4 Benefits Of An Outsourced Core Model

As technology evolves, credit unions of all sizes are taking a second look at outsourced core models.

 
 

Credit unions are no stranger to outsourced technology strategies, especially smaller ones that might lack the resources to purchase an in-house core system, support application development, and manage ongoing maintenance costs. More than 23% of credit unions with $20 million or less in assets and 53% of credit unions with $20 million to $100 million in assets use a hosted core, according to Callahan & Associate’s Peer-To-Peer analytics. By comparison, roughly 11% of credit unions with $500 to $1 billion in assets and 4% of those with more than $1 billion outsource these systems. Within these general trends, however, there are outliers that have successfully maintained in-house technology capabilities but are now moving away from these models in favor of something more efficient, secure, and reflective of their evolving business environment.

With nine branches and an annual membership growth roughly three times that of its asset-based peers — 7.7% versus 2.6% — Members Choice Credit Union ($450M, Houston, TX) is one institution that understands the triumphs and the challenges that accompany rapid growth. After it reached a certain size, the credit union began drawing key technology systems in-house and started padding resources with additional investments every few years. But in the post-recession economy, the limitations of that philosophy became evident.

“Consumers’ technology expectations change so rapidly, particularly in the online and mobile space,” says Steve Gilman, CEO of Members Choice. “We know we have to be a fast follower to keep up with those changes, but with our previous approach, IT staff was handcuffed by the growing burden of our daily operations. We knew we needed a new strategy to redeploy those resources.”

When the credit union’s chief operations officer, Mike Gleespen, joined the organization in summer 2012, leadership challenged him to address this issue. His answer: Adopt an outsourced technology model.

“When we looked at things like risk, cost, and speed to market, there was no comparison between the traditional internal model we had been following and a managed service approach,” Gleespen says.

As the credit union moved forward with the approach, it discovered several new challenges, opportunities, and best practices.

Outsourcing Isn’t Easy (At Least At First)

In theory, the outsourcing model should be more about signatures and invoices than long hours, research, and problem solving. For institutions that have always outsourced their cores, this might be the case, but for complex organizations, the process of moving to an outsourced model will resemble the first half of a core conversion. This includes conducting due diligence and vetting potential partners, a task that in some ways is even more complex than a straightforward conversion because of the abundance of providers and expanded service options.

“There are companies out there like AT&T and Dell who can run your systems and services for you and do a lot of great things,” Gleespen says. “But we found you have to do your homework on who will be able to best understand your business as a credit union.”

It did not originally intend to break from its core partner, Symitar, but after Members Choice surveyed its options within and outside of the financial services sphere, it decided to migrate to an entirely outsourced, off-site core solution from EASE.

“There’s a waiting list to get in the cue for that product,” Gilman says “We didn’t sign the contracts until May 2013, but as early as February we made sure we were penciled in for the next opening.”

The actual transfer of the core system, including the migration of the credit union’s data to a remote core in Kansas, occurred over a single weekend. However, preparation for the event took approximately six months and included several supplier-provided deadlines. If the credit union missed any of these steps, the provider would push it to the back of the queue.

Last summer, the credit union also began implementing a remote services program from Jack Henry called Gladiator. Gladiator encapsulates close to 50 support systems — including security and networking — and the credit union is using it to replace many of its ancillary and third-party relationships. Members Choice has completed approximately 90% of the transfer, but the consolidation process has proven far more time consuming than the core migration. However, it will provide benefits that an outsourced core alone would not.

“Our online banking system alone had about 10 different integration points with separate vendors, so every time we wanted to change something we had to corral all these different parties,” Gilman says. “We know we might never streamline every system down to one relationship, but we can get it down to three or four.”

Outsourcing Increases The Shelf Life Of Investments

Another advantage its outsourced relationships provide is cost avoidance, Gleespen says. For example, under its in-house arrangement, Members Choice had to handle at least three to four annual core system updates, each of which would require at least half a dozen people working over the weekend. Moving forward, these updates will occur remotely and will be a nonevent for the credit union.

Members Choice has also found that having another party in the mix increases its own standards for accountability, especially when it comes to updates.

"When we went to integrate our third-party applications with the Gladiator system, we were anticipating needing to upgrade about half of them,” Gleespen says. “We ended up upgrading closer to 80%.”

By bringing these systems together in a more manageable way, the credit union has the piece of mind in knowing that everything in this new environment is truly supported and up to date — and will remain that way.

“An in-house, legacy approach requires buying new hardware and software every three years,” Gleespen says. “That’s where things really start to add up. That alone can easily cost you hundreds of thousands of dollars.”

By moving to a rent rather than an own strategy, Gleespen anticipates Members Choice will cut losses resulting from equipment deprecation by at least half over their historical levels.

Outsourcing Allows The Credit Union To Reprioritize

Previously staffed with just five individuals and the occasional contractor, the IT department at Members Choice was often pushed to its limits under the previous in-house model.

“We knew we needed to do a better job focusing on our members and enhancing our business applications,” Gleespen says. “But because we were constantly building and upgrading servers and networks, fixing desktops, and trying to manage security, it just wasn’t economically feasible for us and wouldn’t have been even if we were a billion dollar institution.”

The credit union could have hired several new IT staff members, but such talent in the Houston market is in high demand and candidates typically go to the highest bidder. By adopting a managed service model instead, this department has been able to maintain an even keel for staffing levels and, through natural attrition, even slim its ranks to just four individuals.

“We’ve seen about a 20% efficiency gain in staffing, but that’s only a small part of the efficiency strategy,” Gleespen says.

Because both daily maintenance and riskier, bleeding edge development projects are now largely off their plate, in-house staff are able to devote the majority of their time to building the best experiences possible for their members and fellow employees.

Enhancements to online account opening and other features have already generated enough activity in these channels to rival the credit union’s branch footprint. But future additions such as mobile loan applications, advanced financial management capabilities, and mobile wallets are all now potentially on the horizon — if and when the credit union can establish a business case for these products.

“There’s some things like location-based notifications that, while we don’t necessarily want to be on the front end of that technology, we don’t want to be too far behind either,” Gilman says. “Having this more flexible approach will allow us to find that balance.”

Outsourcing Reduces Or Eliminates Some Risks

“When you only have five people managing all of your IT needs, they’re forced to wear four or five hats rather than pursue specialization,” Gleespen says. “It was getting difficult to keep people’s skills up to date when they were dealing with so many different functional areas.”

For this reason, having a larger company manage the credit union’s firewalls, security, and storage made more sense than trying to tie these responsibilities to an individual with other priorities or parcel them out among the staff. In addition, because these partner organizations also often do business with banks, they receive a tremendous amount of oversight from regulators including and beyond the NCUA, Gleespen says.

And from a risk mitigation standpoint, smaller companies tend to be more susceptible to failure or buyouts, which can create a burden or additional liabilities for the credit union later on.

“This landscape changes so often, so if you are going to put more of your eggs in one basket, you want to make sure it is a really good basket and that the company is going to be around for a long time,” Gilman says.

Lastly, the built-in ability to have data redundancy and a physical backup operation outside of its hurricane-prone Houston footprint creates piece of mind for leadership at Members Choice.

“Even if our branches were not able to open, we’re confident our data, systems, and channels like online and mobile will be up and operational from a safe and secure place,” Gleespen says.

 

 

 

March 31, 2014


Comments

 
 
 
  • Steve you are right on, I think the future of credit union core processing is this remote hosted model
    Ed Perry