In the ever changing banking industry, First Fidelity Bancorp had grown to be one of the largest holding companies of eight financial institutions and over 500 branches. Their growth has been through the acquisitions of other smaller institutions and internal growth generated by strong relationships with customers. This growth has come at a cost and First Fidelity has been left with a complicated mix of systems, operations, and organizational culture.
First Fidelity allowed the eight financial institutions to operate totally independent of each other and the corporate office solely managed the integration of the financial reporting responsibilities. The non-integration of systems and operations has also left First Fidelity with higher costs and the need to make changes which will allow them to be competitive in the future. By the early 1990’s First Fidelity had begun to integrate some of the operational functions, but had yet to connect them further.
Due to changes in banking regulation, the US government had begun cracking down on new rules on financial reporting, asset quality, and capital requirements for the banks. The government wanted better controls from upper management and the only way First Fidelity could accomplish this was to integrate systems, management, and combine all eight financial institutions into a more consolidated with less autonomous feel. Management made this their highest priority and put a strict deadline of 18 months on this task.
This deadline put two major decisions directly ahead of First Fidelity, organizational structure and method of achieving the full integration. In order to evaluate the full impact of their decision on organizational structure changes, First Fidelity looked at the following criteria: • Cost Effectiveness • Responsiveness to Business Needs • Responsiveness to Individual Needs • Ability to Standardize Products and Service Offerings • Ability to Support Outsourcing Options • Ability to Support Acquisitions • Service/Quality Orientation/Incentives
While these criteria would decide what organizational structure First Fidelity would have, they also had to decide how the rationalization and consolidation plan should be conducted, internally, through the use of consultants, or through outsourcing. First Fidelity saw outsourcing as the most viable solution to their problem and felt it would best serve the company by achieving the goals in the desired time frame. First Fidelity has recognized several potential outsourcing vendors and determined the advantages and disadvantages of each vendor.
Their decision now must be to select the proper vendor who will provide them not only with the services needed to move them through the rationalization and consolidation process, but one which will provide quality services and cost savings to First Fidelity for years to come. Changes to Organizational Elements The major change First Fidelity will be forced to deal with is the change to their organizational structure and hierarchical relationships within the firm. Prior to the rationalization plan, First Fidelity operated as eight separate financial institutions.
Decisions were made independent from each other and there was no single person to oversee all operations from the holding company point of view. When Don Parcells was put in charge of all operations, and improvements were needed immediately, he put a plan in place to consolidate functions and make First Fidelity a more cost efficient organization. In order for this to become a success, First Fidelity was going to first have to restructure their separate cultures into a single unified culture.
Parcells was planning on consolidating the separate operations and systems which the eight banks used. To make this a success, all parties need to be thinking in the same direction and accepting of the upcoming changes. Parcells task of unifying First Fidelity under these same systems would not be a success if the current management did not understand the reasoning behind the changes and understand the “big picture” of increased profits and long-term sustainability of First Fidelity. Current management would also be forced to deal with changes in management structure.
This will give the First Fidelity corporate office more control over the eight banks and ensure the banks operate in a consolidated manner once the initial changes are implemented. Systems Integration The importance of systems integration goes well beyond the cost efficiencies First Fidelity hopes to experience. The system changes will put one face on the eight financial institutions and will provide them with the ability to accomplish many of the goals mentioned before under the criteria for organizational structure changes.
First Fidelity should also take this opportunity to take advantage of the best practices which can be found through their analysis of their own internal operations and systems, external competitors, and the potential third parties they are analyzing for outsourcing opportunities. As the 25th largest bank holding company, First Fidelity has the potential to take advantage of improvements in technology. By decreasing their transaction costs through technology, First Fidelity’s high volume will allow them to take advantage of economies of scale.
An integration of systems will also make First Fidelity a much more attractive candidate for merger activity. They will either be able to expand and make new acquisitions integrate more smoothly into the First Fidelity family, or make themselves more attractive as an acquisition target. Outsourcing at First Fidelity First Fidelity is in a very difficult situation. The short time period in which First Fidelity has to turn around its operations and systems does not ffer First Fidelity many options. They are seeking a simple solution to a problem which should have been addressed a decade earlier when they had begun merging the banks under one holding company. When considering the use of outsourcing, businesses should not rush this decision and should analyze what functions and how important these functions are to the business. As a general rule, core functions should not be outsourced to third party vendors.
Only non-core functions should be considered, and only when significant cost savings will be made and the vendor offers a long-term, high quality service which will not have a negative impact on the customers of the outsourcing firm. First Fidelity needs to consider whether their systems and operations are part of their non-core functions and will truly add value through cost savings. Long Term Implications of First Fidelity Decision First Fidelity’s decision to outsource will have long term implications on the future of their banking operations.
When First Fidelity began investigating the decision to outsource in 1990, one important variable would be the future of banking and which technologies would be the future of bank operations. The upcoming jump in the use of technology in banking will have a major impact on the systems necessary to be successful in banking. This offers even greater risk for outsourcing, since First Fidelity will be giving up much of their control of their technology.
The Decision and Future of First Fidelity. First Fidelity did decide to use EDS as the company which will handle their software systems and data center operations. The contract was valued at $450 million over ten years and was considered the largest outsourcing contract for financial institutions at that point in time. In 1996, First Fidelity merged with First Union, in what was then considered one of the largest mergers in the banking industry, and made First Union an imposing force in banking along the east coast of the United States.
One of the major factors for the merger was to add additional economies of scale to First Union’s operations and to decrease the high costs of technology which banks were experiencing. First Fidelity’s decision to integrate their systems in 1990 came at an integral point in time for the bank holding company. It provided them with cost savings and made them a strong acquisition target by un-complicating their systems and making their operations more efficient.