Banking on outsourcing

By  Jack McCarthy
July 5, 2002 1:01 pm PT

CTOS AND MARKET analysts took note early this year when American Express announced it had agreed to pay IBM's global services division $4 billion over seven years to take over provisioning and management of the credit card giant's noncore IT operations.

In the 18-month analysis that led up to the February 2002 agreement, Steve Karl, senior vice president of technology operations at the Stamford, Conn.-based company, thought hard about giving up control of part of his IT operations. Ultimately, says Karl, the decision to outsource large-scale operations aligned IT with the company's aggressive growth strategy.

The IT resources of American Express could be better focused on core business, a proposition becoming ever more demanding, Karl says. "I felt we were running out of runway," says the vice president of the constraints on his resources.

Karl is joined by other chief technologists in the financial services and banking sectors who are handing off to outsourcers day-to-day management of noncore -- yet crucial -- operations. In return, they are freeing up resources for the core business by saving money and consolidating disparate systems.

Extending capabilities

Both Karl and Michael Raneri, senior vice president of electronic communications at San Francisco-based Charles Schwab, want to devote their IT resources to supporting the core mission of their respective companies rather than dealing with the growth of other, less critical concerns. In addition, these IT executives see that outsourcers are adopting technologies before end-user companies are able and can be part of a financial services company's long-term growth strategy.

"We are using more and more outsourcing [for noncore functions]," Schwab's Raneri says, "The core IT is something we can manage internally in our datacenters."

Raneri says he jealously guards the internal IT operations that oversee the financial giant's customer data and proprietary systems. "Things like customer data, which we feel is proprietary, we like to keep internally. The security and reliability of the company's customer data is central to its reputation and can't be entrusted to outsiders. The 99.999 [reliability standard] is where we have our brand," he says.

Karl agrees. The potential for a misstep with proprietary systems in the financial sector is too great. "One thing we made clear [to IBM] is that we were maintaining control of all things strategic -- technical architecture, information security, compliance capability, and application development," he says.

Contracting noncore complexity

When it comes to technology that's not considered part of the company's core business, both Karl and Raneri are looking at outsourcers as an extended part of the enterprise that bring numerous benefits to the table.

In opting to outsource management of American Express' computer systems, Karl wanted to push the boundaries of IT's capabilities. "We had to see if we could be more flexible and be able to continue to support growth," Karl says. "The formula was that there would be no trade-off in the ability to deliver economic benefits and quality. The arrangement we had with IBM accomplished that and gave us extra benefit."

Under the seven-year contract, IBM will manage American Express' computer systems, from mainframes and network servers to desktops, as well as its database administration, help desk operations, and Web hosting. "The long-term contract gave us economies of scale and qualitative improvements," Karl adds.

Although Schwab's Raneri used the same criteria -- planning for growth -- to outsource its e-mail operations to San Francisco-based Quris, the tie between outsourced functions and core business can not be severed entirely. As e-mail-based communications channels such as financial reports at Charles Schwab increased in value and complexity, it became necessary to bring in an expert in the field, Raneri says.

Schwab and Quris are now using the e-mail channel to strengthen customer relationships, he says. "Part of doing business with a smaller outsourcer like Quris is the ability to move fast -- to bring a specific channel knowledge and the ability to execute fast," Raneri says. "There are a lot of pitfalls, like spam, and a lot of ways to prevent it.

Consolidation benefits

At Canadian Imperial Bank of Commerce (CIBC) in Toronto, Hugh MacDonald, vice president of strategic alliance management, signed a $156 million contract with EDS Canada last June to outsource his human resources applications.The consolidation of CIBC's retail and investment banks brought together more than 45,000 employees using a patchwork of legacy systems and a PeopleSoft HR application.

Each system had its own benefits environment," MacDonald says. "Six employees in one department would be paid on one day, and six others would be paid on another, each with different benefits programs."

EDS took on about 180 employees from CIBC -- nearly the entire HR staff of the bank -- and now runs all HR functions, including benefits, pensions, health insurance, and payroll. "They became responsible for everything in the HR system. This was a strategic move for us. We're getting high performance," MacDonald says.

In Schwab's case, Raneri says he has been able to continue to push ideas for e-mail applications out to Quris to handle. "Things that tend to be distribution-focused, like e-mail distribution or alerts, we do with Quris."

Bottom-line benefits

Cost savings -- whether actually saving money on IT expenditures or helping the enterprise earn money more effectively -- is a key decision-maker for banking and financial services.

American Express expects to save "hundreds of millions" of dollars over the life of the contract in actual savings, Karl says. "The long-term contract draws on economies of scale and improvements, Karl says. "It raises the question, 'Could we do it ourselves?' IBM offers [reasonable] price, quality, and experience."

American Express was also able to transfer almost 2,000 of its employees to comparable jobs at IBM starting March 1. Going forward, American Express has asked IBM to work on diverse projects that only an outsourcer with large resources could address. IBM will work to strengthen American Express' Web environment, upgrade old infrastructure at American Express Latin America operations, and develop strategic initiatives.

"It's not just a question of [IBM] running a large infrastructure -- a large number of providers can do that well," Karl says. The senior vice president of technology operations also saw the outsourcer's ability handle change management as an asset. "They have a client base and they are always doing research and applying it to economies of scale."

McHugh at CIBC and Raneri at Schwab say the savings from outsourcing noncore functions will result in efficiencies that will fuel revenue growth. Even so, McHugh says he didn't outsource just to save costs. "This for us was a strategic move for high performance, as an investment to move to an eHR [Web-based HR self-service]," he says.

Still, a CTO's decision to outsource will only be made if the bottom line is ultimately strengthened, Schwab's Raneri says. "[Outsourcing] is becoming a very ROI-based intensive evaluation, where we are taking a look at what we can do versus an outsourcing company."