Old assumptions die hard. Such is the case in the debate surrounding outsourced versus in-house core processing.
Conventional wisdom once held that credit unions with more than $1 billion in assets should keep core processing in-house, while an outsourced solution or service bureau was better suited to all other credit unions.
And, so the thinking went, any credit union opting to outsource would have to relinquish control of how and when it conducted its core processing operations.
But core processing experts say it’s time to toss out those old assumptions. “The technology has come a long way,” says Naseer Nasim, senior vice president at Fiserv. “The differences between in-house and service bureau delivery models are narrowing.”
Strategy, not size, matters
In the traditional service bureau model, which is still the preferred outsourcing choice for many credit unions, vendors take over all core processing functions. Today, however, credit unions can choose from a variety of outsourcing options that let them retain more control.
At Fiserv, for instance, one option offering a high level of control is dedicated hosting, in which the service bureau assigns one of its servers to the credit union. “It’s similar to them having their own system in their own computer room,” Nasim says.
But the server is at Fiserv, and maintenance, upgrades, and security are Fiserv’s responsibilities, not the credit union’s.
During the past five years, Nasim has seen more credit unions—including some of the largest—opt for some type of outsourced core processing.
“Asset size no longer determines the best delivery option,” he says. “It’s more a matter of what the credit union’s business strategy calls for.”
Symitar also is witnessing a movement toward outsourcing, says President Ted Bilke. Current in-house clients are migrating over, and more than 50% of Symitar’s new core processing customers are selecting some form of outsourcing.
“We’re also starting to see a few billion-dollar credit unions make that choice,” Bilke says, “and I think we’re going to see more.”
Part of what’s driving the shift is cost, Bilke explains. Credit union delivery channels have multiplied, making constant, uninterrupted connectivity at multiple points critical. With that, the cost of in-house core processing has climbed.
He says Symitar now sees more instances where a service bureau doesn’t increase costs as it has in the past. “It’s actually becoming a savings opportunity.”
Still, the in-house model remains the top choice for many credit unions. In such cases, the key issue is maintaining total control of core processing, Bilke says.
Because outsourcing means giving up some measure of control, “you have to go into this with your eyes wide open,” he advises. “It’s difficult for a service bureau to be as nimble as you can be when you need to go into your system and change anything at any time.”
Failure to recognize that difference can lead to frustration with the outsourced model, Bilke says.
Freeing up resources
Control is a major issue, agrees Daryl Tanner, president/CEO of Share One, a core processing credit union service organization. But control brings with it major responsibilities, such as system maintenance and security.
The risk of cyber attacks, for instance, calls for constant vigilance. “That requires expertise—expensive expertise,” Tanner says.
A growing number of Share One’s clients are choosing the company’s hosted service model, which Tanner describes as a hybrid of in-house and service bureau options.
In the hosted service arrangement, unlike with Share One’s traditional service bureau, the credit union buys the license for the core processing software and uses Share One’s hardware to run it.
“We’re responsible for the security, backups, and disaster recovery,” Tanner says. “The rest is up to the credit union.”
That allows the credit union to run processes and reports whenever and however it wants. And if at some point the credit union decides to return to an in-house system, it already owns the software.
“You have that freedom of choice,” Tanner says. “You can go to your board and say, ‘We’re not locked into this.’ ”
East Idaho Credit Union in Idaho Falls switched from in-house core processing to Share One’s hosted service model in mid-August. A major draw was being able to free up information technology (IT) manpower, says Don West, IT manager for the $268 million asset credit union.
With the hosted service solution, his crew still has control over day-to-day operations. The credit union can, for instance, add a new employee user to the system without having to ask the service bureau to take care of it.
At the same time, East Idaho doesn’t have to worry about hardware issues, system updates, security patches, and disaster recovery.
“That’s all taken care of,” West says. “When we come in Monday morning, we just push the new system load out to the machines. When we were in-house, I had to come in at 5 a.m. to do that before everybody showed up for work.”
Still, West admits he had some reservations initially about switching to outsourcing. “I didn’t want my system somewhere else where I didn’t have access to it.”
He also wondered if he’d become less valuable to the credit union. But he got past his doubts.
“Keep an open mind,” West advises.“You have to weigh the pros and cons. And for us, the pros far outweighed the cons.”
Tapping deeper resources
The departure of a lead IT person spurred $70 million asset Cintel Federal Credit Union in Cincinnati to shift to outsourced core processing in 2011, says CEO Bill Zimmer. He knew hiring a replacement to run the credit union’s complex system would be a challenge given limited expertise among the local labor pool.
Not only that, Zimmer’s 18 years of experience as the secretary-treasurer of Cincinnati Bell convinced him that an operation such as Cintel Federal needed two backup IT people—not just one as before—to ensure continuity of operations.
Hiring one replacement and a second backup in the IT department was challenging enough, but Zimmer also faced some hefty capital expenditures. Scanning protocols were changing, he explains, which would have required $40,000 in new software purchases.
This combination of factors convinced Zimmer his credit union could no longer support core processing in-house. Not only has outsourcing solved the IT expertise issue and budgetary dilemma, Cintel Federal also enjoys access to deeper IT resources, Zimmer says.
“A smaller institution can’t run maintenance cycles at odd hours like a 24/7 data center can,” he says. “So now we have better up-time and better performance on our metrics. Our members get better service. I’m convinced we made the right call” in deciding to outsource.
That’s not to say he didn’t have trepidations at first. Zimmer wondered, for instance, if the local area network delivery was good enough to ensure reliable connectivity to the service bureau. “Fiserv sent a team to help us assess that,” he says.
Also, with outsourcing, IT staff might miss being more hands-on, Zimmer says. But that’s tempered by certain benefits.
Now Cintel Federal’s lead IT person doesn’t have to run updates at 2 a.m. on a Saturday. And she has time to talk to members about how to improve online banking and other services.
“We’ve taken her skills and moved them up-market,” Zimmer says.
He advises credit unions choosing between in-house and outsourced options to examine their capital costs, operational vulnerabilities, and IT staffing levels. Don’t just assume, he advises, that if you lose your key IT person you’ll have the necessary backup expertise.
“You might think Joe in IT is ready,” he says. “But there may be something he had a week of training on back in 2008, and you’ve done seven upgrades since then. You need to do a candid assessment of how prepared you actually are for your key person’s departure.”