Enabled by the shift toward inexpensive client-server and PC-based distributed architectures, the hallmark of most of these systems was that they were easy to use, could be run “in house” without a large technical staff, and delivered cost savings and better control of priorities. With few exceptions the marketplace rewarded these pioneers for challenging the conventional wisdom.
However, time moves on and things change. Once-little Jack Henry and Associates’ Silverlake system and Fiserv’s Signature system now process tens of billions of bank assets every night. The Hyland OnBase system, literally designed in pencil on the back of a brown paper grocery bag, is now the repository for trillions of document and check images. Fidelity’s premier check processing system, formerly known as AFS ImageVision, processes checks and images for some of the largest U.S. banks and thousands of community institutions.
I call this relentless pursuit of improvement “the forge of the marketplace,” and it sooner or later forces other changes. Clearly, there are functions that banks will always prefer to keep in house, but the number and scope of outsourcing options grow larger daily. Core processing, item processing, credit card accounting, cash vaults, ATM servicing, physical security, lockbox, statement/notice printing and rendering, auditing, loan review, compliance and network administration are just a few examples. The list is endless!
How does a bank evaluate when to quit doing something for itself and turn it over to an outside provider? Here are some of the considerations to think about when evaluating outsourcing:
Consider the example of item processing. Driven by changing consumer preferences (popularity of electronic transactions – PIN and signature debit, ACH and online bill pay), technological change (rapid decline in the cost of imaging hardware, growing availability of high-speed networks and wireless communications) and regulatory change (Check 21), the world of item processing is very different today than it was a three short years ago. Distributed capture (branch, merchant and in some cases teller) is no longer optional. As a result, community banks and credit unions have adopted this technology by the thousands. Simultaneously, though, this is complex technology. Critical competencies include preventing presentment of duplicate images or IRDs, maintaining satisfactory image quality, maintaining precise controls over significant numbers of low-dollar transactions, and managing hundreds or thousands of remote capture devices. All of this must be done while managing fixed costs in a declining transaction volume environment.
For many organizations, item processing is no longer a function that must be done in house, absent uniquely compelling circumstances. Item processing has become a commodity, and doing it in house doesn’t pass 9 of the 10 criteria listed above. There are many other functions banks would be well-served to NOT do for themselves in a tough economic climate. The 10 criteria listed above provide a useful framework for evaluating almost any outsourcing decision.The banking marketplace is a fiery furnace, continually refining products, services and best practices. This persistent refinement can be a banker’s ally or enemy. Where a bank has a better strategy and the ability to execute that strategy it is usually vital to keep and enhance those competitive differentiators by sourcing those products or services in house. Where a product or service has become humdrum, available from any financial institution, bankers owe it to their investors and customers to consider outsourcing those functions to specialized providers who have economies of scale and who can compete nationally or globally in those commodities.
Our American passion for innovation is always pushing us to do better. The Forge of the Marketplace, characterized more brutally as the Survival of the Fittest, forces a re-thinking of “conventional wisdom” again and again. Excellence in strategic execution is a core management competency that cannot be outsourced, but just about anything else can be.
Whether you’re trying to make an outsourcing decision, looking to evaluate the effectiveness of an existing core or ancillary system, negotiating or renegotiating a vendor contract, or converting to a new system, Cornerstone Advisors can help.
For decades, Cornerstone professionals have been providing banks and credit unions with expert guidance to make smart, money saving decisions around their data processing vendors.
Visit our Web site or contact us to learn how we can make your job easier.
2 thoughts on “The Forge of the Marketplace”
Bill, Nice article. Well done! Best Regards, Gerald
Hi Bill. I just wanted to let you know that I thoroughly enjoy your articles. Your more recent article “The Forge of the Marketplace” provided a more thoughtful process of how to evaluate if outsourcing is the right thing to do. In today’s world, ROI seems to drive the decision making process which can be short sighted in many ways. However, simply funding for new products is a huge risk in today’s economy. No revenue usually translates into “thanks but no thanks” for the great idea. As I go forward with evaluating Treasury Management products and strategies I will definitely consider your compelling steps in my evaluation process.
Hope all is well for you.
United Bank and Trust
Ann Arbor, MI