What is outsourcing?
1. Outsourcing is the process by which an organization delegates some of its in-house operations or processes to a third party. While in contract, ownership or control of those processes generally remain with the parent company, while third parties are responsible for carrying out and reporting on the predefined tasks.
2. Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in house by the company's own employees and staff
3. Outsourcing is a
common practice of contracting out business functions and processes to
third-party providers.
Introduction
Outsourcing was first recognized as a business
strategy during the period of 1970-1989 and became an integral part
of business economics throughout the 1990s. Many opposed arguments emerged
that it has caused the loss of domestic jobs. Supporters say it creates an
incentive for businesses and companies to allocate resources where they are
most effective, and that outsourcing helps maintain the nature of free market economies on a global
scale.
Types
of outsourcing in banking industry
IT Outsourcing
This involves an external service provider being given
responsibility for managing specific IT related applications for a financial
institution.
Ex- Server management, Network administration, Isolated cloud centers and software development. This is implemented to save banks time and money while introducing flexibility in terms of data storage, product offerings and speed of service.
Business Process Outsourcing
is the practice of
contracting a specific work process or processes to an external service
provider. The services can include telemarketing, data recording, social media
marketing, customer support, and more
The full-fledged
product outsourcing
This is relatively a new concept emerged in
banking sector.
In many cases, full-fledged product outsourcing
leads product development, operations, compliance, and regulatory
infrastructure over to a third party while the bank retains ownership of said
tasks and instead focuses its time on customer interface and its balance sheet.
Benefits of outsourcing
There
are many reasons why a bank or any financial organization may choose to
outsource a particular task, job or a process. This gives relief to banks because they are delegating
excessive work to another company. Outsourcing firms help to maximize their
client firm’s growth and profitability by effectively handling a high volume of
time consuming work.
Ex- Mortgage servicing, and loan processing.
- improved focus on core business activities - outsourcing can free up your business to focus on its strengths, allowing your staff to concentrate on their main tasks and on the future strategy
- increased efficiency - choosing an outsourcing company that specializes in the process or service, can achieve a more productive, efficient service, often of greater quality
- controlled
costs – This
help to release capital for investment in other areas of your business
- increased
reach -
outsourcing may access to capabilities and facilities which cannot be accessible
or affordable by inhouse staff Ex- Recovery
activities
- greater
competitive advantage –
To leverage knowledge and skills along with your complete supply chain
Outsourcing
make the organization procedures more flexible and agile while providing cost
savings and service level improvements.
Downside of outsourcing
Outsourcing involves handing over direct control over a business function or process to a third party. As such, it comes with certain risks.
- service delivery - which may fall behind time or below
expectation
- confidentiality
and security -
which may be at risk
- lack
of flexibility -
contract could prove too rigid to accommodate change
- management
difficulties -
changes at the outsourcing company could lead to friction
- instability - the outsourcing company
could go out of business
Should examine carefully on all the pros and cons of outsourcing to make sure that the benefits outweigh the risks.
How Banks Decide that What to be Outsourced
When considering outsourcing, a common question is which
activities should be outsourced and which tasks should be done in-house. Such
question may include,
Should a bank outsource its cleaning function, or hire
in-house cleaners to perform this ?
Incorrect decision could result in erosion of
service value and cost escalation. On the other hand, a correct outsourcing decision can help bank management to have a better sleep at night.
Generally, banks divide their activities into core and
non-core activities. Core activities being central to their strategy and cannot be
outsourced whereas the non-core activities can be outsourced.
Outsourcing decision matrix
This is generally used for effective outsourcing decision
Some examples for the risk involved in outsourcing in Global Context
There have been multiple instances in recent years where consumer banks
had to face serious reputational and financial debacles due to a third party’s
error.
- Millions of customers unable to withdraw funds or view their balances due to a computer failure, which occurred as one of the bank’s IT vendors was performing a software update. The failure resulted in paralysis of critical banking systems a costly error.
- Bank had to compensate thousands of customers
whose personal information had been stolen and sold illegally. The data had been stored
by a vendor on a USB stick which was subsequently lost.
