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Outsourcing of Banks

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Abstract

Outsourcing can be viewed as a management activity whereby part of the tasks of a business firm is delegated to an outside firm. The delegation process is usually a contract between two companies whereby one of the companies specializes in some technical tasks. The jobs which are outsourced are usually those which special skills or are not necessary directly related to the core activities of a company though they act as auxiliary services to the company carrying out the services. Some of the examples of the jobs which are commonly outsourced are payrolls, call centers and e-mail services. The firms which offer outsourcing services in most cases are located oversea and it is reported that the services that they offer are quite cheap at quite quality services.

Introduction

Managing of businesses in the modern day economy has continuously become challenging due to complexity associated with carrying out of businesses. The corporate leaders have continually found it challenging to train new employees to carry out additional tasks to ensure that the businesses they run operate in an efficient manner. Business applications have become so diverse that it has become so expensive to continually keep on training and employing more people to keep the business. This has been the case all round for all the business. The banking sector has not been an exception and has been most affected mostly due to the e-commerce business application which has well integrated well with the banking sector. To cut down on the expenses, banks have resorted to outsourcing some of their duties to outside bodies some of which are foreign organizations. This has brought forth much debate from various backgrounds posing various arguments on the issue of outsourcing. There have arguments to the effect that outsourcing is quite effective and make and banks and other organizations operate effectively and smoothly. It is further argued that outsourcing offers high quality services at very competitive prices. This, it is claimed has the effect of boosting the economic position of the company carrying out the outsourcing activities. This is affirmed by the fact business are no longer vertically integrated and as such need to explore ways of making horizontal integration in an effort to maximize value added business process.

This is a research proposal which will examine the effect of outsourcing by bank in the United States. The proposal gives an outline of how the research will be carried out what is expected. The proposal also reviews literature on the issue of the outsourcing and airs the opinions of various authors in this field of management. Generally the proposal will seek to examine whether the outsourcing activities by the American Banks are of any benefit.  

Chapter one: Introduction

Background to the study

Ketter (2006) argues that the ever changing business environment has been the chief trigger for the outsourcing activities among business firms in the modern society. The process of globalization has equally participated in the hastening the process of noutsourcing activities: this happens because of thr increased competition and hence the need to cut down on the costs and at the same time to upgrade the quality of the services that are offered to the clients. This is very evident for the case of the banks in the U.S. setting. Outsourcing has given the U.S. banks cheap and quality services and as such as become quite popular and as garnered much attention from many firms.

Objective of the Study

This study will seek to examine the effect of the outsourcing activities on the U.S. Banks. In order to achieve this, study will seek to answer the following questions.

  • Why outsourcing has become quite popular among banks in the recent past
  • Identification of the relationship between outsourcing and effectiveness in the banking sector
  • How third parties view the outsourcing activities

Significance of the study

This study is quite significant as it examine a current practice whose popularity is rising rapidly. The study is expected to shade more light on the issue of outsourcing by American business firms. It is expected that the study may also reveal any future impact on the U.S. banks due to overreliance on the outsourcing process.

Scope of the study

The study will make use of a number of methods in carrying out the study. The proposal examines the views of literature with respect to the topic of outsourcing by business firms especially by the banks. On the literature analysis the proposal makes use of peer reviewed journals among other academic materials.

Research Question

The proposed research question for the study is, “is outsourcing beneficial towards improved effectiveness and competitive advantage with respect to U.S. banks.”

Research Design

The views of Jankowicz (2005, 196) on the issue of research design are that, “a research design is a structured approach to data-collection that neatly and economically addresses the research question, answering the hypothesis or resolving the argument involved.” According to Seltiz et al., (Jankowicz, 2005, p. 196), “a research designed can be viewed as deliberately planned arrangement of conditions for analysis and collection of data in a manner that aims to combine relevance to the research purpose with economy of procedure.” This study will base its research design on the above definition. This study will make use of the literature review. This will be substantiated with interviews.

The researcher will interview the human resource manger of Citigroup bank to help in getting an idea what outsourcing means to the banks.

Chapter Review

The benefits of outsourcing have been hotly debated. Diverse arguments exist on whether the outsourcing does any good to the U.S. banks. There exists a general feeling that though the banks benefit from the low prices for the tasks that are outsourced the banks in the long run will end up being disadvantaged. This section reviews the opportunities which are brought about by the outsourcing activities as well as the disadvantages which come along. The positive impacts are reviewed first.

