Does IT Outsourcing Make Dollars and Sense For Your Organization?
By Gary L. Kruse For Fall 2002 The ABA's Journal of Agricultural Lending

Outsourced services that were once considered more sacred in banks' customer relationship arena, such as cash management, mortgage origination and lending, are now driving the renewed interest in outsourcing. The most popular form of outsourcing today is provided by and Application Service Provider (ASP) or a company that supplies software applications and/or software-related services over the Internet. It's a form of technology outsourcing that is gaining in popularity, and for many small to medium sized community lenders, it's a cost-effective way to access the very latest technologies for loan decisioning, portfolio management, customer retention and new business development.

Business process outsourcing already has a long and honorable heritage in financial services' efforts to control costs, and although cost containment ranks high among the key drivers, an intensely competitive environment for keeping and adding new customers is behind the boost as well. Anything that can be offloaded in order to help the financial firm focus on customer retention is considered on the table these days. For some banks, outsourcing is a key growth strategy. A recent Cap Gemini survey finds that, on average, financial institutions' are devoting about one-quarter of their IT budgets to outsourcing.

One of the many ASP success stories in banking is Memphis, TN-based National Commerce Financial Corp. (NCF). They signed their first outsourcing contract in 1998 when they were a regional bank with $5 billion in assets and 160 branches. Today they are a $20 billion bank with 450 branches. They outsourced their network infrastructure because networking is not the bank's core business. They attribute outsourcing as a key part of their growth strategy.

Outsourcing makes sense when you realize the time and dollars that have to be spent on the hardware, software, space, people, and training necessary to run your IT systems. In this issue of JAL we have compiled 10 bottom line reasons to help you determine whether outsourcing makes sense for your organization.

#1: Make capital funds available

There is tremendous competition within most organizations for capital funds. Deciding where to invest these funds is one of the most important decisions that senior management makes. It is often hard to justify non-core capital investments when areas more directly related to producing a product or providing a service compete for the same money. Outsourcing can reduce the need to invest capital funds in non-core business functions. Instead of acquiring the resources through capital expenditures, they are contracted for on an "as used" operational expense basis. Outsourcing can also improve certain financial measurements by eliminating the need to show return on equity from capital investments in non-core areas.

#2: Reduce operating costs

Organizations that try to do everything themselves may incur vastly higher research, development, marketing and deployment expenses, all of which are passed on to the customer. An outside provider's lower cost structure, which is a result of a greater economy of scale or other advantages based on specialization, reduces operating costs and increases competitive advantage.

#3: Reduce risk

Tremendous risks are associated with the investments an organization makes. Markets, competition, government regulations, financial conditions and technologies all change extremely quickly. Keeping up with these changes, especially those in which the next generation requires a significant investment, is very risky. Outsourcing providers make investments on behalf of many clients, not just one. Shared investment spreads risk and significantly reduces the risk born by a single organization.

#4: Free up resources for other purposes

If your organization is like most it has limits on the resources available to it. Outsourcing permits an organization to redirect its resources, most often people resources, toward activities which serve the customer.

#5: Improve company focus

Outsourcing lets an organization focus on its core business by having operational functions assumed by an outside expert. Freed from devoting energy to areas that are not in its expertise, the organization can refocus itself on meeting the needs of customers.

#6: Limited internal resources

Organizations outsource because they do not have access to the required resources within the company. Outsourcing is a viable alternative to building the needed capability from the ground up. Organizations in a growth mode should consider the benefits of outsourcing from the very start of their expansion.

#7: Efficiency vs Investment

When an organization moves to improve cost, quality, service and speed through a "reengineering" project, often times the need to increase efficiency comes into direct conflict with the need to invest in core processes. Thus, as non-core internal functions are continually put on the back burner, systems become less efficient and less productive. By outsourcing a non-core function the organization can begin to see the benefits of their reengineering efforts.

#8: Knowing what you need done

Outsourcing doesn't mean abdication of management responsibility. When a process is viewed as difficult to manage, the organization needs to examine the underlying causes. If the requirements, expectations or needed resources are not clearly understood, then outsourcing won't improve the situation. If the organization doesn't understand its own requirements, it won't be able to communicate them to an outside provider.

#9: Access to world-class capabilities

World-class providers make extensive investments in technology, methodologies, and people. They gain expertise by working with many clients facing similar challenges. This combination of specialization and expertise gives an organization a competitive advantage and helps them avoid the cost of chasing technology and training.

#10: The due diligence dance

As is the case with our own Web Equity Manager® financial analysis and decisioning solution, we have a world-class outsourcing partner (IPRevolution) that to date is trusted to host the customer data for half of our Windows-to-Web converted customers. Together we answer all the due diligence questions you can come up with about data security, maintenance, off-site vaulting, redundancy and the other key processes that are in place to keep your data safe, accessible and private.

We also cover the tougher "what happens if stuff hits the fan" questions with regard to company financials, market stability and other "force majeure" issues that might be realized. Not only do we get you the right answers to your questions but we encourage any/all customers interested in an outsourced financial analysis solution to tour the IPRevolution facility for a first hand look at this exceptional service. Give us a call at 1-800-264-0787 ext. 200 if you are interested in finding out more information about this outsourced solution.

Additionally, the FDIC Web site has an excellent resource on technology outsourcing titled "Effective Practices for Selecting a Service Provider." You can access this information by going to this URL: http://www.fdic.gov/regulations/information/btbulletins/brochure1.html.

Gary Kruse is Chairman/CEO of ECI, developer of Equity Manager financial analysis and decisioning software for lenders. If you have any questions about this story you can contact ECI at 1-800-264-0787 ext. 200, emailing them at inquire@eci-equity.com or by visiting their Web site at www.eci-equity.com.

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