07 - Chapter 1

CHAPTER I
INTRODUCTION AND RESEARCH METHODOLOGY
1.1 INTRODUCTION
Outsourcing is a management strategy, by which an organization delegates
major non-core functions to specialized and efficient service providers. Outsourcing
has been a growing phenomenon in the last few decades for business entities. Most
organizations outsource some of the functions they used to perform themselves.
Banks have also started outsourcing their operations due to various operating
reasons. Outsourcing can be defined as, the strategic use of outside resources to
perform activities traditionally handled by internal staff and resources. Due to
widespread outsourcing practices, it has become a frequent topic in literature.
Outsourcing is promoted as one of the most powerful trends in modern management.
The rationale for outsourcing some functions and/or processes includes
substantial financial economies, increased ability to focus on strategic issues, access
to technology and specialized expertise and an ability to demand measurable and
improved service levels. Outsourcing differs from alliances, partnerships or joint
ventures in that the flow of resources is one-way, from the vendor to the outsourcer;
but, profit sharing or mutual contribution are not a common practice (Belcourt,
2006)1. Outsourcing can help in cutting costs and is fast becoming an important
phenomenon according to Captain Raghu Raman2.
1
Currently in the banking industry, a wide range of studies are taking place
regarding outsourcing of activities and the potential risk exposures faced by the
banks. Advances in information technology has revolutionized the way organizations
conduct business. In this 21 st century, where everything is driven by technology and
never ending innovations, the needs and demands of the consumers are changing
rapidly. They expect quality of service anytime and every time. Banking sector is no
exception. The financial industry has realized that outsourcing provides an attractive
means to remain competitive. Outsourcing is gaining importance as an essential
strategic tool, as competition and performance pressure have lead banks towards
outsourcing. The process of outsourcing has made the banks to strategically focus
their resources on the banking business and leave the rest to be done by experts.
According to Jones (2004)3 outsourcing can strengthen the competitive position of
banks by allowing them to offer 24/7 service without the payroll cost of 24/7
employees.
1.2 Need for outsourcing by banks
Banking services are increasingly becoming process drivers. Technology has
enabled banks to assume huge number of transactions and customers of diverse range
seeking different requirements. This increased demand by customers involves a huge
amount of back office functions. For many banks, it is not possible to handle this
rapid growth on their own. Hence, outsourcing is the only solution to handling of this
increased work. The world over, banks are increasingly using outsourcing as a means
of both reducing cost and accessing specialist expertise, not available internally, to
achieve strategic aims.
2
At present, most banks are pursuing outsourcing strategies more aggressively
than before in view of the global economic crises. Many banks have started realising
that they need external partners for additional innovation, increasing revenues and
maximizing efficiencies and also since most banks have capacity constraints, they
are beginning to outsource more and more of their activities to service providers. The
reasons for outsourcing have been discussed by many researchers. To emphasis this
concept, observations from previous research citations are given below:
Quinn J.B.4 highlights the importance of focusing on core activities and
outsourcing the non core activities. The banking functions involve a huge amount of
back office work. For a number of banks, it is very difficult to handle this rapid
growth on their own. They have to work in a competitive atmosphere and
outsourcing is an important solution.
“Outsourcing is the practice of hiring “functions experts” to handle business
units that are outside of a firm’s core business. It is also a method of augmentation of
staff without adding to head count”5. According to Cheon et. al.6 “outsourcing is the
organizational decision to turn over part or all of an organisation’s IS functions to
external service provider(s) in order for an organization to be able to achieve its
goals.” Altinkenmer7 has defined outsourcing as “the act of subcontracting a part, or
all, of an organisation’s Information Systems work to external vendor(s) to manage
on its behalf.” Grover et al. (1996)8, explain that, organizations expect to gain some
degree of advantage, typically in the form of economic, technological or strategic
benefits in an outsourcing relationship.
3
The fast pace of development in information technology makes IT skills
obsolete and often creates shortage of skilled persons. A single organization may not
have enough financial resources and professional IT staff to try a new technology.
An IT service provider can provide a greater range and depth of trained personnel
with the access to a large variety of advanced software and hardware products9.
Outsourcing is used as a strategic element in market differentiation strategies to gain
further competitive advantage10. In the present day banking field banks are handling
huge number of transactions and a large number of customers who have to be
satisfied with good service. To handle this situation outsourcing of the bank jobs are
increasingly undertaken.
1.3 Information Technology Outsourcing vs. Business Process Outsourcing
There is a widely held belief (Brooks 2004)11 that outsourcing may be divided
into two major types: information technology outsourcing (ITO) and business
process outsourcing (BPO). Outsourcing first started with information technology
outsourcing and later on it spread to business processes also being outsourced 12.
According to Factor13, outsourcing may be divided into two major types, namely,
information technology outsourcing and business process outsourcing. ITO is
typically service-based. It is a vendor-driven market with its main objective being to
reduce the cost of IT systems or site/data centers. But, BPO goes beyond that
wherein, it has to do with improving the performance, efficiency and productivity of
a business.
4
Business organisations may use IT systems to support the business process
outsourcing. BPO is focused on changing and improving competitiveness in the
marketplace, such that it will generate more revenues, more margin, etc. With ITO,
organizations can reduce costs, whereas with BPO, organizations can increase the
overall productivity, efficiency and competitiveness of processes, which can result in
huge gains. The main difference between BP outsourcing and traditional IT
outsourcing is that BPO can help organisations achieve transformational outcomes
more quickly. This usually happens when a BPO provider goes beyond just
managing a process and instead re-engineers the process, and introduces new
technology, to make it better.
Business process outsourcing can be defined as the delegation of one or more
entire business processes to third party providers, including the information systems
(IS) services that support those processes according to Halvey and Melby, 200014. It
is the combination of traditional information technology outsourcing and the
outsourcing of non-IS business functions15.
Further, business process outsourcing (BPO) refers to the delegation of one or
more information technology enabled business processes to an external service
provider (Rouse and Corbitt 200616; Wülenweber et al. 200817). Business processes
involve the manipulation of either physical or informational objects18.
It is evident from the above references, that, IT is integral to process execution
and management in BPO. This is true of transactional processes such as
administration or processing services, where IT performs simple automation or
5
process updates, as well as more strategic processes such as customer analytics or
financial planning, where IT facilitates linkages with other processes and delivers
business information to process workers in a timely fashion. (Mani et al. 2010)19.
The benefits of IT outsourcing in the banking industry has been well understood
from both academic and a practitioner’s perspective (Ang and Straub 199820,
Lancellotti et al. 200321). As the banking industry relies very much on information
technology, information technology has been a strong driver of developments in the
banking industry with ATMs being a popular example according to Benaroch and
Kauffmann 200022.
Well developed information systems have made the processing of large
transaction volumes possible. While banks have gained some experience in
Information Technology outsourcing (ITO) over the past decade, business process
outsourcing (BPO), i.e., procuring a business process together with the relevant IT
from the market, is quite a new challenge (Heiko Gewald et al.2006)23.
It is evident from the above that, the outsourcing market especially business
process outsourcing is growing every year. For years organizations have successfully
used outsourcing to generate significant savings. BPO is widely seen as an
opportunity which is enabled by advancements in IT, where organizations gain
competitive advantage from outsourcing. Accordingly, BPO is considered to be of
substantial importance in the banking industry (Kumar and Hillegersberg 2004)24.
6
Like in any other business sector, financial sector also has increasingly started using
outsourcing to gain in operational efficiency25.
As such, outsourcing refers to a company that contract with another company to
provide services that might otherwise be performed by in-house employees. Many
large companies now outsource jobs such as call center services, e-mail services,
payroll etc. These jobs are handled by service providers who specialize in each
service.
In the present global operating scenario, there are many reasons that companies
outsource various jobs, but the most prominent advantage seems to be the fact that it
often saves money. Many of the companies that provide outsourcing services are able
to do the work for considerably less money, as they don't have to provide benefits to
their workers and have fewer overhead expenses to worry about.
Business process outsourcing—or BPO—is the outsourcing of a specific
business process task, and it is often divided into two categories: back office
outsourcing, which includes internal business functions such as billing or purchasing
and front office outsourcing, which includes customer-related services such as
marketing or technical support. Information technology outsourcing, therefore, is a
subset of business process outsourcing.
Given its dependence on IT, BPO shares important attributes with information
technology outsourcing (ITO). Yet, there are important distinctions between these
two outsourcing forms, namely, the objectives driving the outsourcing decision.
Prior research (e.g., Lacity and Willcocks 200126) and industry surveys attribute the
adoption of ITO to two primary factors: a focus on core competencies of the firm
and reduction of IT costs. On the other hand, BPO involves significant diversity in
7
outsourcing objectives, ranging from reduction in operating costs to innovation and
business transformation 27.
A business model ITO vs. BPO as described by Saxton28, is shown in the following
figure:
FIGURE 1.1
Information Technology Outsourcing vs. Business Process Outsourcing
BPO activities:
e.g. Complex or core
Strategic applications,
Software development
Tactical ITO activities: e.g. help

