When a credit union approachesthe all-important task of determining whether to reach out to aservice bureau or assume all related responsibilities to maintainan in-house data processing system, a number of quandariesimmediately arise.

The first issue centers on the asset class, size and geographiclocation of the credit union. For many small-to-mediumorganizations, the ability to effectively oversee an informationtechnology operation is not feasible and therefore relying on athird party is essential to success. And for larger credit unions,with a dedicated IT department, it may be prudent to handle alloperations in-house, which provides more flexibility when selectinghardware, software and third party solutions, as well as dealingwith contract negotiation of services.

The Business Performance Innovation (BPI) Network, inassociation with Paladin fc, released a report in May 2013 titled,“How Core Vendor Contracts Impact Bank and Credit Union Value.” Thereport found that 90% of respondents added to their core bankprocessing and related IT services in the past three years.Seventy-four percent expect to make additions in the next threeyears.

In-House vs. Service Bureau

The decision whether to go in-house or select a service bureauis closely tied to the complexity and asset size of the creditunion. There are inherent benefits to opting for a service bureauas these credit unions have a “dedicated box” of IT services. Thisapproach simplifies the IT management process and provides a senseof security and relief, especially with issues of compliance,security and disaster recovery, among other action items.

A credit union that has placed its confidence in a servicebureau must believe that all related IT contracts are beingactively negotiated in this time frame. This, however, is afaith-based approach as they are not privy to the contractnegotiations between its service bureau and the third-party vendorsproviding services.

For a larger credit union with an IT department, the sameconcern arises. It is one thing to have the technological know-howto manage vendor projects, especially as they relate to core systemoperations, but understanding the varied contracts timeframes andstipulations is another challenge.

Therefore, it is critical to understand that contractnegotiations should include a “long-term view” approach. The BPINetwork report found that credit unions with $500 million to $1billion in assets “appear” to have the greatest opportunity toreduce costs, with an average savings of 29.1%, or approximately $1million over a five-year contract.

Next Page: Reality Checklist

Perception vs. Reality: Checklist toSelecting

In-House

1. Independence. Perhaps the leading reason a credit unionselects in-house is the perception that it will be able tooperate independently. The reality is that the creditunion is limited by the flexibility and capability of the system.For example, how easily can the IT department create interfaces orcustomize and manipulate data?

2. Lower Costs. While the perception is true that acredit union operating an in-house system will pay less annually,the reality is that the organization is taking on moreresponsibility. Therefore, senior executives have to employ a10-year view and determine the “all-in” costs, which includehardware, software and manpower.

3. Service Quality. The perception is that by selectingvendors for specific solutions rather than an umbrella servicesystem, the level of service per contract will be elevated. Thereality is that since the Great Recession, there has beena change in vendor attitude, which has adversely impacted serviceand is not in line with the cooperative spirit of creditunions.

Service Bureau

1. No Independence. While the perception is that allservices are operating under one system and one point of contact,the reality is that many of these services are outsourcedfrom the hosted core provider. As a result, credit unions loseinteroperability with key third-party interfaces. Senior executivesmust determine the “all-in” cost per member over a 10-year period.At a certain point, there will be a financial inflection pointwhere switching to in-house is cost effective.

2. Assets. The perception is that credit unionsselecting a service bureau are operating at a lower asset class andwithout an IT department. The reality is that in manycases this theory holds true; however, the followingcharacteristics must be considered: geographic location (larger butrural credit unions are at a disadvantage), infrastructure, cultureand financials.

3. Aging Technology. The perception is that servicebureau core systems include cutting edge technologies; thereality is that the ratio of old, proven technologycompanies to new technologies is increasing. As such, there is moreconcentration on service bureaus “patching” together older legacysystems than developing cohesive, up-to-date solutions that lookpast the present and determine future technology needs.

Parting Thought

As more vendor consolidation is realized, credit unions mustunderstand that it is not merely a question of selecting a servicebureau or an in-house core data processing platform based simply oncost. Credit unions should never generalize services over cost.This is dangerous and often detrimental to the overall well-beingof the credit union construct.

Sabeh Samahais president/CEO of SamahaAssociates in Chino Hills, Calif.