Outsourcing in Banking Community

The concept of outsourcing is as old as the existence of the human community.  With the division of labor and specialization of occupations, the complexity of functions has become worse narrowly and clearly defined. To in-sources or outsource is strategic decision for many 21^st century organizations including banking sectors.

Just like any other industry, banking is also influenced by the buzzword outsourcing. Banking and financial services industry is witnessing robust growth underline influence of changing regulatory environment, rapid technological advancements, heightened competition and consideration. This changing landscape in the banking industry is driving banks to explore the outsourcing options to achieve efficiencies. The bank ensure that their outsourcing vendors are capable to delivering the level of performance, service reliability, capability and security needs that are at least as stringent as it would expect for its own operations.  

Outsourcing: Pros and Cons

Many banks seeking to increase shareholder value outsource to take advantage of a variety of benefits. Often the rationale for outsourcing is containment or reduction. Bank management’s desire to obtain external expertise is another principle reason for outsourcing. outsourcing can bring fresh minds to the business of the bank, and it can also free time up for innovation and other vital tasks, another factors to motivate bents going for outsourcing is management desire to focus on it score competences. Other benefits outsourcings include brand building and marketing of bank products, introducing new products and services, access to new technology, and less capital investment and effective recycling of funds.

Outsourcing is not free form drawbacks. One of the significant drawbacks of outsourcing is that the quality of outsourcing vendors. Poor performance by outsourcing vendor results in poor quality of services to the customers. Another drawback of outsourcing is that when a particular business process is outsourced by the bank, the employees of the bank may lose interest and motivation for expertise and innovation which will adversely affect the bank productivity. Also, pricing by outsourcing vendor cannot be valued correctly as the price quoted by one vendor is different from another on account of differences in product process, services, technology, reputations etc.

Outsourcing Decision

When considering outsourcing, a common question is which activities should be outsourced and which takes should be done in-house for instance, should a bank outsource its clearing function, or hire in-house clearers to perform this function? Should the decision be the same for corporate planning, deposit acceptance or loan sanctioning functions?

There are complicated questions and making the right decision can add significantly to your organization bottom line in terms of cost saving and increased efficiency. However, making the wrong decision can put your business at a competitive disadvantage.

Badly-planned outsourcing could result in erosion of service value and cost escalation, whilst a well-planned outsourcing decision can help bank management to sleep better at night, knowing that the responsibility of deliverables is in safe hands.

Generally banks divide their activities in to core and non-core activities. Core activities being central to their strategy cannot be outsourced whilst the non-core activities can be outsourced.

For effective outsourcing decision, the outsourcing decision matrix shown below could be used. In out sourcing decision matrix, two different factors are considered in outsourcing a particular function to be performed by bank, i.e. how strategically important is the task to the business of a bank, and what is the task’s impact on the bank’s operational performance are those which tasks have a high impact on operational performance are those which, if done well, contribute greatly to the smooth running of the banks or if done badly, greatly disrupt it.

Outsourcing Decision Matrix:

strategic importance	High	From Strategic  Alliance	Retain
	Low	Eliminate	Outsource
		Low	High
		Contribute to operational performance

The quadrant of the outsource decision matrix are explained below:

1.  From a strategic alliance: Tasks in this quadrant are highly in strategic importance, but contribute little to operational performances. So, although a bank needs to retain control of them to ensure they are done exactly as it wants, or the bank gets the quality it wants they are relatively insignificant in terms of cost or smooth running and so not worthy in full in-house focus. This means that the bank should form a strategic alliance with another compete party.  

2.      Retain: Tasks in this quadrant are highly in strategic importance and have a big impact on operation performance; those tasks should be kept in-house so that the bank keeps maximum control over those. For example, sanctioning loans must be retained as it is strategically critical. 

3.      Outsources: Tasks this quadrant are important for successful operational performance, but are not strategically important. These tasks could safely be outsourced. They are simply not worth spending in-house time managing. For example, following tasks could be outsourced by a bank.

# Opening, settlement and closing of accounts

# Issue and Process of cheques

# Managing of customer queries (Call Center)

# Recruitment, selection and training personnel

# Maintaining of computer and other electronic gadgets

# Administration of payroll and taxation

# Marketing of bank products

# Cross selling of bank products like insurance and mutual funds

# Credit card and Debit card queries

# Maintenance of ATMs

# Internal audit

# Tracking and control payables

# GAAP Reporting

4.      Eliminate: Tasks in this quadrant are not important. To the banks overall strategy and nor do they make a significant contribution to its day-today operational performance. Although a bank might not be able to eliminate these tasks completely, it’s important to check why the banks are doing them? An example might be running a subsidized day care center for staff’s children.