desk, Asset management,
Data center
Volume Activity Value Activity
Revenue Generation
The potential for BPO is high in the Banking Industry. Those business processes, in
which IT plays an important role for processing, have become prime components for
BPO in almost all sectors of industry and commerce.
8
1.4 Evolution of Outsourcing
The growth of outsourcing is difficult to estimate. From the time of industrial
revolution, business organizations have started exploiting their competitive
advantage to increase their markets and their profits. In the nineteenth century,
railway companies relied on steel manufacturers, component manufacturers and tool
makers to construct locomotives. In the 1950s and 1960s, business entities started
diversifying to broaden the corporate bases. This is to take advantage of economies

of scale. Business organizations started finding it difficult to manage their size and
started thinking of outsourcing some of their non-core business activities.

Outsourcing was not formally identified as a business strategy until 1989 (Mullin
199629). Organizations that were not self-sufficient started outsourcing those
functions for which they had no competency. The use of external service providers
for certain activities might be termed as the beginning stage in the evolution of
outsourcing.
Experts mark the start of outsourcing to the foundation of Ross Perot’s
Electronic Data Systems (EDS) (Erber and Sayed-Ahmed 200530). It was probably
the first few companies to act as service providers. Outsourcing really took off with
Eastman Kodak’s decision to outsource the majority of its IT operations to IBM in
1989. For many, this first big deal marked the starting point of IT outsourcing
(Lacity et al 1996)31. Since then, there has been growth in the volume of
outsourcing32. Business organisations chose to contract-out their software activity to
an outsourcer whose contribution was difficult to measure and demonstrate33.
9
Starting in the 1970s, the outsourcing trend by banks began mainly with
outsourcing software development and maintenance. In the banking industry, the
beginning was made by outsourcing business processes as well as technology
projects. Outsourcing traditionally involved offshore call centers and credit card
transaction processing. Since the beginning of 1990s, there has been a significant
increase in the number of banking organizations that have decided to outsource some
or all of their activities.
In the early days of outsourcing, the focus was primarily on short-term cost
reduction. Outsourcing was not much more than the traditional make-or-buy
decisions, i.e., the decision to provide certain goods or services internally or to
purchase them in the market. This form of outsourcing is known as conventional
outsourcing (Stephan Weinert and Kirsten Meyer 200534. Thereafter, information
technology outsourcing has been a major trend over the last fifteen years35. After a
period, the idea of strategic outsourcing was introduced. Thus, software outsourcing
emerged in the late 1980s and has been reported as one of the strongest and most
sustained business trends since then36. Companies were forced to look much harder
than before at efficiency and costs37. Competition has led organizations to adopt to
outsourcing as an option to increase efficiency and cut costs ( Kern and Willcocks,
2000)38.
10
1.5 Barriers of Outsourcing:
Outsourcing is not devoid of certain barriers. The major barrier is the fear of loss
of customer data which banks will be preserving with utmost confidentiality.
According to Power, Bonifazi and Desouza39 there are ten common traps of
outsourcing. They are:
Lack of management commitment,
Minimal knowledge of outsourcing methodologies,
Lack of an outsourcing communications plan,
Failure to recognize outsourcing business risks,
Failure to tap into external sources of knowledge,
Not dedicating the best and brightest internal resources,
Rushing through the initiative,
Not appreciating cultural differences,
Minimizing what it will take to make the vendor productive and
Poor relationship management programs.
Banks have to overcome the barriers of outsourcing if it has to work very effectively.
With this in view, they can adopt the following steps to overcome the barriers:
Establish clear objectives of outsourcing a particular service,

Develop the talent base by generating/ encouraging enough opportunities for
technical knowledge.
Design appropriate training programmes for BPO employees.
Provide broad and essential hands-on experience.
Follow proper code of ethics and procedures in recruitment of employees.
11
Ensure proper control and quality management systems.
Make sure that the service provider understands the project specifications,
which requires a great deal of coordination and back-and-forth
communications.
Organize formal review meetings periodically to maintain successful
relationships.
Pre-determine the incentives and penalties schemes so that the service
provider is driven to meet the established customer expectations by adopting
the performance based pricing criteria.
Therefore, banks should take the required steps in order to reap the full benefits
of outsourcing. If handled properly, outsourcing can be considered as an excellent
opportunity to reduce costs and increase efficiency which is the most important
concern of banks.
1.6 INDIAN BANKS AND OUTSOURCING OF SERVICES
Like any other industry, banking sector in India too which is serving a huge
number of customers, has been influenced by the latest buzzword in business,
namely, “outsourcing”. Internationally, the banking and financial services sector has
been in the forefront of the outsourcing movement. India also does not lag behind. In
today’s dynamic environment, services sector, especially banking and financial
sectors are faced with new challenges. Technology has grown to such a great extent
that banks have to keep pace with this growth. Since, banks handle critical financial
services, outsourcing is not as simple option for banks as it is for various other
businesses. However, for the sake of rationalizing costs and tapping professional
expertise, outsourcing is being adopted by banks at an increasingly faster rate.
12
In order to make banking operations more efficient, Indian banks are
becoming more technology oriented as information technology enables sophisticated
product development and development of better market infrastructure. Banks are, for
that purpose increasingly relying on external services providers to provide IT
services so as to get access to specialized services and to avail cost benefits.
The activities presently being outsourced by Indian banks include:
Opening of Bank Accounts

