Outsourcing Redefined

By Elizabeth Judd

When it comes to managing their branch facilities, bankers are outsourcing on an increasingly selective basis.

For financial services providers, "outsourcing" is typically associated with technology, since banks often turn to outside vendors to handle their back-office processing and Internet delivery functions. These are the arrangements that usually get heralded in press releases and news stories.

Outsourcing covers more than high-tech services, however. It can also be part of a strategy for handling the most mundane branch operations, such as signage, yard maintenance and even plumbing. Just as with Web design and payroll processing, many bankers prefer to delegate these tasks to outsiders so they can focus on customers and what bankers were trained to do.

In this area of branch facilities management, practices vary widely by institution. While some banks outsource practically everything branch-related, others manage many of these functions in-house. There is a movement, however, toward a third approach in which outsourcing decisions are handled on a highly selective, or "mix-and-match," basis. "In the past, you outsourced everything or you outsourced nothing. Now tasks are viewed more as components," says Robert Iati, research director at TowerGroup Inc. in Needham, Mass.

This development is facilitated by increasingly sophisticated information technology, which enables managers to fine-tune their outsourcing strategies. Managers confront not one big decision, but rather a series of small decisions about which discrete tasks to outsource. Only those tasks that truly can be handled more efficiently on an outsourced basis are delegated outside.

The technology also enables institutions to monitor the performance of their outsource service providers more closely than before, giving them better control over how their branch facilities are maintained. But this more nuanced approach requires a foundation of careful analysis. Managers need to examine each discrete branch-related function and assess its importance to the institution's brand image and overall strategy. While a particular function may be cheaper to handle on an outsourced basis, those cost saving could be offset if the change diminishes customer satisfaction.

Whether functions are handled in-house or on an outsourced basis, active management is essential. "You can't just partner with someone and stand back and watch things happen, because sometimes they don't happen," says Eric Davis, a senior vice president with Wachovia Corp. The Charlotte-based institution once outsourced nearly all facilities management tasks, but has now brought some of those functions in-house again to rein in costs and improve control.

Other institutions may take a different approach, but all senior branch managers need to elevate the discussion by thinking long and hard about what they want to achieve through outsourcing and which tasks are best handled in that manner.

Proper Focus

Over the past decade, a prominent trend in banking has been to increase the number of functions that are outsourced, which leaves the nation's large banks with a lot of outsourcers and a lot of decisions to make.

Wachovia, for example, has an internal team of 300 employees who handle facilities management for 2,800 offices. On top of that, it uses 50 primary external vendors for branch-related activities, according to Davis. Bank of America Corp., with 4,200 branches, spends $7 billion annually with outsource vendors. About 80% of those dollars are spent with 280 suppliers, many of them branch-related, says Lisa Eversole, senior executive for supply chain management.

The perceived lower cost of outsourcing plays a role in its popularity, but even more important is the fact that outsourcing frees up bankers to concentrate on their professional duties. In the retail area, for example, managers are not trained to grapple with the intricacies of office construction and maintenance, but rather to open new accounts, make loans and serve customers. "Our bank presidents are really good bankers, but lousy real estate guys," says Keith Pressley, director of corporate real estate for Regions Financial Corp., which is based in Birmingham, Ala., and has 750 branches distributed across nine southeastern states.

Regions currently has an architectural firm on retainer to provide three prototype designs when one of its 120 regional bank presidents wants to add a branch. Previously, the executives individually hired architects.

This business of designing, building and renovating branches and other offices is known as "project management." It is one of four non-technology functions that banks typically outsource. The others are: facilities management, which encompasses everything from snow removal to cutting the grass and pest control; transaction management, which is the cluster of tasks that includes buying and selling property or leasing space; and finance/accounting, in other words, paying an outsider to keep the books and cut checks for incoming bills and invoices.

Some institutions like the idea of shifting the management of these functions almost entirely outside. Detroit-based Comerica Inc., for example, has turned over virtually all real estate-related functions to Trammell Crow Co. of Dallas. David DenBaas, first vice president and director of corporate real estate, estimates that this arrangement saves Comerica about 15% a year on branch-related tasks.

One big savings came from reduced overhead. The bank's corporate real estate department now employs only seven people, compared with 100 in 1999. And those remaining employees have been freed up to focus on strategy rather than the minutiae of maintenance. "In the olden days," DenBaas recalls, "the need to handle the daily nuisances sometimes prohibited people from focusing on where the real money is."

Extra Horsepower

It is not clear whether outsourcers are cost-effective in all situations. One complication is that the cost of outsourcing can vary greatly by institution, depending on which vendors are hired and how the contracts are written. At the very least, however, outsourcing does allow banks to shift from a fixed to a variable cost structure.

