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.
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