Call centre for customer queries
Recruitment, selection and training of personnel
HR and Payroll
Marketing of Banking Products
Software Development, maintenance
Network management
AMCs for IT Assets- Hardware and networks
ATM/Debit card printing, disbursement and switch management
ATM maintenance
Marketing of Insurance Products etc.
Developments in telecommunication, fiber optics and satellite communications
have made internet-based communication and transfer of data possible, paving the
path for outsourcing by Indian banks. Getting access to technology benefits is the
main driver for outsourcing. Outsourcing of activities and processes are the key
outcomes of the large scale technology adoption in the banking sector during 1990s.
But to some extent, the majority of the banks in India are conservative in their
approach towards outsourcing their business processes due to some risks involved in
outsourcing and also because of resistance from some quarters of employees.
13
The primary driving force behind the increase in outsourcing activities in India is
the cost saving involved. In a study it was found that outsourcing to third parties can
result in cost savings of up to 30-40 percent as compared to doing the same work in-
house. Saving through IT outsourcing is more of a long-term perspective as there
might not be significant up- front return on investment. Over a period of five years
the cost savings vis-à-vis in-house work can be as high as 50 percent. Another
advantage that banks can get due to outsourcing is greater expertise. Service
Providers would have appointed employees with the required technical skill which
can be easily adapted and utilized by all the banks that outsource their activities.
The banks in India are concerned over the security of information. This security
risk can be minimized if certain aspects are taken care of. The Reserve Bank of India
has advised banks to follow the outsourcing guidelines to manage risks arising out of
third-party service providers. These risks include disruption in service, defective
services and personnel of service providers gaining intimate knowledge of banks’
systems and misusing the same, etc. The banks today are being forced to maintain
operational and cost efficiencies, main imperatives to fight tough competition.
Dependency on third party service providers for provision of certain services
(say, for example, ATMs) does pose certain limitations on the range and level of
services offered to the customers. The risks arising out of outsourcing need to be
suitably mitigated through proper selection of vendors, comprehensive agreement,
etc. An appropriate Service Level Agreement (SLA) with the vendors should cover
the service needs of the banks.
14
In a research work undertaken on “outsourcing by Indian banks” by Siva Prasad
Ravi et al.,40 the following conclusions were drawn:
1) Both private and public sector banks in India are outsourcing business
related activities.
2) Private sector banks, to combat competition, have adopted more aggressive
outsourcing strategies.
3) Almost all banks preferred having on-shore outsourcing irrespective of the
type of activities outsourced.
4) It was also noticed that majority of banks preferred dealing with a single
vendor for providing all services and
5) Several banks preferred short term or medium term contracts with the
service providers.
The above observations indicate that, banks in private sector in India, outsource their
non core activities more when compared to public sector banks. The Joint Forum, a
tripartite body comprising Basel Committee on Banking Supervision, International
Organization of Securities Commission and International Association of Insurance
Supervisors, had issued guidelines on outsourcing in financial services in February,
2005. Internationally, several countries like USA, UK, Germany, Hong Kong,
Australia and Singapore have put in place, guidelines on outsourcing in financial
services41.
Based on these international best practices, The Reserve Bank of India has
issued certain guidelines for outsourcing in financial services. In India, as banks
augment growth and expand business, there is an increasing reliance on external
service providers as partners in achieving the growth targets and as effective cost
15
alternatives. According to the guidelines given by RBI, 'Outsourcing' may be defined
as a bank's use of a third party (either an affiliated entity within a corporate group or
an entity that is external to the corporate group) to perform activities on a continuing
basis that would normally be undertaken by the bank itself, now or in the future.
‘Continuing basis' includes agreements for a limited period.
The benefits of outsourcing include efficiencies in operations, increased

ability to acquire and support current technology and tide over the risk of
obsolescence, increased time availability for management to focus on key