Consider, for example, the fact that a typical bank's corporate real estate department generates a wildly uneven workload, making it difficult to keep a large staff regularly occupied. "There are great peaks and valleys," DenBaas says, "especially in this era of mergers and acquisitions."

Outsourcing can overcome that problem since the consultants are employed only as needed. "What banks are really buying is the ability to have extra horsepower when they want it," says Michael Wiener, a senior associate at Gensler, an international design firm based in San Francisco. "With a consultant, you just say, 'Don't come in on Monday.'"

Consultants can also bring some important leverage to bear. DenBaas points out that the buying power Comerica commands for its six million square feet of office space pales beside the clout Trammell Crow enjoys in the real estate market. The same benefit applies to expensive call centers; outsourcers already have sophisticated systems in place and can spread the cost across many clients, all of whom benefit from that investment.

The argument against outsourcing rests on both control and cost issues, as exemplified by the experience of Wachovia. During the '90s, First Union Corp., one of Wachovia's predecessor organizations, was a heavy acquirer of other banks. The time and energy devoted to frequent mergers made it difficult for First Union to manage its facilities effectively in-house, so it outsourced much of its facilities management.

After First Union and Winston-Salem, N.C.-based Wachovia began merger discussions in 2000, however, executives reconsidered their outsourcing policies. "We weren't achieving our target levels of service and financial performance," Davis says. "Frankly, we thought we were spending more money than necessary. We needed a more flexible, responsive approach to managing projects."

As a result of this review, Wachovia began managing more facilities-related tasks in-house. It also strengthened internal accountability for the scheduling and financial aspects of branch management.

This could be part of a larger trend. Douglas Robidoux, studio principal at Charlotte-based Little & Associates Architects, sees evidence of banks "focusing inwardly a little more" in the current economic slowdown by bringing some critical jobs back in-house. He says banks want to make sure that their employees are fully utilized before hiring outsiders for help.

Even banks committed to outsourcing generally reserve a few strategically important tasks to manage themselves. Comerica, for instance, does its own transaction management in Michigan, where the bank is headquartered and the bulk of its square footage resides, according to DenBaas. The bank also handles all its accounting and bill paying internally in order to maintain tighter control over projects.

"The number one thing to do internally is to set the goals," says consultant Wiener, who urges banks to stay involved and act as ultimate arbiter on decisions. In too many projects, he says, "consultants just talk to consultants. The client needs to be available for decision-making."

What's more, Wiener urges bankers to reserve final say over any task that directly affects the corporate brand. Brand identity, he believes, is too important and too central to a bank's success to be decided by an outsider.

Holding the Reins

As Wiener's comments suggest, the ultimate responsibility for maintaining efficient and attractive branch facilities rests with the bank, not the outsourcer. Whether a battalion of outside vendors is employed or not, the critical issues are monitoring performance and assigning accountability for results.

Bank of America's Eversole says she makes sure that her company holds the reins, especially when it comes to measuring performance. She sees her role as facilitating better practices, and to this end, BofA is requiring its largest suppliers to become certified in the quality control discipline known as Six Sigma, in a course adapted from the management theory and taught by the bank. "We're looking for things that will make us all more operationally efficient," she says.

Within the near future, Eversole also plans to pare the number of primary vendors to around 200 from the current 280. "Our ultimate vision," she says, "is to do business with the very best suppliers, not hordes of them, because you can't do a great job of performance management with large numbers of external entities."

Comerica has a very different model, but performance and accountability are still prime considerations. Its agreement with Trammell Crow gives the real estate company the green light to select vendors for various bank projects. The advantage of having just one outsource partner is that DenBaas, as the executive in charge, needs to monitor only that one relationship.

The monitoring process itself is easier than before. Portfolio management software is now available to facilitate the gathering and review of information about all an institution's properties, including lease contracts, from a single database. A year ago, for example, Regions hired Dallas-based Fischer & Co. to handle its strategic portfolio management. With Fischer's Web-based software, Pressley can download expense information and track how efficiently the entire institution is using space.

Specialized consultants can help the monitoring process in other ways. Regions hired Little & Associates to oversee space-planning issues, for example. By knowing exactly what square footage is necessary to house a given department, Little can calculate how any new hires will affect Regions' real estate needs. This knowledge directly strengthens the bottom line, according to Pressley. "Knowing who's got to move and how many square feet I need to acquire to house a department means I can get a better deal by negotiating leases a year in advance versus two months in advance," he says.

All these trends in branch-management outsourcing suggest a redefining of the client/vendor relationship. The standard practice had been for a bank to sign an outsourcing contract and then forget about its outsourcing partner until the contract came up for renewal. Now banks are beginning to understand that these relationships need to be more interactive. "You're not going to get good performance if you're not managing and measuring on an ongoing basis," Eversole says.

Ms. Judd is a freelance writer based in Washington, D.C.

Copyright © 2003 by Banking Strategies, published by BAI.

back to top