Positive Impact of Outsourcing on U.S. Banks

Focus on the core activities

It has been argued that outsourcing of some duties makes it possible for banks to engage in activities that are core to their business. When banks grow, the back office duties increase in quantity and sometimes take up good amount of time. At times there is a likelihood of arising of conflict of interest in terms of time allocation to the various duties available. This may take time which should be dedicated to carrying out of the core activities. To avoid such mistakes from taking place, banks more often than not make decisions to outsource some of their back office duties to the other firms which specialize in the those duties (O'Sullivan, 2009). Outsourcing of some of the back office duties to other firms will make it possible for a firm to specialize in the core activities.

Reduced Overhead

In cases where the overhead costs of performing a given back office function is very high, outsourcing becomes a better option. This becomes possible when carrying out the task within the organization gives negative implications on the financial status of the organizations. A good example is when a growth in an organization has led to increased office activities which calls for acquiring of more office space. In such a case it becomes cheap to outsource some of the office tasks to avoid getting more office space. The cost of outsourcing these tasks is favorable to organizations financial wise than acquiring more office space which might prove to be quite expensive depending on the region of the office location. Activities which can easily be outsourced in such a manner include data entry. 

According to a survey carried out in 2008 on community bank competitiveness, it was shown that the banking sector has resolved to outsourcing most of the tasks which have been traditionally carried out by bankers. From the survey it was implied that the most significant task which required the direct personal touch of the bankers was the banker –customer contact (ABA, 2008).

Sundaramoorthy, Rieker, and Matthias (2004) discuss outsourcing with respect to global companies such as J.P. Morgan Chase & Co. and Citigroup Inc involvement in outsourcing activities. These companies, they argue, have turned to outsourcing of jobs as pressure as mounted on business firms to cut down costs. The authors however note that the small financial groups are reluctant to go offshoring. The authors found out that most of the banks involved in the outsourcing activities only outsourced technology and not the activities that touch on the interactions with the customers (Sundaramoorthy, Rieker, & Matthias 2004).  

Operational Control

Outsourcing has been found to be quite significant in cases where some operations are running out of control. Departments that may have over time got involved in uncontrolled operations can be considered for outsourcing. This is because an outsourcing company is likely to bring in more expertise and manage the department better than the organization could. This can occur in the area of Information Technology where most bankers are not well skilled due to the nature of their careers (O'Sullivan, 2009).

Staffing Flexibility

Outsourcing makes it possible for banks to meet cyclical demands by bringing in additional resources when they are needed and releasing them when they are no longer needed. An instance of this happens in the accounting department. During the auditing period and taxing season a bank can outsource of the tasks in this department in the place of employing new taskforce which will be idle once the peak season is over.

Continuity & Risk Management

Outsourcing has been a frequent option during periods of high employee turnover. In such circumstances the continuity of a company is not affected as outsourcing will help to attend to tasks which are left unattended. This is quite significant as it helps banks to ensure that the level of service production is not affected (Sullivan, 2007).

Develop Internal Staff

Outsourcing of projects which require advanced skills not available within a financial organization helps in developing the skills of the internal staff. When the internal staff of a bank works alongside the outsourcing company staff the internal staff will tend to gain new skills which can be put to use in future as the need will arise.

Negative Impact of Outsourcing on U.S. Bank

Loss of Managerial Control

Outsourcing of tasks turns the management of a bank to another company. The managerial control is shifted to another company which operates on different standards. A general feeling is that the companies which take up outsourcing tasks are driven by the motive to make profits from the provision of their services and as such there is a likelihood of company standards being compromised.

Hidden Costs

Outsourcing involves the signing of contracts covering the details of the work to be outsourced. According to such contracts, services which are not included in the contract if offered are subjected to additional charges. Contracts in most cases require the use of lawyer services. These are additional charges which have to be incurred to ensure that the contract is not breached. It should be note that outsourcing companies have got rich experiences in these contracts and as such they are likely to take advantage of an organization (Berger, Dick, Goldberg, & White, 2007).

Threat to Security and Confidentiality

The operations of a bank depend on the information that keeps it operating. Outsourcing some departments or duties will lead exposure of some confidential information about a company. Outsourcing companies deal with a host of companies and as such confidential information might be at risk of being exposed to a rival bank or any organization which might be interested in the organization carrying out outsourcing.  With this in mind it is always advisable that organization make careful examination before choosing a company to outsource it functions to. It should also be noted that the process of scrutinizing which company to outsource function to is time consuming which might not be available (Berger, Dick, Goldberg, & White, 2007).

Quality Problems

Outsourcing companies are likely to compromise on the quality of the services especially when there is requirement that they should go an extra distance in their functions. The outsourcing company will aim at making profits out of the services it offers. The price of the contract is fixed upon the signing of the contract and as such the only way the outsourcing companies are likely to safeguard the profits they obtain is through the reduction of the expenses they incur. In the process of expense reduction there is a likelihood of quality being compromised.