management functions, shorter lead time in delivering services to customers, better
quality of services, and stronger controls among others.
Common Areas for Outsourcing:
Outsourcing has been a constant theme in banking technology over at least
the past ten years, as banking has become more technology intensive and the
required scale of investment has grown exponentially. Many operations have been
outsourced to third party vendors comprising external vendors and specialized
subsidiaries. Service providers today may be a technology company or specialist
outsourcing manager. This decision to outsource should fit into the institution’s
overall strategic plan and corporate objectives.
Common areas where Banks have outsourced functions include:
1. Technology Operations
Technology Infrastructure Management, Maintenance and Support
Application Development, Maintenance and Testing
16
2. Banking Operations
Cash Management and Collections
Customer Service helpdesk / call center services
Transaction Processing including payments, loans, deposits
Activities such as Debit card printing and dispatch, verifications,
etc.
3. Marketing and Research
4. Fiduciary and Trading activities
Role of the Board and Senior Management:
The Board and senior management are ultimately responsible for
‘outsourcing operations’ and for managing risks inherent in such outsourcing
relationships. Whereas an institution may delegate its day-to-day operational duties
to a service provider, responsibilities for effective due diligence and management of
outsourcing and accountability for all outsourcing decisions continue to rest with the
Bank board and senior management. Board and senior management have the
responsibility to institute an effective governance mechanism and risk management
process for all outsourced operations.
Banks should undertake a periodic review of their outsourced processes to
identify new outsourcing risks as they arise. For e.g. when the service provider has
further sub-contracted work to other service providers or has undergone a significant
change in processes, infrastructure, or management.
17
The key recommendations given by Reserve Bank of India are given below:
1. The Board and senior management are responsible for outsourced operations and
for managing risks inherent in such outsourcing relationships. They have the
responsibility to institute an effective governance mechanism and risk management
process for all outsourced operations.
2. Banks need to assess the degree of ‘materiality’ inherent in the outsourced
functions. Whether an outsourcing arrangement is ‘material’ to the business context
or not is a qualitative judgment and may be determined on the basis of criticality of
service, or technology to the overall business objectives.
3. Risk evaluation should be performed prior to entering into an outsourcing
agreement and all outsourced information systems and operations may be subject to
risk management and security and privacy policies that meet the Bank’s own
standards.
4. When considering negotiating / renewing an Outsourcing arrangement, due
diligence should be performed to assess the capability of the technology service
provider to comply with obligations in the outsourcing agreement.
5. Banks must be required to report to the regulator, where the scale and nature of
functions outsourced are significant, or extensive data sharing is involved across
geographic locations as part of technology / process outsourcing.
6. In the event of multiple service provider relationships where two or more service
providers collaborate to deliver an end to end solution for the financial institution, a
bank, however, remains responsible for understanding and monitoring the control
18
environment of all service providers that have access to the banks systems, records or
resources.
7. The terms and conditions governing the contract between the bank and the service
provider should be carefully defined in written agreements and vetted by bank's legal
counsel on their legal effect and enforceability.
8. Banks should ensure that the contract brings out the nature of the legal relationship
between the parties (agent, principal or otherwise) and addresses risks and mitigation
strategies identified at the risk evaluation and due diligence stages.
9. Banks should establish a structure for management and control of outsourcing,
based on the nature, scope, complexity and inherent risk of the outsourced activity.
10. Management should include service level agreements in the outsourcing contracts
to agree and establish accountability for performance expectations. SLAs must
clearly formalize the performance criteria to measure the quality and quantity of
service levels.
11. Banks should evaluate the adequacy of the internal controls environment offered
by the service provider. Due consideration should be given to implementation by the
service provider of various aspects like information security policies and employee
awareness of the same, logical access controls, physical and environmental security
and controls, controls for handling data etc.
12. Outsourcing should not impede or interfere with the ability of the bank or the
regulator in performing its supervisory functions and objectives. An institution
should also review its outsourcing arrangements periodically to ensure that its
outsourcing risk management policies and procedures, and these guidelines are
effectively complied with.
19
13. Banks should also periodically commission independent audit and expert
assessments on the security and control environment of the service provider. Such
assessments and reports on the service provider may be performed and prepared by
the institution’s internal or external auditors, or by agents appointed by the
institution.
14. Banks should ensure that their business continuity preparedness is not
compromised on account of outsourcing.
15. A bank needs to take effective steps to ensure that risks with respect to
confidentiality and security of data are adequately mitigated.
16. Banks, while framing the viable contingency plan, need to consider the
availability of alternative service providers or the possibility of bringing the
outsourced activity back-in-house in an emergency (for example, where number of
vendors for a particular service is extremely limited) and the costs, time and
resources that would be involved and take suitable action, if warranted.
17. In the event of outsourcing of technology operations, the banks should subject the
same to enhanced and rigorous change management and monitoring controls since
ultimate responsibility and accountability rests with the bank. It may be desirable that
banks control the management of user ids created for use of external vendor
personnel. As a contingency measure, banks may also endeavor to develop, over a
period of time, reasonable level of skills/knowledge in various technology related
areas like system administration, database administration, network architecture and
administration, etc., to effectively engage with the vendors or to take over these
functions in the event of any contingency.
18. The engagement of service providers across multiple geographies exposes the
organisation to country risk – economic, social and political reasons in the country
20
that may adversely affect the Banks business and operations. Banks should
proactively evaluate such risk as part of the due diligence process and develop
appropriate mitigating controls and as required, an effective exit strategy.
19. Emerging technologies such as data center hosting, applications as a service and
cloud computing have given rise to unique legal jurisdictions for data and cross
border regulations. Banks should clarify the jurisdiction for their data and applicable
regulations at the outset of an outsourcing arrangement. This information should be
reviewed periodically and in case of significant changes performed by the service
provider.
20. Banks should ensure that quality and availability of banking services to
customers are not adversely affected due to the outsourcing arrangements entered
into by the Bank. Banks need to institute a robust grievance redress mechanism,
which should not be compromised in any way due to outsourcing.
21. Indian Banks’ Association may facilitate requisite data sharing between banks to
maintain scoring information for existing / new service providers and including any
fraud or major operational lapses committed by the service providers.
These recommendations are aimed to improve the effective functioning of
outsourcing by Indian banks and to insulate them from the risks in outsourcing.
1.7 SELECTION OF OUTSOURCING VENDORS
There are numerous factors to consider when evaluating and selecting a
vendor. Banks looking to outsource their activities should evaluate the capabilities of
the providers. There are many benchmarking reports by independent research and
21
consulting firms which analyze the vendors' capabilities. The role of outsourcing has
changed from traditional purchasing to strategic activity (Chan and Chin, 2007)42.
Their role has also been expanded to that of business partner dealing with operational
control of functions43, business process added values (Liou and Chuang, 2010)44 and
sustainable competitive advantage (Miles and Snow, 2007)45.
It is more challenging to identify the right vendor for the job, and it is more
important than ever for banks to clearly understand their current requirements and
capabilities to be able to identify the suppliers that best align with their needs. It is
also critical that banks clearly identify areas they believe are core to their business.
Banks must ensure that the vendors of choice have the right mix of knowledge,
skills, technology, and best-practice processes and that these capabilities are
complementary to internal strengths.
Time spent in training vendors, defining and negotiating service-level
agreements (SLAs), building appropriate governance capability and selection and
implementation of tools is a significant overhead investment that needs to be
clarified and agreed to by both parties.
1.7.1 Considerations for Selecting outsourcing vendors include the following:
Certain important criteria for selecting outsourcing vendors are listed below:
Financial viability of outsourcing contract,
Evaluation of expertise of the outsourcing vendors,
References obtained about service vendors,
Requiring the vendor to do a Proof of Concept (PoC),
22
Cost competitiveness in selecting outsourcing vendors,
Access and ability to adapt to latest technology on the part of the service
vendors,
Practices of security by the service vendor/provider,
Practices of standard policies and procedures by service provider and
Responsibility towards disaster recovery plan.
Financial viability includes an assessment of the vendor’s overall financial
health, the fiscal and practical success of the business unit and the likelihood that the
business unit in question will continue to invest in and offer the product within the
vendor’s portfolio of offerings.
Reference validation is also a viable option to the decision team.
Historically, organisations may have requested the vendors to supply a list of
references. Reference checking is an opportunity to discuss Critical Success Factors
(CSFs) regarding implementation, managing the vendor relationship, and other
division or industry-specific topics. An evaluation process and an RFI to select
vendors must be adopted. The vendor evaluation process will be more effective if it
is started with a high quality RFP.
Bailey 200246 shows that the criteria used for selecting outsourcing
contractors were mainly reputation, cost, previous contacts and technical capability.
Kennedy 199747 argued that the most common selection factors are market position
of the potential vendor, the quality of service offered, the product and technical
leadership, the contending company’s image and reputation.
23
1.8 RISKS EVALUATION AND MANAGEMENT
Risk management is the process of identifying, measuring, monitoring and
managing risk. Risks inherent to outsourcing include perceived risks, strategic risks,
performance risks and financial risks. Risk is defined as the probability of an event.
It is the chance of serious adverse outcome (Bahli & Rivard, 2003)48.
Basel II49 defined four general causal categories - people, technology, processes
and external factors. Brief description on each factors are provided below.
1. People: human factor related matters
2. Technology: IT and all communication system including hardware and software.
3. External Factors: man-made or natural disaster, business environment and
competition.
4. Strategy/Policy: strategic change either in the management itself or in its
counterparties
The predominant theory among Indian regulators and policymakers is that when
something is outsourced, the outsourcing company still owns it and is responsible for
managing it and managing it and needs to control it.
24
1.8.1 Classification of Outsourcing Risks:
The following chart depicts the major risks in outsourcing faced by banks:
FIGURE 1.2
RISKS IN OUTSOURCING
Risks in outsourcing
Perceived Performance
Risks Strategic Risks Financial Risks
Risks
PERCEIVED RISKS
Perceived risk is the potential loss in the pursuit of a desired outcome of
outsourcing business processes (Featherman and Pavlou 2003)50. The decision to
outsource banking activities often strikes fear in the minds of bank authorities.
Outsourcing of banking operations is associated with high levels of risks as
perceived by banks. According to the banking authorities there is a high level of risk
that the expected benefits of outsourcing will not materialize. This is due to the fact
that banks have to depend on outside service providers for the performance of their
work.
25
STRATEGIC RISKS
Loss of control over the various activities outsourced may give rise to
strategic risks. Attention to the outsourced activity may tend to lapse as
knowledgeable staff depart for greener pastures or are laid off, leaving fewer people
to keep up with advances in the core functional areas. By outsourcing, banks become
dependent on the service providers. There may be conflict between the objectives of
