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The Big IT Switch Outsource vs. In-House

Present Situation
After tracking this metric for 22 years, regarding core processing among small banks and credit unions (87% of the U.S. financial institutions population), when a trend-breaker appears on my radar, I want the world to know it.  Even though the first signal was apparent in 2006, when new core sales began to overwhelmingly slant towards outsourcing (Exhibit 84 of "Automation in Banking - 2014" reported 60%), the base numbers didn't move much.  It's just a rule of fifth-grade math.  When the denominator (base) is huge, it takes a while for the numerator (change) to affect the outcome.  This year it has. 

Recent Trend
This year, new core sales continued their romance with outsourcing and hit 77%, thus the numerator grew into enough of a bully to flip the base.  Now 55% of small banks are using outsource mode (Exhibit 2).  But don't look for a smooth trend line here.  To emphasize my point, at one time in the early 1970s, outsource mode was 100% because it was the only mode.  In those days, large banks took on their downline correspondents for a "free ride," letting them piggy-back onto the large bank's system.  Free ride meant credit for deposits when deposits had meaningful earnings value for any size bank. 

Why the Change
You'd have to look at Exhibit 73 to see when and why the splits changed.  Indeed, there has always been a correlation between the health of banking and the use of technology, for better or for worse.  In the past eight years, technology's influence began to grow at a clip faster than banks could increase their internal tech expertise or afford to pay for it, so finally when the 2008 Financial Crisis hit like a tsunami, bankers ran for the hills.  Burdensome regulations, following the wake-up call from 2008, have added pressure on bank earnings and more work for IT.  At the same time, old fashioned banking gave way to new ideas where technology was a larger part of the solution.  The result:  Small banks made the "911 call" to their primary tech provider.  It begins with, "Can we talk?" 

The Unaffected
In the case of mid-tier (1,645 FIs) and the top 133 FIs, it's an entirely different reaction.  When the goin' gets tough, the tough get goin'.  Here the CEO calls his CIO and says, "Show me your HR management skills.  I want no new hires, just leverage the new regulatory work with the resources you've got.  And keep our name out of the press."

What Does This Switch Mean
And there you have it, folks, another day in the not-so-dull world of banking technology.  I have created a separate "Volume 2" of Automation in Banking - 2014" for exhibits alone.  It contains more than 130 displays of statistics, metrics, facts, specs, trends, realities, models and vendor solutions.  If it were a script, Steven Spielberg could turn it into a thriller movie, but not me.  I'm more like Joe Friday's, "Just the facts, ma'am."

•  Vendors love outsourcing because instead of a one-night stand (huge license fee on day one plus 20% per year), they get a steady flow of revenue, quite often forever.
•  Bank CEOs love outsourcing because when things go wrong he's Mr. Power with vendors.  With in-house he's Dr. Phil trying to fix the "suffering."
•  Both bank and vendor CFOs prefer outsourcing because budgeting is a snap rather than a euphoric dream.
•  Bank examiners love outsourcing because they become experts the minute they hear the names of only 13 outsource companies (Exhibit 118) that provide IT services for banks and credit unions.  Been there, done that.  At in-house banks, the systems take on a life of their own as a result of that dreaded word "customization."  Every in-house bank looks different to a bank examiner when it moves from off-the-shelf to bankers'-turf-and-control. 
•  And finally, the reality of IT - outsource lets bankers be bankers, and tech vendors be the knowledgeable nerds they were born to be, and never the twain shall meet.

What's in your bank's back room?

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Comments: (1)

Melvin Haskins
Melvin Haskins - Haston International Limited - 29 April, 2015, 08:32Be the first to give this comment the thumbs up 0 likes

Excellent analysis.