on a pretty good trend," said Mr. Clark of EDS. "But I don't know if you can expect an increase every year."
Data processing companies such as EDS said they are pursuing deals with bigger banks and thrifts. This may slow down the rate of contract signings.
Thinking It Over
"It takes longer to evaluate when the institutions are larger," said Mr. Clark. "And we are in conversations with larger institutions this year as compared to last year."
Still, banks interest in outsourcing remains high. "There is as much activity in evaluation of this as there has been at any point in time - even more active," said Mr. Willis.
"You'll be seeing quite a few transactions in the next couple of months," he said.