References
Kate E.(2017)everything you need to know about business process outsourcing. www.smartsheet.com [online]Available from: https://www.smartsheet.com/everything-you-need-know-about-business-process-outsourcing#:~:text=Business%20process%20outsourcing%20(BPO)%20is,%2C%20customer%20support%2C%20and%20more. [Accessed : 22 May 2021]
nibusinessinfo.co.uk(2020) outsourcing.nibusinessinfo.co.uk [online]
Available from: https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-outsourcing/.[Accessed : 22 May 2021]
Riggins N.(2019) outsourcing and the banking sector.theglobaltreasurer.com[online] Available from: https://www.theglobaltreasurer.com/2019/02/11/outsourcing-and-the-banking-sector-problems-and-prospects/. [Accessed : 22 May 2021]
20 Comments
Outsourcing is the business practice of hiring a party outside a company to perform services and create goods. There are advantages and disadvantages.
ReplyDeleteIn practically we can outsource services Machine service, stores facility, Transport facility, computer services, machine repairs, consultancy services, etc.. my question is how we select the outsourcing party. it is a big process for some main categories. But modern-day most organaizations outsource company critical sections ex Stores, production, servers, salaries, it may be a risk but no headache.
Yes, your aspect is explicit. We have to outsource some of our procedures, but we must be more cautious when deciding which processes to be outsourced. Otherwise repercussion of the same will be unpredictable.
ReplyDeleteI agree with you, in terms of cost analysis.
ReplyDeleteBut I never agree with the outsourcing concept in banking. Banking is very sensitive & confidential industry when comparing to other industries. In modern day, most of the banks adopt relationship banking strategy & using their long-lasting relationship to sell their product & services. Banking is all about trust.
But recently we noticed that, lot of outsourced sales people cheating clients to achieve their personal targets. Lot of recovery people made arguments with clients & number of complains increasing day by day. Their irresponsible behavior badly effected to banks vision & also its well reputed brand image.
When we doing the banking business & make profits, cost must be there. We should try to reduce the cost, but never in this way.
Thanks Lahiru. You are correct. There are so many repercussion in outsourcing. Specially in banking sector. Since as bankers we should clearly understand that what areas to be outsourced and reduce its impact to our reputation.
DeleteI agree with Lahiru, out source is better until everything going in order. But due to simple mistake done by the third party vender it may highly effects for the decline of banks image on customers. As the bank image is mainly develop on customer’s trust on the bank, always bank liable to provide service by offering value to their trust. The most popular example for out sourcing service in banks is automatic teller machines (ATM). When we take retained card incident in that process, due to outsourcing there is a third party involvement in between the bank and the customer. Therefore card hand covering process will be getting delay. Due to competitive market among banks at present, this small incident also makes path to loss the customer from the bank. So I think outsourcing not suitable for financial intuitions like Banks.
ReplyDeleteYes Lahiruni, I agree with you. Outsourcing has made a huge reputational loss in many instances. But still the banking sector uses it as a cost cutting strategy. Until that we will have to face so many bad experiences in future also. Since we have to streamline this outracing process properly.
DeleteOutsourcing is a famous concept globally which provides better connected services in order to run day-to-day businesses for companies as well as banks. They may be premises maintenance, providing Security staffs for business units, transportation services, Recoveries, Customer care service, Providing IT solutions and logistic services. Whatever the services obtained they should monitor the process in order to get the maximum benefit out of it.
ReplyDeleteEspecially when outsourced service is connecting with customers there should be a proper process and close monitoring system because such activities are more sensitive with the “Customer bank relationship” and the “Reputation” of the bank. Otherwise it may in some way lead to instability of the bank.
Yes Kavinda, we must keep the key control of the process even it is getting done by a third party. Slipping out the grip of the task may leads to low quality and less productivity. Sine outsourcing should be closely monitored.
DeleteOutsourcing can be a critical decision for a bank. Various factors play an important role in this decision, such as quality, cost, and customer satisfaction.
ReplyDeleteAs all other comments says it is good when every thing is in order. Bank has to consider their service quality, security and business continuity before implementing any outsourcing strategy which will affect the sustainability of the business
When doing outsourcing the quality and security are at a risk to some extend. Since the process should closely follow up.
