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10/29/2004
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SmartAdvice: Small Banks Should Use An ASP And Their Agility To Differentiate Service

As more banking moves online, small and midsize banks must use their agility to keep customers, The Advisory Council says. Also, Google has to sharpen its focus to be competitive in enterprise search; and a CIO must develop staff leaders to enhance the business.

Editor's Note: Welcome to SmartAdvice, a weekly column by The Advisory Council (TAC), an advisory service firm. The feature answers three questions of core interest to you, ranging from career advice to enterprise strategies to how to deal with vendors. Submit questions directly to smartadvice@tacadvisory.com


Question A: For what applications should a midsize retail bank consider application service providers?

Our advice: All of them.

The Underlying Question
Beneath the ASP question is the fundamental business question of how a midsize retail bank can compete effectively with Bank of America. Bank of America has a huge advantage in number of branches, number of ATMs, and number of application programmers (not to mention assets). And it does a great job training its branch personnel (and especially its "Premier Banking" staff) in "friendliness," so the standby of "we're friendlier," though it's a favorite of medium-sized bank ads, doesn't really cut it.

The good news is that parts of Bank of America's size advantage (the branches and ATMs) are becoming irrelevant. A growing segment of the population does its deposits electronically, its transfers and payments on the Internet, and its cash withdrawals at the grocery store.

Even more good news can be found in the ability of a midsize bank to be more agile than Bank of America, by which we mean more flexible in policy and faster to adopt new technology.

As regards policy, present Bank of America with a financial request that doesn't fit neatly into a paragraph in the policy manual, and the place goes helpless. With fewer layers of management, your institution can be far more responsive.

That leaves "speed in adopting new technology," which gets directly to the ASP question.

A Fable (told as a fairy tale, but true): Once upon a time, there was a large savings and loan association that discovered that its savings accounting system was broken, and that the fixes required were severe. The CEO asked a computer vendor if a new computer system could be installed in 90 days, and was told that the only way was to install an application package "as is," i.e., to make policy changes instead of programming changes wherever there was a conflict between the package and association policy. The package went in on time; it required that the board make about a dozen changes to policy. Upon examination, it turned out that the policies replaced were either illegal or less profitable than the package's approach.


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The moral of the story is that a midsize bank can install a new application even faster than Bank of America if it's willing to focus differentiation on new features and services, and not on different ways of doing core service.

In-House Or ASP?
There's no question that a small in-house staff can install new applications quickly on modern platforms. Nor is there a question that modern platforms can be honed to produce cost parity (or even a cost advantage) with Bank of America on a per-account-per-month basis. Furthermore, it's possible that a well-managed in-house system can achieve a cost advantage over an ASP approach.

The real question lies in agility as a strategic differentiator. If you're serious about being more agile than Bank of America, then you have to keep focused on policy flexibility and technology leadership. To preserve technology leadership, it's important to be willing to abandon an installed application in favor of a better one. Unfortunately, it's human nature to fall in love with work well done, which means you may develop a dangerous loyalty to a well-managed in-house application. (And your accountants may develop a dangerous loyalty to un-depreciated book value.)

Do consider the ASP approach. Should you adopt it, remember that it's all about agility. Pressure your vendor for new features, and be willing to swap vendors to get them.

--Wes Melling

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