banks and the service providers. Yet another strategic risk may be that the banks may
lose the capability of long term operational innovativeness. Loss of critical skills is
one of the most important risks associated with outsourcing. Outsourcing leads to
loss of organizational competencies (Earl, 199651; Lacity et al., 1995)52.
The loss of technical knowledge is another relevant problem. When a service
is outsourced, banks gradually lose their understanding of the service over time.
Banks may lose its capacity to stay up to date with the technological breakthroughs.
(T.D. Clark et al. 1995)53.
According to Lacity and Hirschheim54, external providers are not strategic
partners, since the interest in benefits is not a shared one. It is because, when clients’
costs grow, so do providers’ benefits also.
PERFORMANCE RISK
Some of the risks associated with performance on the part of service
providers are, on-time delivery performance and end customer satisfaction levels
may decline because of delays by service providers. The service provider may not
have sufficient outsourcing experience. High level of confidentiality should be
26
maintained for banking operations which the service providers may not provide. The
process of outsourcing is too complex and difficult to be properly executed by the
service providers and there may not be proper coordination between the bank
employees and the vendors. There is the risk of technology failure.
The technology needed to service the company’s needs may change over time
and the supplier may no longer be able to service that new technology. Thus, there is
the risk of service provider’s inability to adapt to the new technologies (R.L. Glass
1996)55
The Lack of Compliance with the contract by the provider is a potential risk.
This problem is inherent to any contract: when an agent performs a task for a
principal, the latter always faces the risk that the agent might not carry out the task as
expected or that the agent might pay less attention and monitor the process less
closely than the principal would have done 56.
FINANCIAL RISKS
Unforeseen costs are one of the major risks in outsourcing. In the first
instance banking authorities may fail to reckon the costs of evaluating vendors,
managing major contracts, travelling to sites, enhancing security and paying
severance for laid-off workers. In addition, standardized services rarely meet the
needs of the business and customized solutions by the vendor will likely to add
between 15% and 30% to the cost.
Finally, exit costs can be substantial, as ending an arrangement prematurely
exposes both bankers and service providers to litigation. Banking authorities should
plan realistically for the full range of costs, creating detailed financial models and
27
testing scenarios to make sure the decision will still look good if various factors go
wrong. There is another risk of the service provider trying to increase his profit
through hidden or non transparent costs. The present study incorporates all the above
risks to understand the perceptions of bank executives regarding them.
1.9 THE SERVICE QUALITY OF OUTSOURCED WORK:
Service quality refers to the performance according to bank requirements in
the delivery of a service57. In this study service quality is defined as the level of
perfection and excellence of service quality perception. The higher level of service
quality means higher level of customer satisfaction and results in better customer
loyalty and high level of profitability (Ghobadian, et al. 1993)58. To transfer the
quality to service means to satisfy customers’ requirements. It is important that the
firms aspiring to adopt the customer oriented approach should determine the
customer requirements and associate the customer requirements with service design
and capabilities59.
According to Warrington, P.T., 200260, research in four different service
industries, it is found that quality has a direct and positive effect on customer
satisfaction, but no other inverse causal effect could be proved.
A number of existing IT outsourcing research examines different quality
factors that affect bank executives’ satisfaction. These quality factors can be grouped
into four types: service quality, solution quality, service level agreement (SLA)
quality, and relationship quality.
Service quality is the source of competitive differentiation according to Das
et al.61 and Gavin, D. A. 198762, especially when the number of vendors offering
similar outsourcing services has increased over the years.
28
Solution quality refers to the extent to which the products or services
provided by vendors help banks to solve their problems or improve their business
needs (G. Whyte et al.)63.
In an outsourcing context, service agreement level (SLA) refers to the
“detailed formal contract between the two contracting parties”64. SLA identifies
service commitments of both the customers and the vendors65. A good quality SLA
should contain specifications and precise requirements as it sets up expectations
between customers and vendors66.
Good relationship quality refers to “a relationship between service provider
and customer that involves high levels of trust and commitment, quality
communication, cultural similarity, and balanced interdependence between entities in
the service partnership”67.
The overall assessment of quality of outsourced activities by client banks should be
based on the following criteria:
1. Reduction in cost
2. Increase in revenue
3. Improvement in customer service
4. Betterment of brand building
5. Better marketing of bank products
6. Easier introduction of new products
7. Better utilization of new technology
8. Reduction in capital investment
9. Effective recycling of funds
10. Focus of core competence
11. Access to specialized vendors
12. Importance of reduction of morale of employees
13. Better use of in house personnel
29
The decision to outsource is often based primarily on cost reduction, supported
by a desire to focus on core business activities. Once the activities of the banks are
outsourced, the bank management should undertake periodic assessment of the
outsourced activities to find out the effectiveness of the work and also the capacity of
the service provider. Service quality also should be regularly evaluated. Banks must
determine whether their existing outsourcing relationship is providing satisfactory
service, not just in terms of adherence to contractual Service Levels, but in the
overall health of the customer/service provider relationship.
Outsourcing information technology by the banks helps them to enhance
efficiencies in operations, increases their ability to acquire and support current
technology and helps to tide over the risk of obsolescence. Outsourcing of financial
services by the banks helps the management to focus on key management functions
and assist in delivering to customers in shorter lead time and better quality of
services as management focuses on core services. Once when the banks decide to
outsource they must undertake steps to assess the quality of outsourced work. They
may even appoint people who are technically and otherwise qualified to audit the
outcome of outsourcing. By this the banks can satisfy themselves as to the benefits of
outsourcing to their banks.
Successful implementation of an outsourcing strategy has been credited with
helping to reduce cost (Bowers1990)68. Business organization outsource because of
reduced costs69. Greer et.al. 199970 in their research paper have concluded that
economy in cost is the foremost reason why organizations outsource. Outsourcing
30
increases capacity of the banks and improve quality so that there will be
improvement in customer service71. By outsourcing their activities, banks increase
their capacity to offer good services to their customers, as opined by Kotabe et. al. 72.
It will increase profitability and productivity73, improve financial performance74,
lower innovation costs and risks (Quinn 2000)75 and improve organizational
competitiveness (Lever 1997)76. In a research study, Steensma and Corley 200077 felt
that outsourcing will improve a firm’s competitiveness.
All these earlier studies indicate that, a good outsourcing strategy will lead the
banks towards focus on core competence, access to specialized vendors and better
use of in-house personnel etc. with the ultimate aim of customer service satisfaction.
Some of the dimensions of the above studies were adopted in this study for analytical
evaluation.
1.10 THE LEVEL OF SATISFACTION DUE TO OUTSOURCING
Previous empirical researches by Parasuraman et al. (1984)78, Lee & Kim
(1999)79 and Kern (1997)80 has shown that satisfaction is strongly associated with the
perception of whether or not outsourcing is working. Thus, satisfaction is a
phenomenon expressing that the performance and benefits of the products exceed the
expectations of the customers (Peter, J.P. and Olsan, J.C., 2005)81. The overall
satisfaction with outsourcing is strongly associated with a perception that
outsourcing is effectively working in organizations that have adopted them.
Satisfaction with outsourcing is related to outsourcing being seen as successful and
working well but various banks may still be dissatisfied with the arrangement. Some
31
of the factors that affect the degree of satisfaction with outsourcing are service
quality, the relationship developed between the outsourcing company and vendor,
and the costs involved in switching vendors.
Based on the above references, some important dimensions for satisfaction have been
taken for this study. They are:
Cost reduction
Provision for better service
Better match of resource to supply
Access to better technology
Better use of in-house personnel
Access to services unavailable in-house
Access to better/more skills/expertise
Reduction in risk of technology obsolescence
Enhancement in economies of scale in technological resources
Enhancement in economies of scale in human resources
Improvement in banks IT competence
Focus on our core business issues.
The main benefits to the banks due to outsourcing are cost reduction and
concentration on core competencies by the banks. So much so that respondents were
asked to give their perceptions regarding their satisfaction due to reduction in cost,
their satisfaction on performance of outsourced activities like, whether, there was
reduction in risk of technology obsolescence, enhancement of economies of scale in
technological and human resources and enhancement of banks’ competence.
32
1.11 PERCEPTIONS OF THE IMPORTANCE-PERFORMANCE GAPS OF
BANKS OF OUTSOURCED ACTIVITIES:
Importance-performance gap analysis involves the concurrent examination of
customer views on the importance of salient service quality dimensions (or service
quality attributes) and their perceptions concerning the performance of service
providers in meeting customer needs related to each of these service quality
dimensions (cf. Hawes and Rao 1985)82. The present study adopts the above theory
to understand the level of perceived satisfaction among the banking customers as
compared to the present day importance.
1.12 STATEMENT OF THE PROBLEM
Business process outsourcing (BPO) has been suggested as one of the biggest
areas of growth in the banking industry. Nevertheless, many banks are still reluctant
to outsource business processes that are noncore part of their business. In order to
help overcome this divergence between expectations and reality, a systematic
analysis of the factors that forms banking organisations’ attitude towards BPO as
well as their intention to adopt it is being attempted in this study. BPO poses both
risks and benefits and decision makers need to balance both before adopting it. This
is an important research context because banks increasingly outsource their activities
and the resultant outcome of outsourcing is important for evaluating their good
performance from bank’s perspectives. While outsourcing is a wide area of research
interest, this study looks at bank executives’ perceptions regarding the risks and
performance results. It was decided to explore this area because outsourcing is an
issue being discussed currently all over the globe and the banking sector is proving to
33
be a sector that undertakes a greater percentage of outsourcing their activities and
operative bank personnel are responsible for its effective functioning.
Thus, the present study on the perceptions of bank executives is attempted on
the issues like the drivers for outsourcing, and the risks involved in outsourcing the
banking activities. The aim of this research work is to present an evaluation of the
different types of risks that banks may encounter while outsourcing their financial
activities Moreover in order to know about the perceptions of the bank executives on
the importance of the outsourced activities and the actual quality of work performed
by the service providers which are relevant for further studies, this study has been
undertaken. Not many research works have been undertaken in this regard in India
pertaining to Indian banks.
The review of literature available suggest that most of the studies have been
done on issues related to outsourcing by banks in countries like USA, UK, Malaysia,
Singapore Finland, Australia and Germany. Though sufficient interest in research
works has been done recently in India with regard to outsourcing operations, bank
executives’ perceptions on risks and satisfaction issues on outsourcing activities are
scarce. The present study intends to identify their perceptions of risks, perceived
importance and the actual quality of outsourced work identified through gap in
performance and satisfaction levels of bank executives due to outsourcing in the
Indian context.
Thus, the study focuses only on the bank executives’ perceptions regarding
risks in outsourcing and the actual quality of work and not on any specific bank. Non
34
executives or employees working in non managerial positions were not included. The
executives represent a wide spectrum of bank managers and officers located in
Chennai. The unit of study is confined to public and private sector commercial banks
in India.
1.13 OPERATIONAL DEFINITIONS:

