ATM Sourcing Strategies: Get What You Pay For

In today's retail banking landscape, the role of the ATM can vary from delivering basic "cash-and-dash" functionality to conducting a variety of sophisticated, value-added transactions.As this environment continues to change, it is becoming clear that the cheapest ATM sourcing deal is no longer the prime objective. Rather, an effective arrangement supports business objectives. For a no-frills self-service strategy, cost efficiency is imperative. A high-end approach, meanwhile, requires appropriate investment in service and support levels, expertise and performance targets. The trouble is, ATM strategy is often misaligned with the sourcing solution. As a result, many banks overpay for basic ATM functionality, or under-spend and miss opportunities to leverage the ATM for competitive advantage.

An effective ATM sourcing strategy is comprised of three elements. First, a self-service vision must be defined and communicated to relevant business and operational stakeholders. Second, a detailed baseline of existing ATM operational costs and service levels highlights performance gaps and helps the institution understand the extent of change needed. Finally, a business case is needed to define the operational requirements to effectively support the strategy and optimize the contribution of the ATMs.

Sharing the Vision In the real world, a bank's self-service strategy often fails to link to an ATM sourcing solution. In some instances, banks simply lack a clearly defined strategy; in others, the strategy has been defined, but has not been adequately communicated from the strategists to the operational team responsible for developing and implementing the sourcing arrangement. Without a clear vision of the ATM's role to drive the discussion, the client organization becomes a reactive player in the sourcing negotiation. Rather than driving the process by defining requirements for the service provider to address, the client simply responds to vendor proposals developed more or less in a vacuum.

Effective communication can be achieved through relatively simple and straightforward means such as workshops facilitated by a third party with in-depth understanding of sourcing best practices as they relate to IT/business alignment in general, and to ATM deployment and support in particular. The business objectives for the ATM should then drive the ATM sourcing solution-one that supports an appropriate balance between cost reduction, customer service and revenue enhancement.

The Baseline Assessment Once the business vision is defined and communicated, a baselining exercise delivers three key findings:

• Insight into the strengths and weaknesses of the existing arrangement. • Assessment of the potential value of a new arrangement. • Definition of sourcing options, costs and potential benefits.

Baselining analyzes how existing services and processes are delivered compared against the external market and leading practice. The objective is to identify cost reduction and service improvement opportunities, rather than to assess whether services are appropriate in terms of strategic alignment.

Defining an "apples-to-apples" comparison is especially critical in an ATM environment. Maintenance costs for high-value multi-functional ATMs with cash recycling capabilities are generally 30 percent to 40 percent higher than basic "cash-and-dash" machines. In addition, remote machines are more costly to support than branch machines.

Moreover, service level requirements have a significant impact on costs. Typical target availability levels are 95 percent to 96 percent, but increasing that by just two percentage points will cost considerably more, particularly if the supplier has to undertake regular "out-of-hours" maintenance to achieve the target.

Technology maturity is another important consideration. Broadband connectivity, remote fixing capability, real-time monitoring, cash recycling and automated deposit functionality all have an impact on ATM performance. An outdated operating system that lacks the capability to support such functionality will have an impact on overall ATM estate performance. This must be considered in the service analysis.

Also to be included in the benchmark analysis are in-house staff. They often play an important role in ATM operations, in first-level maintenance, branch cash replenishment and other areas. They are often omitted in practice, leading to skewed findings.

Building a Business Case Following the baseline analysis, a business case can be developed to define operational needs and a change plan in the context of current state and future vision.

Issues to address include:

• How appropriate is the existing sourcing arrangement to the business vision? • What machines, infrastructure, and processes must be added or changed to enable the vision? • How much investment will be required? • How long will it take?

In this context, the sourcing strategy focuses on delivering the operational support required to optimize the bank's self-service strategy and overall operational efficiency. For example, if the strategy is to take a cost minimization approach to ATM deployment, the sourcing business case should focus on accommodating that goal of cost reduction. Similarly, if the objective is to use the ATM as a value-added service offering, the business case must justify the higher operational price tag associated with implementing that strategy.

Roger Warner is a managing consultant with Compass, a global management consulting firm specializing in business and IT operational improvement.