Outsourcing: why "out" is "in".

Among the legends of banking is Amadeo Peter Giannini, the Italian-American banker who turned adversity into success beyond belief. In the aftermath of the San Francisco earthquake of 1906, Giannini rescued and then transported his bank's cash to a safe spot. He then set up a makeshift temporary

It's hard to know if Giannini could have done what he did in 1906 under modern conditions. So much has changed--what people use banks for; what rules banks must abide by; the technology they must have at their fingertips--and at the fingertips of customers.

Yet many community banks have come to realize that the most important thing they offer is personal banker-to-customer contact.

But much of the invisible back-shop that makes today's plank and two barrels work can be rented out, leased up, contracted for, consulted with ... in other words, outsourced. Customers want the community banker--they don't care who handles his or her compliance, processing, and such. At its extreme, this implies community banking as a branding strategy.

As Exhibit 3, opposite, top, shows, more than one-third of the banks surveyed, overall, outsource some functions traditionally performed by bank staff, and among banks over $1 billion, nearly half do so. And of those banks that have taken this tack, almost 70% report adopting this strategy to some degree in the last two years. As Exhibit 5's bar-chart shows, the adopters' reasons for this were tied between cost-cutting and obtaining expertise without having to hire it full-time. Of banks not currently outsourcing, Exhibit 6 demonstrates that one in four are considering the strategy.

What do community banks outsource? Of the top four choices, in Exhibit 4, far left, one is item processing, a mechanical function. But the other three are "brain work"--internal audit, loan review, compliance audit. All essential, but requiring deep and expensive expertise. As Exhibit 9, right, shows, these are also the types of functions that banks said they would most likely be willing to share with other banks.

It would appear the lessons of the past are being applied to the products of the future. As Exhibit 7, above, shows, nearly half the banks offering remote deposit capture, the subject of an extensive section of this report, outsource.

69.3% started outsourcing in last two years

Exhibit 3

Does your bank currently outsource any
functions traditionally performed by staff?

BY ASSET SIZE                 YES

Under $100 million            32.4%
$101-$200 million             39
$201-$500 million             38.6
$501-$999 million             33.3
$1 billion-up                 48.6

If yes ... has any of the
outsourcing occurred
within the last two years?

Yes                            36.6%   30.7%
No                             63.4%   69.3%

Rural-suburban,
and suburban
banks have made
this move more
frequently than
urban-suburban
and urban banks.

Note: Table made from pie chart.

Exhibit 4

If your bank outsources, what traditional
bank staff functions does it outsource?

TOP PICKS FOR OUTSOURCING, REGIONALLY

Northeast   Internal audit
Southeast   Loan review
Central     Internal audit
Midwest     Compliance audit
Southwest   Internal audit
West        Item processing

Internal audit                52.7%
Loan review                   48.8%
Compliance audit              46.3%
Item processing               44.8%
ATM servicing                 28.4%
IT management                 24.9%
Compliance                    19.4%
ALCO reporting                18.4%
Investment management         17.4%
Training                      12.4%
Human resources               11.9%
Marketing                     10%
Call center                    6.5%
Other                          9%

Note: Table made from bar graph.

Exhibit 5

Top reason for banks
over $1 billion

To cut costs                  60.1%

Top reason for banks
under $1 billion

To obtain expertise,
  but not in a full-time
  post                        60.1%
To utilized talent we can
  no longer find in, or
  attract to, our market      28.1%
To utilize talent we can no
  longer find in, or
  attract to, our market
Other                         5.9%

* Banks could choose multiple answers.

Note: Table made from bar graph.

Exhibit 6

If you don't outsource, are you
actively considering doing so?

BY ASSET SIZE                 YES

Under $100 million            19.4%
$101-$200 million             25
$201-$500 million             20.2
$501-$999 million             33.3
$1 billion-up                 41.2

Yes                           23.6%
No                            76.4%

Note: Table made from pie chart.

Exhibit 7

Which best describes the approach your
bank takes to processing RDC, or will take?

BY ASSET SIZE        OUTSOURCE     IN-HOUSE   COMBO

Under $100 million     66.7%        19.7%     13.6%
$101-$200 million      55.7         21.7      22.6
$201 million-up        41.5         41        17.5

REGIONAL
TREND                OUTSOURCE     IN-HOUSE   COMBO

Northeast              48.6%         25.7%     25.7%
Southeast              48.8          33.3      17.9
Central                51            37.3      11.8
Midwest                52.9          40         7.1
Southwest              40.9          31.8      27.3
West                   55.3          23.4      21.3

Outsourcing was much more common for banks
under $500 million (53.2%) than for banks over
$500 million (37.7% of banks $501-$999 million
and 34.4% of banks over $1 billion).

Combination           18.1% (16.3%)
In house              32.5% (33.3%)
Outsourced            49.4% (50.4%)

Note: Table made from pie chart.

What type of outsourcer
do you use?

Payment solutions
provider              19.1% (22.1%)

Correspondent bank    4.4% (7.4%)

Bankers bank          2.7% (2.2%)

Other                 2.7% (3.4%)

Core banking
provider              71% (65.1%)

Percentages in parentheses reflect 2007 survey results.

Note: Table made from pie chart.

Exhibit 8

What steps has your bank taken to cut costs or improve efficiencies
in the last two years?

37.8%   Revised employee categories/job descriptions.

25.5%   Adopted internal document management system.

23.5%   Installed voice-over-internet-protocol phones.

20.9%   Performed efficiency studies for
        operational positions (e.g.,tellers)

14%     Removed functions, such as loan analysis,
        item processing from branches.

11.1%   Other, includes: cross-training,
        branch capture, check imaging

* Institutions were asked to choose a single main reason.

Exhibit 9

What functions would your bank be willing
to share with a unaffiliated institution?

Top pick for banks
over $500 million

Internal audit     32.6%
Compliance audit   31.7%
Loan review        31.1%
Compliance         30.8%
Training           30.6%
IT management      28.7%

Top pick for banks
under $500 million

Courier service    23.5%
Item processing    22.4%
ATM servicing      21%
Human
  resources        18.8%
Processing
  facility         14.6%
Investment
  management       12.3%
Marketing          11.3%
ALCO reporting     11.1%
Call center         7.6%

* Banks could choose multiple answers.

Note: Table made from bar graph.