The explanation of some of the terms adopted in this study is presented below:
Outsourcing: “outsourcing” is the contracting of a service provider to completely
manage, deliver and operate one or more of a client’s functions.
Service providers: A banker enters into an agreement with the service provider for
performance of certain activities of the bank that is not done in-house. Contracts are
entered into by bank and service provider that define the duties, responsibilities and
liabilities of both the bank and the service provider.
Banking operations: The following are some of the operations of the banks that are
outsourced:
Opening of Bank Accounts

Call centre for customer queries
Recruitment selection and training of personnel
HR and Payroll
Marketing of Banking Products
Software Development, maintenance
Network management
AMCs for IT Assets- Hardware and networks
ATM/Debit card printing, disbursement and switch management
ATM maintenance
Marketing of Insurance Products etc.
35
The terms, “risks in outsourcing” include the risks such as, perceived risks, strategic
risks, performance risks and financial risks.
The dimensions for quality measurement taken up for the present study include
the following:
The measurement of satisfaction of bank executives includes the following
dimensions:
1. Cost reduction
2. Provision for better service
3. Better match of resource to supply
4. Access to better technology
5. Better use of in-house personnel
6. Access to services unavailable in-house
7. Access to better/more skills/expertise
8. Reduction in risk of technology obsolescence
36
9. Enhanced economies of scale in technological resources
10. Enhanced economies of scale in human resources
11. Enhancement of banks IT competence
12. Refocus of core banking business
1.14 SCOPE OF THE STUDY
Outsourcing could be considered an inevitable development of the banking
industry, a trend based on the labour market and the economic conditions. The
present study seeks to identify the factors that impact the decision to outsource
banking activities, identify what factors affect bank executives’ attitudes regarding
the outsourcing decision and discuss how these attitudes impact banking
organisational outcomes. This empirical research was undertaken to serve two
primary purposes. The first was to identify the current framework of outsourcing
practices in Indian banks. The second purpose was to identify the risk involved and
to measure the level of performance and satisfaction due to outsourcing.
Therefore, this study focused on the risks perception of outsourcing of
banking activities on the one side and the actual performance results of the
outsourced activities on the other. The bank executives were asked to give their
opinions about the importance of the outsourced activities and whether the quality of
work done by the service provider matched with the expectations. This will help a
growing number of analysts in the banking sector and academics in relevant research
fields who are keen to learn more about outsourcing scene in the Indian banking
industry.
37
This study has focused on Indian banks for the empirical investigation. It also
attempts to investigate the challenges and impacts for banking organisations with
regard to outsourcing processes, the drivers for outsourcing and the way banks deal
with them to create potential benefits. Therefore, it is hoped that this present study
will enhance the current knowledge on outsourcing, with significant value addition
for banks in India.
1.15 OBJECTIVES OF THE STUDY
This present study focuses on outsourcing by banks in India with special
emphasis on risks faced and the work quality of the outsourced work while
outsourcing their activities. The main purpose of this study is to advance our
theoretical and practical understanding of outsourcing, thereby contributing to the
knowledge on the execution of outsourcing.
Further, this study builds on the knowledge and research on outsourcing by
examining in detail the themes of outsourcing satisfaction and benefits realization
and processes and practices as they relate to India. The main aim is to further
substantiate on the current research into bank outsourcing in the Indian context, in
particular, the reasons for outsourcing being considered successful or not. It is also
important to note that this study is primarily concentrated on risks and satisfaction of
outsourcing, based on “perception research”on outsourcing literature (Downing et
al.)83. The present study is focused on the perceptions of bank executives on different
dimensions of outsourcing the activities of banks. The major objectives of this study
are given below:
38
The major objectives of the study are summarized as follows:
1. To review the concepts of outsourcing and the current development in the Indian
banking sector.
2. To examine the impact of demographic variables of bank executives on risks
involved in outsourcing by banks and also to find out the satisfaction levels and the
actual quality of the outsourced activities of the banks.
3. To identify the drivers for outsourcing in Indian banks and the risks perception of
bank executives regarding outsourcing.
4. To analyse their perception regarding the importance of outsourcing and the actual
quality of performance of the outsourced activities.
5. To examine the satisfaction levels of the bank executives regarding the outsourced
activities.
6. To suggest suitable measures that may be adopted by banks to make best
utilization of the outsourcing activities to benefit the banks and their customers.
1.16 THE SPECIFIC HYPOTHESES OF THE STUDY:
Based on previous literature review and information gathered from initial
interviews, the following important hypotheses were formulated for the purpose of
the present study:
1. H0: There is no relationship between risk in outsourcing and gap in

performance and satisfaction due to outsourcing.
H1: There is significant relationship between risk in outsourcing and gap
in performance and satisfaction due to outsourcing.
39
2. H0: There is no relationship between satisfaction and risks in outsourcing and
Gap in performance.
H1: There is significant relationship between satisfaction and risks in
Outsourcing and gap in performance.
3. H0: There is no relationship between the gap in performance and

risks. in outsourcing and satisfaction due to outsourcing.
H1: There is significant relationship between the gap in performance and risks
in outsourcing and satisfaction due to outsourcing.
4. H0: There is no significant association between the number of years of

service in the banking sector, gender, age of the respondents, and their
educational level with their perceptions of risk in outsourcing.
H1: There is a significant association between the number of years of service in

the banking sector, gender, age of the respondents, and their educational
level with their perceptions of risk in outsourcing.
5. H0: There is no significant association between the number of years of service in

level with their perceptions about importance of outsourcing.
H1: There is significant association between the number of years of service in

level with their perceptions about importance of outsourcing.
6. H0: There is no significant association between the number of years of service

in the banking sector, gender, age of the respondents, and their educational
level with the perceptions of actual quality of outsourced work.
40
level with the perceptions of actual quality of outsourced work.

