Hot Summer Matches Heat in a Banker's Kitchen

Most parts of the U.S. are experiencing a hot summer, noticeably above average in heat, and in many cases humidity too. I am reminded of a phrase attributed to President Truman, "If you can't stand the heat get out of the kitchen."One interpretation of this phrase is that if you can't cope, or handle the workload, then have someone else who is capable of doing the work take over.

As I have noted on several occasions, the number of banks continues to shrink one way (FDIC failure) or another (voluntary merger or acquisition), which is tantamount to being foreclosed upon (by the FDIC) or selling the house and retiring to some other location (and getting out of the kitchen voluntarily). I expect there will be about 4,000 more "net" departures by banks and credit unions over the next five to seven years. Beyond the issue of a bank or credit union remaining a survivor in this industry is the answer to how they prefer to run/operate their own kitchens, preparing and serving meals. Do the bank executives like to buy the groceries, cook and serve the meals and cleanup? Another key answer is determining the type and quality of prepared meals the banker wants on a daily basis. Will quality cafeteria-like or chain restaurant meals be sufficient? Readers can use their imagination to fill out the range of food preparation and dining requirements.

This "heat in the kitchen" analogy is also driving the intensity and quality of competition to a higher level than ever among the surviving bank technology vendors, who are equivalent to the food service suppliers that operate the kitchen and feed a bank and its customers. The largest bank technology vendor, FIS, now cites even larger horizontal technology vendors like IBM, Oracle and SAP as its main competitors in the future. No doubt Oracle and SAP like to be thought of in that context. For IBM I'm not so sure that is true with its partner-based business model. I think IBM wants to sell all the kitchen equipment, the various cooking and meal preparation supplies with some services added on the side. IBM divested itself of banking software assets over the past 15 years (e.g., sold its Hogan stock, transferred its core banking software to FIS's predecessor, Alltel). IBM has added to its portfolio by buying Lotus, Rational, Tivoli, and Cognos, to name a few vendors.

So what should bank executives who plan to survive do about the kitchen and cooking? Clearly, bankers have a choice -- there are two camps: outsourcing and in-house. As several other industry veterans have noted, there is no one answer that covers all banks and credit unions. Many institutions from each camp succeed and are satisfied with their choice. Some institutions do some of both and are successful. Each institution has its own strategy, culture, needs, and preferences, including the level of focus and commitment to in-house or the preference for outsourcing. One task every management team must do well is to figure out what they need to eat to stay healthy and grow by successfully satisfying their customers and employees. For management teams that are contemplating a change in their kitchen/cooking regimen, another important task is to carefully check out a vendor's reference institutions that have a similar set of menu requirements. At the end of each day, management teams should be satisfied that the "heat in the kitchen" is not oppressive or suffocating and the quality of the meals and service is between good and great.

Then there is the matter of paying for the meals and service, either in-house or outsourcing. I'm reminded of another phrase, "champagne taste on a beer budget." We'll save a discussion of that analogy for the next column.

Bill Bradway, founder and managing director of Bradway Research LLC, analyzes the business strategies and IT investments of US banks and credit unions.