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The issue of outsourcing is hotly debated especially in the U.S. where the practice is quite common. There are mixed feelings as to whether the banking sector should be encouraged to keep on utilizing the outsourcing opportunities or not. Issues of reduction in the overhead costs due to outsourcing are often debated. There are also concerns about short term benefits which are likely to lead to long term liabilities.
This chapter carries out an empirical review of literature which underpins outsourcing as a tool for enhancing effectiveness and competitive advantage in the banking sector. The literature review is done by reviewing the associated advantages and disadvantage of outsourcing in perspective of the U.S. banking sector.
Growth of organizations leads to corresponding increase in the activities of an organization. This is particularly manifested in the back office operations and is a common phenomenon among banks. This growth in the activity if not taken care of will lead to a conflict of interest in terms of time allocation as the core activities may be deprived of some of the time earlier allocated to them(O'Sullivan, 2009).
It becomes prudent if such activities are out sourced because that will create time for the bank to focus on the core activities that need the direct attention of the bank employees. For example when a bank opens up a new branch there will a need to make purchases for office equipment to be used. The bank officials may outsource the purchasing of the office equipment to enable the employees concentrate on the core activities which directly need their attention.
Some of the increase in back-office functions might not be as simple as making purchases: they might be complicated in nature and as such the bank might not perform them at a consistent rate. These activities mostly are issues which touch on IT and might be best accomplished by outsourcing them to specialist companies instead of wasting time trying to figure out how the programs will be implemented. Weiss and Todd (2007) argue that outsourcing provides, “operational improvement and performance gains” (p. 58). They carried out an online survey which showed that of 50 organizations 35 outsourced some of their functions quoting improvement and performance reasons.
Dunn, Kimberly, Kohlbeck, and Magilke (2009) claim that offshoring is an important practice to the banking sector. They associate outsourcing with improved profitability and competitive advantage, “increased performance is positively associated with the increasing size of offshoring arrangements” They write that this is possible because the economies of scale make it possible to overcome any social costs in the long run (Dunn, Kimberly, Kohlbeck, and Magilke,2009).
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).
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).
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.
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).
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.