level with their perceptions on satisfaction levels of the outsourced work.

level with their perceptions on satisfaction levels of the outsourced work.

level with their perceptions on gap in performance in outsourcing,

level with their perceptions on gap in performance in outsourcing.
1.17 METHOD OF RESEARCH
The present research endeavour is empirical in nature. Hence, Survey
method through structured questionnaire was adopted for this study. This method
was used as a tool for data collection because this method assists to increase response
rate of respondents selected for the study. (Saunders et al 2000)84.
41
1.17.1 Sample Size and Data Collection Procedure
The primary data required for the study were collected through questionnaires
issued to five hundred bank executives, who constitute the sample for the study.
They represent a wide spectrum of Public sector banks and Private sector banks
located in the city of Chennai in Tamilnadu State. The banking executives who
responded were at different levels like senior management, managers and middle and
junior level of officers working in branches.
For this empirical study, the leading banks from different categories from
banking sector have been selected. These are nationalized public sector banks and
private sector banks. These have been selected from Chennai only with the
assumption that the behaviour of banks executives and practices adopted relating to
banks are mostly similar across India, particularly with respect to outsourcing
operations.
Ary et al. (2006)85 define sampling as the process of selecting participants
from a population of interest. To suit the objectives of the study, convenience
sampling method was adopted considering the availability and approachability of the
bank executives for the purpose of data collection.
Five hundred questionnaires were distributed through personal contacts to
various bank executives after necessary official permission. Completed
questionnaires received were 403 which represented 80.6% of response rate. 310
questionnaires complete in all respects were used for statistical data interpretation.
42
1.17.2 Data Collection Period:
The questionnaires for the sample survey of executives were distributed during
March 2012 to June 2012 and the filled in questionnaires from respondents were
collected up to January 2013. Thus, it took nearly 7 months to distribute the
questionnaires and collect data from the respondents.
1.17.3 Research Instrument:
The questionnaire is schematically designed to meet the requirements of the
research and was used as research instrument for this study. It was designed to obtain
a comprehensive view of IS/IT outsourcing practices in India. The present research
has two major directions. On the one hand, it focuses on the analysis of the
outsourcing process and its specific elements like, reasons for outsourcing, benefits
and risks involved, the outsourcing decision process and choosing a service provider
etc. On the other hand, it seeks to outline the overall assessment of outsourcing based
on the perceptions of bank executives/officers.
Hence, the questionnaire for the study was designed to serve two primary
purposes. The first was to identify the current framework of outsourcing practices in
Indian banks. The second purpose was to establish the risk involved and the level of
performance and satisfaction due to outsourcing. The questionnaire consisted of six
main parts with mainly closed ended questions.
43
1.17.4 Questionnaire Design and Measurement
The PART A consists of items dealing with the identification of personal data
of bank executives to understand the demographic characteristics of respondents,
such as gender, age, educational qualification and number of years of service in their
banks.
The PART B consists of one statement under the heading of outsourcing
strategy. It deals with the activities that are being outsourced by banks, such as
opening of bank accounts, call centre for customer queries, software development
maintenance, ATM maintenance etc.
The PART C consists of items that were ranked with regard to reasons for
outsourcing, with the following dimensions:
1. Competitive advantage
2. Cost Reduction
3. Improvement in quality of customer service
4. Avoid recruitment of additional staff
5. Lack of internal expertise (ex: Network management, software development etc.)
The PART D has nine statements that bring out information about outsourcing
vendors. The first question covers the factors that influence the selection of
outsourcing vendors that has a ranking component. The next eight questions are
closed ended questions getting information on service level agreements, audit of
outsourced activities, managing and monitoring the outsourced arrangement etc. All
these dimensions were incorporated in the study, based on extensive survey of
previous research and banking industry observations.
44
The PART E consisted of two sections. The first consisted of statements asking
the respondents to rank the risks related to outsourcing and the second section had
statements based on the Likert’s86 5 point scale starting from strongly agree to
strongly disagree for different risks associated with outsourcing. It consisted of four
dimensions of risks i.e. perceived risks, strategic risks, performance risks and
financial risks. These are measured in 12 statements as follows:
Sub dimensions Statement Number
1 Perceived Risks A–B

2 Strategic Risks A–D
3 Performance Risks A–D
4 Financial Risks A–B
The FINAL PART consisted of two sub variables, one finding out gap in
overall assessment of outsourcing by the respondents and the second finding the
satisfaction levels of the respondents.
The first sub variable consisted of 13 statements and carried the Five Point
Likert scale to view the gap between how important the various dimensions were and
the actual quality of performance. The dimensions for quality measurement taken up
for the present study were as follows:
45
The scoring pattern was as follows:
To measure the perception of bank executives on importance of various dimensions
in outsourcing, the following weights were assigned:
Score Points
Very Important 5
Important 4
Somewhat Important 3
Not very Important 2
Not Important at all 1
To measure the perception of the bank executives regarding the actual quality of
work performed by service providers, the scoring pattern assigned were:
46
Score Points
Excellent 5
Good 4
Fair 3
Poor 2
Very Poor 1
The second sub variable consisted of 12 statements based on Likert’s Five
Point Scale covering the measurement of satisfaction of bank executives regarding
their satisfaction levels of outsourced activities. The statements taken up for the
present study are as follows:
1. Cost reduction
2. Provision for better service
3. Better match of resource to supply
4. Access to better technology
5. Better use of in-house personnel
6. Access to services unavailable in-house
7. Access to better/more skills/expertise
8. Reduction in risk of technology obsolescence
9. Has provided enhanced economies of scale in technological resources
10. Has provided enhanced economies of scale in human resources
11. Has enhanced our banks IT competence
12. Has enabled our bank to refocus on our core business
To measure the satisfaction levels of the bank executives the following scoring
pattern was followed:
47
Score Points
Highly Satisfied 5
Satisfied 4
Neutral 3
Dissatisfied 2
Highly Dissatisfied 1
1.17.5 Pretesting and Pilot Study
The importance of a pilot study is highlighted by Mason and Zuercher (1995) 87, as
follows:
‘Pilot studies can be "time-consuming, frustrating, and fraught with unanticipated

