October 04, 2010

Given their modest internal resources, community banks are no strangers to partnering with third-party providers. But there's been a small uptick in community banks' adoption of outsourcing recently as they've sought to save money during the downturn and to deal with the flood of new regulations.

In an example of the latter, John Buhrmaster, president of 1st National Bank of Scotia ($321 million in assets), reports that the Scotia, N.Y.-based institution recently began outsourcing all application development in anticipation of the new finance reform bill.

For State Bank of Whittington ($88 million in assets) -- which, after handling IT in-house for 20 years, recently handed core processing over to outsourcing provider Computer Services -- the main driver is "not-our-core-competency." "The conversion will let us concentrate on banking and apply our resources to serving customers rather than operating the in-house system," explains Steve Owens, the Whittington, Ill.-based bank's VP. Owens says he expects CSI to help the bank make product improvements and improve its technology.

Maple Grove, Minn.-based Highland Banks ($560 million in assets) began outsourcing core operations to Fiserv in June 2008. According to CTO Craig Boivin, the reasons behind the move included the high capital costs of running an in-house data center and disaster recovery site, and the difficulty of finding people who could maintain a mainframe environment. "That skill set is not super prevalent in the marketplace," observes Boivin.

Consulting firm McGladrey helped the bank evaluate its basic options: keep core processing in-house, move to Fiserv's Des Moines service bureau, move to Fidelity Information Service's service bureau in Charlotte (where Ridgedale State Bank, which Highland was in the process of acquiring at the time, sent its processing), or switch platforms and use Jack Henry core banking software, Boivin relates.

"The additional risks associated with staying with an in-house processing environment outweighed the price," says Molly Heruth, SVP and director of operations at Highland. Those risks include the risk of not staying on top of regulatory changes, the risk of technology becoming outdated and the risk of not being able to find the needed technical expertise.

Outsourcing, Boivin notes, has changed his CTO role. "I no longer have to worry about growing my staff to meet new requirements," he explains. "I do have to worry about vendor management, and a lot of regulatory controls are being put around that. So I focus my time on managing the vendor relationship, making sure service standards we have are being met, and making sure the disaster recovery is there and working."

About 12 jobs and a data center have been eliminated through the use of outsourcing, saving the bank $500,000, Boivin reports. "The outsourcing business is so competitive, that in itself is driving down costs," he says.

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