Outsized Outsourcing

Arizona bank extensively uses third-party service providers

By Judith Sears

For Mary Lynn Lenz, president and CEO of Foothills Bank in Yuma, Ariz., outsourcing is an ace that community banks could play to greater competitive advantage. The $320 million-asset community bank has outsourced many functions as a cost-saving approach, including its asset-liability management, audit, loan review, shareholder services, IT core processing and IT administration, and human resources.

“It would be easier to list what we don’t outsource,” Lenz laughs.

Lenz champions outsourcing for two main reasons: cost-efficiencies and access to greater expertise. For example, handling asset-liability management in-house requires purchasing sophisticated software and having staff onboard with the necessary expertise to run the programs and evaluate the results.

Every community bank outsources some measure of its operations. As a result, regulators have placed a high priority on vendor management, including vendor due diligence. The financial case for doing more outsourcing for cost savings and greater

“By leveraging partnerships with vendors, we can have the same level of expertise that a multibillion company has.”
—Mary Lynn Lenz, Foothills Bank

profitability is obvious, Lenz says. In addition, third-party vendors often can get more competitive bids for services, further lowering the bank’s costs, she says.

With 52 staff members, Foothills Bank doesn’t have great leverage when shopping for employee benefits. But going to the benefits market with a preferred employment organization that represents hundreds of thousands of employees automatically positions the bank for better pricing. The result: Employees get better benefits at a more affordable cost to the bank, Lenz says.

Outsourcing also can allow a community bank to access greater expertise. Lenz has found this especially helpful in fields where changes in the regulatory environment are nearly constant. “We do a good job, but it helps to have vendors that are constantly in touch with new developments and requirements,” she says.

Third-party service providers also have access to best practices across the industry, further broadening the scope of solutions available to the bank. “We’re not limited by the constraints of a small community bank. By leveraging partnerships with vendors, we can have the same level of expertise that a multibillion company has,” Lenz observes.

Outsourcing can be empowering, but it won’t run on autopilot, Lenz points out. To outsource more functions successfully, she urges community banks to exercise strict oversight of vendors. For example, when running interest rate sensitivity tests, Foothills Bank gives its asset-liability management vendor the bank’s budget and forecast and agrees with the vendor on interest rate assumptions.

“We control the inputs and drive the ALM process,” she explains.

Foothills Bank also practices aggressive vetting of third-party vendors, looking at the vendor’s credit quality and talking to vendor references. The bank even talks to the vendor’s vendors to get a comprehensive understanding of their operations and partners.

Vendor oversight at Foothills Bank extends to taking detailed minutes of meetings with vendors and carefully documenting discussions of actions and activities with the bank’s board of directors and audit committees. Besides giving the bank’s management peace of mind, careful oversight demonstrates its due diligence to regulators.

Finally, keeping bank employees in the loop is key to successful outsourcing in Lenz’s experience. Suddenly telling an employee that you’re taking away the human resource department or internal shareholder services functions can be disorienting, even if the bank can reassign the employee. “Communicate, communicate, communicate!” Lenz emphasizes. “Explain why the bank is going through the transition and what the benefits are.”

Judith Sears is a writer in Colorado.