IT Outsourcing in Banking and Financial Services Industry

Introduction of Outsourcing

Outsourcing is not a strange words to most of us. The outsourcing activity started to bloom and become a phenomenon since two decades ago especially on the information technology (IT) outsourcing. The information technology outsourcing agreement between Eastman Kodak and service providers IBM, DEC and Businessland has become the explosion for the phenomenon of IT outsourcing globally (Lacity and Hirschheim, 1995). The history of outsourcing includes the sweet and bitter episodes. It is a sweet episode when the organization thinks about the hopes that outsourcing will give to the organization. But it might have becomes a bitter or nightmare episode to the organization if the outsourcing activities has not met the organizations expectations. To know the reasons of the sweet and bitter episodes of outsourcing activities, we have to go further into details of the why, how and what questions.

Generally, outsourcing is defined as when any operation or process that could be – or would usually be – performed in-house by an organisation’s employees is sub-contracted to another organisation for a substantial period. The outsourced tasks can be performed on-site or off-site. Loh and Venkatraman quoted that outsourcing happened in which a user organization transfers property or decision rights over IT infrastructure to an external organization.

The revenue of global outsourced services industry increase steadily from 45.6 billion U.S. dollars in 2000 to 99.1 billion in 2012. However, the number drop to 82.9 billion U.S. dollars in year 2013. Fortunately, the market recovered on the following year but subsequently dropped in 2015. Europe, the Middle East and Africa followed by United States of America has the largest share of revenue for the outsourced services industry. As outsourcing contracts are expected to increase in the upcoming year, companies are finding it harder to meet the challenges of a globalized world economy relying on their internal resources alone. Finance sector is one of the industry that depends heavily on the IT for their business processes to cope with the challenges with which the sector is currently faced. IT is not only allowing the industry to operate efficiently but also to maintain their competitive advantage (Adeleye, Annansingh, & Nunes, 2014). Financial entities deals with large volumes of information, in paper and electronic format which means that IT is the most vital element tool that can assist the financial entities to be competitive. Banking offices acquires IT services from various sites such as their own department, upon joint ventures and resort to outsourcing. Financial services are more easily outsourced compare to material products.

The Importance of IT Framework

The basic of having a successful IT outsourcing relationships is depending on the framework build by the IT provider. Framework is an important element. A work design framework is used to explore how IT can be used effectively to support changes and help make workers more effective (Pearlson & Saunders, 2013). A framework is a basic conceptual structure used to solve and address complex issues with making recommendations of what to do, when and how to do, and contains prescriptive elements as it suggests that IS manager should carry out (Gulla & Gupta, 2011). Framework is not only a technical process but it is merely the heart of the IT outsourcing implementations. A good framework should support the perceived value of the organizations in the IT outsourcing activities. Gulla and Gupta mentioned perceived value as expected impact of IS outsourcing in their case studies on three types of Indian Bank. Whereas, Gewald in his study on German Banking Industry stated these elements as drivers for IS outsourcing. The element of perceived values in a study on Malaysian bank by Mohd Adam, Husnayati and Muzaffar concludes these elements as a motivations. Overalls, the elements mentioned by all the studies are perceived values that the clients want and need for their IT outsourcing activities which should be a base for the framework.

Perceived Benefits

Four main perceived benefits that involved in the banking and financial services industry are economies of scale, core competencies, access to resources and quality improvement.

 

Economies of Scale

Most basic elements in doing a profitable activity is to gain as much as possible profit by having a minimum input or costs. Previous studies have substantiated the view that IS sourcing decision is largely driven by reducing production cost in terms of reduction in employment costs, reduction in investments assets and reduction in research and development. The advantage may accrue in forms of cost savings. The study on German bank indicates that cost advantage as one of the highest scoring but with another findings elements of sharing the volume risks. The study on Malaysian bank case study shows that reduction cost is one of the motivating factors. Emma Dunkley in an article titled “Banks Increase Outsourcing of IT Jobs in Attempt to Cut Costs” stated that banks are under a lot of pressure in terms of their amount of capital they need to hold. Therefore, banks are looking carefully about which part of their operations that can move to other providers at a lower costs. World’s largest property services company, found that offshoring and outsourcing will continue to form an important component of banks’ future strategies to control costs.

Core Competencies

The most important perceived value is on the core competencies. Most of the case study agreed that IT outsourcing can help the banking entities to focus more on their core competencies or core businesses. The large volume of transaction being done systematically can save a lot of time and energy compare to manually transaction.  Through IT outsourcing activity, financial company can shifted the concentration on their most key operations or businesses. Core competence movement highlights on maintaining the core business and the non-core activities can be resort through outsourcing. Most of the major factors of business strategic orientations are business focus, learning competencies and updated with changes. Indirectly, the perceived value of IT outsourcing also should support the business strategy of a company or entity. Pearlson and Saunders in Strategic Management of Information Systems Book described the need of relationships of business strategy with IS strategy and organizational strategy that give impact to IS on the organizations.

