ABN Amro Bank, the world's 16th-largest bank, announced last week that an experiment with outsourcing Web hosting has paid off with savings of 25 percent.
The bank's outsourcer, San Francisco-based Digital Island Inc., is hosting eight Compaq 5500R data servers in a London data center. Digital Island is also providing networking and security for the Amsterdam-based bank's global financial markets e-commerce site.
It's an unusual move for a large bank, said Octavio Marenzi, the managing director of Celent Communications LLC, a consulting firm in Boston.
"Typically, the smaller banks do this," Marenzi said, explaining that large banks tend to have some qualms about outsourcing because they're concerned about control and security.
Security is a major concern, according to Debra Rossi, executive vice president of business Internet services at San Francisco-based Wells Fargo & Co., which hosts its Web sites in-house.
"You want to have proper controls in place to manage customer information," said Rossi.
ABN Amro's outsourcing decision is unusual not only because of the bank's size, but also because it deals with a corporate banking service.
"It's more frequent on the retail side," Marenzi said.
Downsides to outsourcing include loss of control and increased complexity.
"There's one more vendor relationship to manage," Marenzi said. "If something goes wrong, it may be harder to track down where."
On the plus side, the vendors are able to spread the costs over a large number of users - making a 25 percent savings figure reasonable, even conservative, he said.
According to Digital Island spokesman Paul Abbott, the ABNAmro site handles $100 million in transactions daily and focuses primarily on offering bonds and foreign exchange transactions to the top 250 global institutional fund managers.
The bank expects the site to handle $1 billion in daily transactions within a year.
"ABN Amro expects its wholesale client business to increase exponentially in the coming years," David Woods, the bank's managing director for e-commerce, treasury and fixed income, said in a statement.
Outsourcing the hosting offered a scalable and a secure environment for the site, he added.
Faster to Market
By going with Digital Island rather than hosting the site in-house, the bank was able to get to the market faster and save money, according to Abbott.
Digital Island takes care of the physical equipment and the operating system, he said. "We control the physical security and the logical security in and around the box. The bank manages and owns the applications," said AbbottOther Digital Island bank customers include J.P. Morgan Chase & Co., whose backup system is hosted by Digital Island.
The main reason the bank chose to outsource this function was speed of implementation, said Edmond Altonji, vice president and project manager of LabMorgan, J.P. Morgan's technology group.
According to Altonji, LabMorgan selected Digital Island in June, and the backup site was up and running by the end of September.
"We also wanted it off-site," said Frederick Loder, Lab Morgan's vice president and director.
LabMorgan wouldn't disclose the costs involved in the project, but Altonji said that cost savings weren't a factor in the decision. "We did not believe that an external provider could do it cheaper than we could ourselves," he said.
Currently, the bank uses Digital Island to mirror its static Web pages. Individual business units also have the option of serving dynamic pages and offering backups of business applications.
Sometime in the second half of the year, the bank also hopes to begin using the Digital Island facility to handle some of its ongoing Web traffic in order to improve the performance of its Web site.
Loder added that the bank didn't have to sacrifice security in the process.
"We are able to control the architecture, have a dedicated network and proscribe the security requirements that meet our standards," he said. "From a security perspective, it's just like our own infrastructure. We have remote full monitoring capabilities, diagnostic capabilities. It's a cage with servers in it, and we do everything else. [Digital Island] won't even enter the cage without our permission."