Outsourcing In The Banking Sector

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Effective Outsourcing To Achieve Reduced Costs In Banking Sector

Effective Outsourcing To Achieve Reduced Costs In Banking Sector


Information systems outsourcing is a business strategy which involves the contracting out of processes to other external parties, more experienced in the area. It can be used by any industry looking to gain a competitive advantage. Outsourcing strategies need to be selected in terms of a bank's core and non-core competencies and which would produce more profit should be determined. Reasons for the growth of outsourcing include globalization, production technology, and changing customer needs.

There are numerous benefits of outsourcing, including cost control, access to skilled workers, strategic focus, financial reasons, improved growth, improved MIS control, access to technology, and management reasons. The pitfalls of outsourcing include upheaval of personnel, coordination costs, lack of flexibility and control, and encouragement of competition and opportunism. An example of a successful outsourcing venture is the one between First Fidelity Bank and EDS; while an outsourcing failure occurred for Ryder Truck International.

Outsourcing is likely to continue to grow into the future and impact most global corporations. If a set of strategies are followed, it is possible to have successful outsourcing relationships and improve a bank. A bank can grow and prosper and gain a competitive edge in an industry.

Research Hypothesis Statement

Taking into consideration the factors which a bank will consider before contracting out its information systems as well as the problems which can arise from outsourcing, is outsourcing a useful business venture which will give a bank a significant competitive advantage in an industry?

Information systems outsourcing, or the contracting out of IS procedures to more specialized firms, is a business strategy which many banks in a variety of industries see as a beneficial one. Before a bank decides to make the leap into an outsourcing relationship however, it should determine what it considers its core competencies and which of these competencies would be most profitable to outsource.

Literature Review

Outsourcing is the contracting out of tasks and services usually performed in-house, to an external vendor. Palvia (1995) offers this definition of information systems (IS) outsourcing - "IS outsourcing is the transfer of part or all of an bank's information system, data processing, hardware, software, communication network and systems personnel to an external party." Jenster & Stener Pederson (2000) agree that it is "the market procurement of formerly in-house produced goods and services from legally independent supplier firms". These supplier firms can be one of the following - technology vendors, contractors, consulting firms or systems integrators (Palvia, 1995).

Typical in the 1970s were diversified conglomerates (Jenster & Stener Pederson, 2000). This has changed considerably over the past decade, with banks moving towards outsourcing. McLellan & Marcolin (1994) explain that outsourcing is not a new concept, but is related to the concept of time sharing service bureaus of the 1960s and 1970s. Who benefits from outsourcing? Outsourcing can be used by almost all industries including financial industries, electronic industries and telecommunications ...
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