 

Access to Resources

Cost reductions and cost savings has now become the last motivations for IT outsourcing. To maintain competitiveness in banking or finance industry, monetary value has not become the most important elements but other non-monetary element has been aiming by the financial entities. Access to resources as business expert and skilled manpower in order to acquire more skills in organization or company. Besides that, technology is also one of the resources that banking entities are looking for in their outsourcing advantages. The changes and high investment of technology may lead the company to have access to the outsourcing company’s resources.

Quality Improvement

Banking company choose to have IT outsourcing activities to be part of their business is constantly to have the ability to improve quality. Finance and banking sectors basically is offering services. The quality of services measures in terms of efficiency and effectiveness. In finance industry, efficiency is achieving maximum productivity with minimum wasted effort or expense which means to have a faster services. The effective meaning is successful in producing a desired or intended result by way means that no defect or errors in transactions. German bank industry support the need of quality improvement in IS outsourcing. The Indian bank case study mentioned that the increasing in IS tool is due to the desire of the company to aim in improving the efficiencies in existing process.

Successful Story

An example of successful outsourcing is IBM with Canadian subsidiary company that made a 10-year contract with National Bank of Canada for $700 million. IBM Canada heads over the bank informational structure maintenance, including its websites and call centres. Besides that, the partner will also join for future development projects in the IT sphere. But a much bigger contract with $4 billion was obtained by IBM on February 2002. Following a 7-year outsourcing contract, IBM alongside American Express will manage “americanexpress.com” website, administrate computer network AmEx, processing credit card operations daily, maintain the database, and keep the technical support to company employees. Other financial institutions has follow these examples of outsourcing the development and implementation of new software, information processing, websites and call-centres.

Issues

Banking and Financial Services has gone through for a long time of having IT outsourcing as their supporting activities. There are quite number of successful IT outsourcing in bank and finance company. It is proven that IT outsourcing in banking industry is successful by looking at the number of current transaction in banking industry. We do know that most of the bank do not have the in-house IT skills and expertise which means that mostly it has been outsourcing. But, the IT outsourcing in banking and finance industry still require some improvement in future as the world is changing globally.

System Failures

A well thought outsourcing strategy is combined with carefully carried out due diligence. It may happened that the IT provider makes unintentional mistake during the development of the outsourcing. The failures of the outsourcing activities that involved with the customers must have tarnish the image of the bank or finance company. Companies often focus on making sure vendors deliver, but they sometimes forget about the ancillary, operational risks of outsourcing. These kind of risks are very large and can significantly impact the capital requirements. There is a case about retail banks which left millions of customers that unable to withdraw money or view their account balances due to system failure which happened because of provider was performing a software update. The failure resulted in paralysis of critical banking systems which is a costly error even though it happened due to the third party.

Keeping Up With Gen-Y and Gen-Z

Generation Y and Generation Z is knowing as new breed that appreciate the importance of connecting with a new, technologically items and products. Customer today prefer to have instant action on mobile devices, in the cloud and online. They demand the ability to have information at their fingertips, and feel that speaking to their bank how and when they want to do so is a fundamental expectation. The increased pressure placed on banking and finance company to fulfil the demand of the both generations have require a further improvement in IT Outsourcing. Bank and Finance Company did not have the requisite skills in-house to implement this changes. Therefore, IT outsourcing may have to be more aggressive in delivering and fulfilling the Gen-Y and Gen-Z requirements.

Way Forward

The initial purpose of having IT outsourcing is as a way to cut costs. But the IT outsourcing in banking and finance industry has become a standard to “run a bank” initiatives. Nowadays, world has become borderless, the expectations of customers is limitless. Every single things especially paid services should be delivered up to the customer expectations especially to cater the Generation Y. The customers expectation is now has become more challenging as services or products should be available at every time (when), anywhere (where) and in every method (how). The initiatives of “run the bank” is no longer applicable to succeed. The Digital Transformation is now the key to success. Agility, creativity and full digital adoption is the tools to success. Bank and finance company should look for partners that have the ability and understood the need of Digital World.

REFERENCES

Gonzalez, R., Llopis, J., & Gasco, J. (2013). Information technology outsourcing in financial services. The Service Industries Journal, 33(9-10), 909-924. Retrieved November 16, 2017, from //dx.doi.org/10.1080/02642069.2013.719888.

Gewald, H. (2010). The perceived benefits of business process outsourcing : An empirical study of the German banking industry. Strategic Outsourcing: An International Journal, 3(2), 89-105. doi:10.1108/17538291011060321

Suhaimi, M. A., Hussin, H., & Mustaffa, M. (2007). Information systems outsourcing : Motivating and the implementation strategy in a Malaysia bank. Business Process Management Journal, 13(5), 644-661. doi:10.1108/14637150710823138

Gulla, U., & Gupta, M. (2012). Deciding the level of information systems outsouricng : Proposing a framework and validation with three Indian Banks. Journal of Enterprise Information Management, 25(1), 28-59. doi:10.11.1108/17410391211192152

Levina, N., & Ross, J. W. (2003). From The Vendor's Perspective: Exploring The Value Proposition in Information Technology Outsourcing. MIS Quarterly, 27, 3rd ser., 331-364. Retrieved November 18, 2017.

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Pearlson, K. E., & Saunders, C. S. (n.d.). Strategic Management of Information Systems. Singapore: John Wiley & Sons Singapore Pte. Ltd.