DeleteAgreed with your incorporation in outsourcing in Banking industry,
ReplyDeleteHowever I have the concern how to overcome risks & moving towards outsourcing,
For a bank or financial institution, following a carefully developed and detailed outsourcing methodology is predominant to significantly lower its operational risks. They should have a clear due diligence approval process for potential companies they outsource to and outsourcing policies to ensure that both parties understand what are the expectations and how business should be administrated. In addition to that, methods should be put in place to monitor those risks related to outsourcing in any particular operational function and controls must be set up to address prevention of issues and contingency planning, potential customer problems, and upcoming changes to both parties’ processes. Compliance and Operational Risk teams should carry out regular reviews to verify that their suppliers are amenable. Given the potential for extreme losses , it is also critical to plan ahead and have a capital-efficient solution to mitigate these risks – naturally imported when a company decides to outsource some of its activities.
Risk managers should talk to their brokers about operational risk insurance as risk transfer is a pertinent solution to address such risks. They should be looking for a cover managed by a carrier with adequate strength and capacity.
While outsourcing provides banks & financial institutions with competitive benefits in today’s challenging business and regulatory environment, it is important to understand that by importing efficiency, companies are also importing risks, which should be addressed by implementing an effective compliance and risk management strategy.
Understanding of the major facts in the agreement by both companies should be a compulsory. Because the thrid party may not have the knowledge of the whole process and some times they might be performing small portion of a lengthy process. But If we ignore the quality of performance of that part total process quality would be questionable. Thanks Susantha for sharing the view.
DeleteOutsourcing has been around for centuries, but banks are only just now discovering how it can empower overworked and under-resourced treasurers to cut costs and bring added value for investors and customers. Nash Riggins explores how financial institutions are working to streamline their products and services through outsourcing.
ReplyDeleteUnlike the other industries in the market banking sector is unable to go for outsourcing largely. Because we are dealing with others money which we have greatest responsibility. Thanks Anjula.
DeleteOutsourcing certain business areas in a organization is common practice for many organization including banks. Now a day bank do source lots of activities to third-party service providers who are experts in that particular area of business. The benefits of outsourcing can be substantial this can range from cost savings to efficiency gains to greater competitive advantage.
ReplyDeleteBenefits of outsourcing business processes to third-party service providers
* Overall cost savings.
* Increased efficiency.
* Focus on expertise areas.
* Save on infrastructure and technology.
* Access to skilled resources.
* Time zone advantage.
* Faster and better services.
Due to such advantages, nowadays banks do outsource certain business areas such as
* IT Maintenance
* Debt Collections
* White Labeled ATM outsourcing
* ATM Cash loading and Cash Transportation
* Business marketing
I agree with you Maheshan, many industries including banks are outsourcing certain business areas in global financial context . It is a great relief for the management to outsource some none core banking areas and handover their responsibility. But the process should closely monitored. Thanks for your value addition.
DeleteI agree with you in terms of outsourcing works of banking sector. In the banking sector outsourcing process should be done very carefully .its because one single mistake can destroy whole the image of the orgnization. These days banking sector is outsourcing
ReplyDelete1.debt collection(recovery)
2.call center operation
3.marketing camping.
4.security service
Are regulary done by orgnazations to reduce the cost and it helps to over come high compettion in the business.and also banks can reduce big amount of cost and human capital.these kind ofprocess should be carefully monitered.to maintain orgnization policies and stranded.
Yes Prasitha, you are correct. But each and every instance the bank should keep the total control of the process with them. Otherwise like you stated, many bad repercussion may be raised from its customers.
DeleteOutsourcing is increasingly being used as a means of both reducing costs and achieving strategic goals in the organization. It has both advantages and disadvantage. Globally, regulators concern is how banks manage risks associated with a third party offering certain key services. Outsourcing risk is manifested in loss of control on some key functions and likelihood of opportunistic expropriation by vendor. While IT outsourcing has profound benefits, it equally exposes firms to serious risks. Hence as you mentioned banks should identify the tasks which need to be outsourced according to risk factor.
ReplyDeleteThanks Sevindi. Rather than other institutions banks should be more vigilant and cautious when they seek support from a third party. Because very confidential and crucial financial information of its customer may be exposed to a third party if the process is done by a wrong person or company.
Delete