It should also be noted that the company outsourcing its duties is denied a chance of responding to market dynamics. Banks, for instance, need high flexibility in the provision of their services failure to which clients are likely to be easily snatched by rival companies which take care of changes in the trends in the market. The outsourcing companies are less likely to respond quickly and appropriately business environmental changes since it will expense the outsourcing company.

Ramingwong, Sakgasit, & Sanjeev (2007) comment on the quality of the offshore sourcing in relation to the impact on cross cultural factors. The authors raise question of what they term as silence code whereby the company entrusted to carry out functions on behalf of another decide to keep quite even when the project which they have been entrusted to take up is not doing well. This is a big risk especially when the functions which are outsourced are major one which touches the operations of a company (Ramingwong, Sakgasit, & Sanjeev, 2007).

Tied to the Financial Well-Being of another Company

Outsourcing the functions of company ties it to the well being of another company. The effectiveness and operation efficiency of the company which gives out its function to be performed by another company will depend on the effectiveness of another company. If an outsourcing company runs down then all the companies whose functions were outsourced to that company are likely to be adversely affected or they may even run down (Berger, Dick, Goldberg, & White, 2007).

CHAPTER THREE - ANALYSES/INTERPRETATION OF RESULTS

Chapter Overview

This chapter is concerned with analyses of the findings in chapter two above in relation to the research question which seeks to examine the outsourcing practice by the U.S. Banks and its effect on the effectiveness and competitive advantage of the banks which carries out the practice. The chapter is divided into three sections as follows:

Reasons for Popularity of Outsourcing by banks in U.S

The popularity of outsourcing can be explained in three fold: reduction of costs; reaching for expertise; and meeting unexpected situations. Most of the functions which are outsourced are usually accomplished at lower charges than if they could be at home. This is biggest motivators for banks which carry out the outsourcing of their function. This is more so when the outsourcing is done overseas by companies from developing countries.

The second reason for the popularity of the outsourcing by U.S. banks is to obtain expertise bin areas where the banks are not able to meet the requirement of some specific tasks. This outsourcing is practiced within American and also from overseas. The third reason is the meeting of unexpected high demands for instance in cases of high turn over rates. 

The perception of Third Parties towards the Outsourcing Practice

The outsourcing practice by the U.S. Banks has faced much criticism with so many questions being raised on the practice. Generally, the public opinion is not against the outsourcing practice as whole a whole but only some level of the practice which seems to have a conflict of interest. Public opinion lies heavily against the outsourcing of jobs by the U.S. Banks to overseas companies. There are a multiple of reasons why the public is against this: job loss, devaluation of the dollar, making U.S. Banks dependent on foreigners, and enriching foreigner through the American Tax payers (issues of bailing out companies which dominantly outsource foreign expertise). Outsourcing by Banks within U.S does not seem to garner much heat as the benefit is still within the borders of U.S. 

Relationship between Outsourcing and Effectiveness and Competitive Advantage

Outsourcing by the U.S. Banks can be viewed as better option especially in these economic hard times. It is evident that for any company to be at a competitive advantage it needs to reduce the operating costs. Outsourcing overseas fortunately makes the U.S. obtain services at lower charges than they could if they hired internal workforce. Lower wages paid out will enable the banks to invest and develop competitive packages for the local and international clients. Outsourcing of departments which require advanced skill which lack among the Bank workforce will equally make Bank effective. High quality services will be offered since it will be offered by outsourcing companies which specialize in the services and functions which have been outsourced.

Outsourcing comes in also during times of shortages of work force: which can be due to high turn over rates or when during peak season. During such times, outsourcing ensures that there is no lapse in the operations of Banks. The Banks are in a position to operate smoothly without the high turnover or the peak season affecting the smooth running of the company. By reducing costs, offering of expertise and meeting demand for workforce when there are shortages, outsourcing has ensured that the U.S. Banks operate effectively and at a competitive edge.

CHAPTER FOUR- CONCLUSION AND RECOMMENDATIONS

Recommendations

Business process outsourcing (BPO) is a current trend which has proved to be of great significance to the U.S. Banks. The Banks in U.S. should be encouraged to make use of the cheap outsourcing opportunities available. This will give them a head start as they will able reduce overhead costs and concentrate on the tasks that require their direct personal. This will enable the Banks’ operations to be effective. 

Conclusion

Globalization has made it possible for the world to be more connected. This connection of the different regions of the world has made it possible for people from different region to exchange ideas.  Outsourcing of tasks either singly or at departmental levels is a practice which many organizations have engaged in. In the Banking sector, the practice started at around the 70’s and 80’s when printing of the customer banking statement was started. This practice was popularized by the advancement in information technology in the 80’s. In the current time, the practice has become a better option as U.S. Banks which are faced with challenges which include: the challenge to provide better services, transparency, the increasing costs of services and the need to offer more services.

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