Turning Inside Out with Outsourcing

Outsourcing is no stranger to big bank IT chiefs, who long ago shifted from the view that they needed to build important technology systems in-house. The recent financial crisis, however, appears to have accelerated the trend as financial institutions face ever-greater pressure to keep up with technological advances.

“The market pressures to be more nimble and to accommodate a flexible set of changes are going to drive your need to go outside the bank rather than try and build in-house,” says Anil Cheriyan, corporate executive vice president and chief information officer (CIO) for Atlanta-based SunTrust Banks Inc.

This accelerated trend toward outsourcing emerged as an important theme of an Oracle-sponsored forum at the recent BAI Retail Delivery 2012 event entitled “BAI Executive Roundtable: Collaborating to Win – Transforming the Bank to Achieve Greater Profitability.” Interviews with large bank technology executives following this roundtable confirmed the importance of outsourcing in the current environment.

“Anything not core or differentiating is a candidate for being leveraged from suppliers outside the bank,” says Vipin Gupta, CIO for Key Community Bank at Cleveland-based KeyCorp.

Paul R. Obermeyer, executive vice president and CIO for Dallas-based Comerica Inc., says he and his staff have “spent quite a bit of time” considering which direction to take their bank’s traditional buy-and-integrate shop. “Our customers don’t choose Comerica for its deposit or loan systems; they come here to develop deep and enduring relationships,” Obermeyer says. Going forward, Comerica executives are looking at “how technology plays a key role in our ability to offer relevant and innovative products for customers” and how the bank can best take advantage of recent technology changes, he says.

Part of this shift is a move from so-called “best-of-breed” products to more integrated solutions, which offer banks the ability to implement without having to customize as much. Obermeyer says Comerica has moved from a best-of-breed software approach to embracing the full spectrum of Microsoft products such as Outlook, Word, Excel, and Sharepoint for the bank’s use. “We can ride on the back of Microsoft’s innovation,” he says.

When it comes to critical core systems, Obermeyer says banks like Comerica still look for vendors with “strong foundations,” deep technical expertise, and the “financial wherewithal to survive the good and bad economies.” But beyond that, bank executives are also seeking vendors with a “record of innovation and strong outreach programs with customers so our output is factored into plans.”

At the same time, Obermeyer says he’s willing to work with nimble newcomers in the right application. “We saw a tremendous market of innovative companies in mobile,” he says, referring to his recent visit to Silicon Valley.

While Obermeyer does not believe vendors “are any more or less innovative than in the past,” he says that his bank is trying to do a better job of “capturing that innovation” by taking better advantage of packages vendors have to offer and upgrading systems more on an on-going basis than previously. As an example, he cites Comerica’s online banking platform that was originally built on software dating from 2005. Going forward, he says, upgrades to this platform will be “more iterative” and more frequent.

“We want to ride that wave of innovation,” Obermeyer says.

Core of the Matter

Taking advantage of more up-to-date technology is driving many banks to look outside even when it comes to their most central functions, specifically their core banking systems. Only a small handful of the largest banks are “developing their core systems from scratch in-house,” says Joe Reilly, CIO and executive vice president for Salt Lake City-based Zions Bancorp.

Zions, for example, is working on a modernization project that aims to “streamline the core banking environment” across the company’s many affiliate banks to create a more consistent use of software, business processes and data definitions and shift the bank from batch processing to real-time systems. “Our primary motivation is the age of our existing systems and the relatively small install base some of those systems have,” Reilly says.

As part of Zions’ modernization plan, which will encompass overhauling the loan servicing, deposits and customer information file systems, the bank will be replacing “five or six systems with one integrated solution,” according to Reilly.

Zions is not alone. Boston-based researcher Celent LLC predicts the total core banking overhaul market size will grow gradually, from $4.8 billion in 2011 to an anticipated $5.1 billion by the end of 2013, as the overall deal sizes increase.

While bank IT budgets are gradually starting to recover as the country pulls out of the recession, the drive to lower costs and get more bang for the buck continues to keep CIOs focused on the cost economics of technology implementation. “With interest rates as low they’ve been and staying low probably into 2015, we’re pressured at the margin and we have to innovate as a means to deliver profitability,” Obermeyer says. By reducing the number of vendors with which the bank deals, Comerica is better able to leverage the capabilities of those vendors, get better terms and have more influence, he adds.

“Coming through the recession, we all have to do more with less,” says KeyCorp’s Gupta. “We have to not only be smart about how we make investments but how we differentiate ourselves.”

Solutions providers are upping their game in response. Reilly says the more modern integrated systems he is seeing “require less development in-house.” These integrated systems are architected to be more services-enabled and offer a full customer view and can typically offer banks as much as a 40% efficiency gain in the back office side, he says.

Over the past five years, bank technology vendors in online banking, front-office and customer-facing technologies have matured in terms of security and risk management, according to Gupta. As collaboration with vendors grows, Gupta says that bank enterprises are becoming “extended enterprises” where vendors are “getting more intertwined.” Increasingly, he says, that means holding vendors to the same standards as the bank’s own in-house technology. 

At the same time, banks are emulating some of the best practices of their technology partners. Over the past four years, for example, the IT development teams at Comerica have moved from working in cube-like office spaces to wide-open ballrooms – as technology companies do – where engineers work in a more “collaborative fashion,” Obermeyer says. “We’re changing from within and that’s had a significant impact on us.”

Ms. Hoffman is a contributing writer to BAI Banking Strategies based in Schweinfurt, Germany