Technology Outsourcing: Trends to Watch for in Your Due Diligence

February 14, 2005

Consumers expect 24/7 service and banking is no exception. The demands that accompany around-the-clock availability have made outsourcing an appealing alternative for institutions that want to leave technology to the experts. Outsourcing can strengthen the competitive position of community banks by allowing them to offer 24/7 service without the payroll cost of 24/7 employees, reports Bank Technology News.

The approximately 45% of U.S. banks that outsource have traditionally contracted with outside vendors to perform data and item processing. In recent years, outsourced product lines have expanded to include check imaging, Internet banking, and EFT payment processing solutions. And remote document imaging, Check 21, remote capture, and enhanced report writing capabilities are among the latest outsourced offerings.

So what can banks expect in the future as technology and outsourcing capabilities continue to evolve? Banks can expect the following to shape near- and long-term outsourcing trends:

New Outsourcing Contracts Because most outsourcing agreements are 60 months in tenure, 20% of those contracts are up for renewal every year. That means 20% of outsourced banks are forced to make a decision annually. The market is in a constant state of turnover as banks evaluate whether or not their current vendor is positioned to carry them forward.

The growing number of de novo banks also could actually impact the number of outsourced banks. In his March 17, 2004 satellite address before the Independent Community Bankers of America Convention, Alan Greenspan stated, "Over the past five years, for every four bank mergers that have been approved, three de novo bank charters have been granted." Add to that statistic the fact that 90% of start-up banks choose to outsource, and there is a high likelihood that the overall number of outsourced banks will increase over the long term.

Focus on Customer Service As banks evaluate outsourcing vendors, customer service is becoming increasingly important. Banks expect a vendor to deliver on a service commitment that the bank has already promised its customers. When a bank trusts an outsourcer to handle its operations needs, it can't all be about feature/function. Strength and stability, both financially and from a customer service standpoint, are critical.

To accurately evaluate the customer service levels of a vendor, customer satisfaction must be measured. Banks will look for quantifiable results relating to system availability, response time, uptime of the switch, and accurate statement production. It comes down to the ability of an outsourcing vendor's customer relationship manager to solve problems.

Single-Source Provider Solving those problems under one roof is becoming yet another requirement for more and more banks. Five years ago, banks looked for best-of-breed solutions and ended up with item processing from one vendor, data processing from another, and EFT from yet a third. That trend is going the way of the eight-track tape as banks come to recognize the convenience of a single-source provider.

Vendor-Controlled Software While many vendors may have an extensive and mature product offering, banks of the future will find it in their best interest to contract with an outsourcing provider that has control of the software running the application. Bankers will no longer accept service vendors that are at the mercy of an outside software provider. Quality outsourcing vendors will write their own software and develop strong partner relationships.

In-House and Outsourced Offerings Not only should an outsourcing vendor write its own software, but banks also want the flexibility of application software that is offered to support in-house or outsourced operating environments. An advanced vendor that provides the same software for in-house and outsourced solutions gives banks the flexibility to migrate from one solution to another without a conversion.

As banks make outsourcing decisions, they need to think long term. Whether a bank realizes it or not, a renewal is a decision. It is critical that due diligence be performed to ensure that the current outsourcing vendor best meets a bank's strategic business needs today and will continue to do so five to ten years down the road.

This article first appeared on The Point for Credit Union Research and Advice website at http://thepoint.cuna.org and is reprinted with permission.