National Bank Financial, the wholly-owned brokerage arm of National Bank of Canada, has signed a $134 million IT outsourcing agreement with IBM Canada Ltd. National Bank of Canada is one of the first Canadian banks to turn over its brokerage IT operations to an outsourcer.
Under the eight-year agreement, IBM will run National Bank Financial's information technology operations and its applications development. It will also take on most of its technology staff of about 115, leaving behind a core IT group, which will be responsible for determining strategic technology initiatives, such as IT architecture and deciding what technology the brokerage needs to build as markets change and develop. The group will also be responsible for managing the outsource agreement.
The deal comes 15 months after National Bank of Canada signed a C$700 million, 10-year agreement with IBM to continue managing the IT operations of the bank's infrastructure, including its Web environment and call centers. National Bank originally outsourced its IT initiatives to IBM in 1994, becoming one of the first Canadian banks to embrace IT outsourcing. Since then, a number of Canadian banks have struck multi-million dollar arrangements with either IBM Canada or EDS Canada for a range of IT services.
National Bank, which has more than 546 branches and C$75 billion in assets, is now drilling outsourcing deeper into the organization to cover its brokerage arm, National Bank Financial, which employs 3,100 people in more than 100 offices across Canada.
The deal follows JP Morgan Chase's seven-year, $5-billion outsourcing agreement with IBM, under which JP Morgan Chase will turn over its data processing technology infrastructure, including data centers, help desks, distributed computing, data networks and voice networks to IBM, including the transfer of 4,000 employees.
The National Bank Financial deal "leverages off the parent bank's original outsourcing deal with IBM and provides the brokerage firm-one of Canada's largest correspondent brokers-a "deeper relationship" with its back-office partner, said David Wood, executive vice president at National Bank Financial.
The firm has long used IBM's securities platform for its core back-office system and has added to that over the past 15 years by building its own middleware applications, such as trade calculation tools, and adding technology it acquired while growing through acquisitions.
National Bank Financial is outsourcing from a position of strength, Wood said. "We had a very good reputation on the Street for technology. I think we were in good shape and our technology is as good as anyone else's in Canada."
He added, "Some people outsource when they're in trouble. We outsourced at the top of our game."
In order to compete, though, National Bank Financial needed more scale. "We're just not big enough," Wood said. That prompted it to propose a strategic relationship in which it would turn over its technology, staff and know-how to IBM, which would then enhance its core brokerage system and market the new offerings to other clients.
"It was a chance to completely redesign our technology strategy, leveraging off our core supplier," Wood said. Some of the technology it turns over will remain exclusive and "we will not share it with the rest of the Street," he added.
Still, he noted, technology is quickly commoditized, and something considered leading-edge today could be obsolete within months.
The brokerage business is a "tough marketplace to be in," said Martin Landry, managing director of financial services at IBM Canada Ltd. "Margins are tight. Everybody is striving for additional efficiencies." The deal, he said, will create "a much more efficient IT environment." More bank-owned brokerages will consider similar moves, he predicted.