A decade ago, many financial institutions were bringing as much technology as possible in-house as a way of controlling their destinies and customizing their core platforms and data warehouses. Unfortunately, those days are over. In today’s environment, application service provider (ASP) offerings of banking technology are moving to “the cloud,” and one by one applications are evaporating from bank-run data centers.
“In the cloud” is common technology vendor-speak for ASP, service bureau, outsourcing, pay-per-click, and a variety of other delivery models. Numerous applications, including card processing, online banking and bill pay, are overwhelmingly being outsourced. And core and infrastructure services that have largely been deployed in-house, like email, directory servers and file servers, are trending heavily toward outsourcing.
In a cloud-based environment, three key factors are pushing financial institutions to move from in-house to outsourced technology:
Attracting and keeping technology talent at a regionally based financial institution is a constant struggle. Industry-specific tech talent is consolidating and migrating to programmer and megabank community hotspots in San Jose, Seattle, San Francisco, Boston, Raleigh, Charlotte, Atlanta and Phoenix. It can be extremely challenging for banks and credit unions that are not in one of these hotspots to find data center rock stars.
While areas like information management and cross-channel marketing will always be in-house non-negotiables (see Five Things Banks Can Never Outsource), keeping system uptimes in the green and developing application updates to keep pace with market expectations are tasks best handled by outsourcing
Technology in the banking industry is moving forward so rapidly that it is difficult for typical regional banks to keep up with compliance updates, new features, housekeeping and performance issues without relying on vendors for some basic technology needs.
Cards are a perfect example. In the last 18 months, the industry has been hit with EMV, Pay Apps and Card Controls – all major undertakings for banks’ IT departments. In the next 18 months, these features will be common in the marketplace and will put additional demand on these departments’ already strained resources.
Solutions architected in the last 20 years were likely developed with an outsourced or ASP model in mind. Now, fintech vendors are retooling their apps to go even further to the cloud using Amazon, Microsoft and Google server-less functions. New services, and especially customer-facing applications like card processing, online/mobile banking, and loan/deposit origination platforms, are all developed as ASP models in today’s environment and are not offered for in-house deployment.
As banks and credit unions explore their outsourcing options, they can better control their destinies by proactively following three key strategies.
Is outsourcing cheaper than an in-house environment? Answering this question is much more complex than just soliciting a bid from a vendor. It takes an analysis of multiple years’ worth of technology decisions. Outsourcing can be less expensive, but it largely depends on where a financial institution is within its technology stack lifecycle. This is exactly why a road map plan is critical (see #2 and #3 below).
Most often, the total cost of ownership (TCO) of both the existing in-house and outsourced solutions needs to be evaluated. Software maintenance costs alone on an in-house deployed application are not comparable to an outsourced solution that includes software, tech support, hardware costs, hardware support, data circuits and programming. Staffing can be the most difficult comparison to make because staffing is impacted by the change in the operational support business model and is an unknown without comparable market staffing benchmarks.
Ensure your strategy contains technology infrastructure details that include a careful inventory and assessment of the institution’s technology solutions, as well as specific dates to evaluate moving to an outsourced model. The following key inputs should be included in the infrastructure inventory:
Once the costs have been evaluated and an inventory is in place, create a road map of executable actions based on the institution’s technology systems contracts.
Your contracts road map should include:
Laying this data out in a spreadsheet may feel like a trivial process, but the end product will be an extremely valuable tool in the technology planning process.
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A consolidated data center can mean considerable efficiency savings for an institution. Taking these steps will arm executives with the insights they need to evaluate the opportune time to outsource, analyze the market for additional feature/functions, and ready the institution for the conversion(s) that will come with a change to “the cloud.”