The top bank outsourcing providers are finding truth in a popular song lyric: Every silver lining's got a touch of gray.
Last year, the four largest third-party providers of technical services to banks booked $442 million of new contract revenues-a 115% rise over the previous year, according to Computer Based Solutions Inc. of Dallas.
Despite the surge, survival in the outsourcing business is getting harder each year as consolidations shrink the pool of potential clients and as banks increasingly demand favorable contract terms.
In such a buyer's market, only the strongest vendors survive. Over the last 10 years, the number of large outsourcing providers (those with 100 or more customers) has dropped from 24 to 13, said Computer Based Solutions.
However, the survivors are thriving. The top 13 outsourcing vendors had a combined 91% market share in 1996, compared with 73% held by the top 24 in 1987.
The outsourcers that remain are saying they have grown more willing to adapt to the needs of individual customers.
Such flexibility is necessary because many banks have gained years of experience with outside service companies and are savvy enough to play off vendors against one another during bidding.
As part of an effort to keep the loyalty of customers, outsourcing providers are increasingly willing to rework contracts, which has given rise to a trend of restructurings.
The Gartner Group, a research and consulting company based in Stamford, Conn., said about three-fourths of companies that outsource will restructure their contracts within the next three years.
Gartner's outsourcing survey, which gathered responses from 250 companies, including banks, also showed that about 10% would terminate deals in the coming year and 20% would switch vendors.
Gartner could be one agent of the above changes. It is offering a series of performance assessment programs designed to help a bank or other company determine whether outsourcing is the most economical processing path.
"We think everyone needs a strategic approach to deal with outsourcing alternatives," said Len Bergstrom, executive vice president and founder of Gartner Group's measurement unit, Real Decisions.
In its outsourcing research, Gartner found many did not measure their technology performance before striking outsourcing deals.
This made it difficult to determine whether an outsourcing deal was serving its desired purpose.
The research also found that companies sometimes got trapped in inflexible relationships. "Most people are moving toward complex environments," Mr. Bergstrom said, "and some vendors are unable to change or provide those services."
Such arrangements are outdated, and banks are getting better at avoiding them, analysts said.
"No bank in its right mind is going to enter into a contract these days that doesn't have provisions for adapting to changes in processing volumes or in technology," said M. Arthur Gillis, president of Computer Based Solutions.
As banks demand more flexibility, vendors must avoid making commitments on which they cannot deliver. Falling short of a commitment frequently means losing a contract.
"A lot of vendors promised a lot, and so there were a lot of disappointments," Mr. Bergstrom said.
One way to avoid an adversarial relationship is to strike deals in which both parties have a vested interest in making the arrangement work.
Historically, few contracts featured "shared risk, shared reward arrangements," Mr. Bergstrom said. Now more companies are "evaluating that business model."
He said price is not always the main concern. Customers want solutions that meet their requirements and vendors that can adapt to clients' preferences.
In general, Gartner says the future of the outsourcing business is bright-for both clients and service providers.
"Outsourcing can work, and we believe cost savings can be achieved," Mr. Bergstrom said, "but it's not magic, and evaluation is difficult."