problems, but it is better to deal with them before investing a great deal of time,
money, and effort in the full study’.
Pilot studies are a crucial element of good study design. In order to improve on
the content validity and reliability of the selected dimensions adopted for the study
purpose, a preliminary survey is felt essential for this empirical work.
A pilot study was conducted to authenticate the content validity of the
questionnaire and to confirm the reliability of the study. Hence, a draft questionnaire
was given to bank executives belonging to different banks and to academicians in the
field of commerce and management to obtain their views on the design and
dimensions considered for the study. According to reviewers’ opinion the
questionnaire was revised and modified.
The questionnaire was then distributed to 53 bank executives belonging to
different banks in the city of Chennai. The Cronbach’s Alpha Co-efficient Criterion88
48
was applied to the data obtained in order to test the reliability and found to be
satisfactory for its conceptual clarity and content validity for statistical purposes.
The Cronbach’s results are as follows:
1. Risks in outsourcing:
Perceived risks scale .626
Strategic risks scale .816
Performance risks scale .826
Financial risks scale .747
2. Gap in performance .770
3. Satisfaction level scale .877
The above reliability coefficient is considered satisfactory. The final version of
the questionnaire was then prepared and used for the study.
1.18 FRAMEWORK OF DATA ANALYSIS:
The data collected through the questionnaire were analysed by using the
following statistical tools:
1. Mean scores, percentages, and standard deviations were calculated for overall
analysis.
2. ONEWAY ANOVA (F-Test) and (T-Test) were used to identify the significant
differences and association of attributes among bank executives on their perceptions
of risk analysis and other variables connected with outsourcing.
49
3. T-test analysis was used to identify the significant differences in the perceptions
of bank executives regarding risk involved in outsourcing and the actual quality of
work results and the satisfaction levels of these executives based on their gender,
marital status, education level and their age.
4. Chi square test was applied to find out the association between different
demographic characters and the variables taken up for the study.
5. Karl Pearson’s Correlation analysis was used to determine the significant
relationship among variables.
6. Stepwise regression was used to identify the relationship between a single
dependent variable and other independent variables by rotation.
7. Factor analysis was applied to find out the most important variables in the study.
8. Cluster analysis was performed to examine the respondents’ perceptions on
outsourcing operations.
1.19 LIMITATIONS OF THE STUDY:
The study has certain limitations:
1. The data for the purpose of the study is collected from bank executives in
Chennai only with the hypothesized assumption that almost the operating system
of banks is similar throughout India.
2. Outsourcing by banks is a relatively new concept and the questionnaire was
distributed only to bank executives who knew about their outsourcing activities.
3. The main objective of the study is to examine the general perceptions of the bank
executives on risks and the actual quality of outsourced work and their
satisfaction level due to outsourcing of banking activities. Hence, this study does
not focus on any individual banks.
4. The results of this research may be applied to participating banks only.
50
5. The study is limited with respect to certain identified dimensions, selected for
analytical interpretation.
1.20 CHAPTER ARRANGEMENT:
The study has been presented in five chapters. A brief outline of the various
chapters is as follows:
CHAPTER I: INTRODUCTION AND RESEARCH METHODOLOGY
This chapter contains an introduction to the thesis. It underlines the need for the
study, significance of the study and also emphasizes on the scope of the study. The
chapter throws light on the various research questions that have been addressed in the
thesis. It highlights the descriptions of sampling i.e. types of respondents, number of
respondents and technique of sampling. It also describes tools of data collection,
content and constructs validity, reliability, tools of data analysis and research design.
CHAPTER II: REVIEW OF LITERATURE
This chapter contains an exhaustive and comprehensive literature review of the
subject. It also discusses the various dimensions of the three variables of the study,
namely, risks in outsourcing, various benefits of outsourcing and drivers for
outsourcing and ends by providing the preliminary framework for this study.
CHAPTER III: ANALYSIS OF DEMOGRAPHIC VARIABLES AND

PERCEPTION OF BANK EXECUTIVES ON OUTSOURCING
This chapter analyses the demographic profile of bank executives and their
perceptions of the variables selected for the study, namely, risk perceptions of the
51
bank executives, importance and quality of outsourced work satisfaction levels on
the performance of the outsourced work and the gap in perception of importance and
quality of the outsourced work.
CHAPTER IV: ANALYSIS OF BANK EXECUTIVES’ PERCEPTIONS ON

OUTSOURCING
This chapter intends to accomplish the first objective of the study i.e. to examine the
extent of risk and satisfaction level of the bank executives. This chapter mainly deals
with the data analysis, interpretation and discussion of respondents’ perceptions.
CHAPTER V: SUMMARY, FINDINGS AND CONCLUSION
This chapter presents the summary of the major findings of the study. It has provided
the background and the overview of the study. It contains the methodology of the
study and concludes with the implications of the study and suggestions for future
research.
52
Chapter I - End Notes
1. Belcourt, M., 2006. Outsourcing – the benefits and the risks. Human Resource
Management Review, 16: 269-279
2. Captain Raghu Raman; “De-risk outsourcing of banking operations”, 2011
3. Dennis Jones; Jack Henry and Associates, “The Evolution of Outsourcing: What
to expect tomorrow”, 2004
4. Quinn, J.B.; “Strategic Outsourcing: Leveraging Knowledge capabilities”,

Harward Business Review, 1999
5.Dominguez, L. R. (2005): The Manager's Step-by-step Guide to Outsourcing.

McGraw- Hill Professional
6. Cheon, M.J., Grover, V. and J.T.C. Teng (1995): Theoretical Perspectives on the
Outsourcing of Information Systems. Journal of Information Technology, vol. 10, pp.
209-210.
7. Altinkemer, K., Chaturvedi, A. and R. Gulati (1994): Information systems

outsourcing: Issues and evidence International. Journal Information Management,
vol. 14, no 4, pp. 252-268
8. Grover, V, Cheon, MJ & Teng, JTC 1996, ‘The effect of service quality and
partnership on the outsourcing of information systems functions’, Journal of
Management Information Systems archive, vol. 12, no. 4 pp. 89-116.
9. Grover, V., Myun, J.C. & J.T.C., 1994, “A Systems Functions”, Information and
Management, Vol. 27, no. 1, pp. 33-45
10.Fritsch,M. and Wullenweber,K., (2007); “Firm-level Determinants of Business

Process Outsourcing Decisions, IRMA 2007, Vancouver, Canada.
11. Brooks, G 2004, What is outsourcing?, New Media Age, October 28, p. 4.
12. Brown, D., & Wilson, S. (2005). The Black Book of Outsourcing: How to
Manage the Changes, Challenges, and Opportunities. Hoboken, NJ: Wiley.
13. Factor, AL 2002, Analysing Application Service Providers, Prentice Hall/Sun

Microsystems Press, Chichester.
14. Halvey, J. K. , & Melby, B. M. (2000). Business process outsourcing: Processes,

strategies and risks Hoboken, NJ: Wiley.
15. Kakabadse, A.P. and Kakabadse, N. (2002) Trends in outsourcing: Contrasting

USA and Europe, European Management Journal Vol 20 No. 2 pp. 189-198
16. Rouse, A. C., and Corbitt, B. J.,“Business Process Outsourcing: The Hysteresis
Effect and Other Lessons” in Information Systems Outsourcing: Enduring Themes,
New Perspectives and Global Challenges, R. Hirschheim, A. Heinzl, and J. Dibbern
(eds.), New York: Springer, 2006, 583-602.
17. Wu llenweber, K., Beimborn, D., Weitzel, T., and König, W., “The Impact of
Process Standardization on Business Process Outsourcing Success”, Information
Systems Frontiers 10(2), 2008, 211-224.
18. Davenport, T. H. & Short, J. E. (1990). The New Industrial Engineering:

Information Technology and Business Process Redesign, Sloan Management Review,
pp. 11-27.
19. Mani, D., Barua, A & Whinston, A ( 2010) ‘An Empirical Analysis Of The
Impact Of Information Capabilities Design On Business Process Outsourcing
Performance’. MIS Quarterly; Vol. 34 Issue 1, p39-62
20. Ang, S. and D. Straub; "Production and Transaction Economics and IS

Outsourcing: A Study of the U.S. Banking Industry," MIS Quarterly, (4), 1998, pp.
535-552
21. Lancellotti, R.; O. Schein; S. Spang and V. Stadler; "ICT and Operations
Outsourcing in Banking," Wirtschaftsinformatik, (45:2), 2003, pp. 131-141.
22. Benaroch, M. and R. J. Kauffmann; "Justifying Electronic Banking Network

Expansion using Real Options Analysis," MIS Quarterly, (24), 2000, pp. 197-225.
23. Heiko Gewald, Kim Wullenweber, Tim Weitzel, (2006), The Influence of
Perceived Risks on Banking Managers Intention to Outsource Business processes- A
Study of the German Banking and Finance Industry-, Journal of Electronic
Commerce Research, VOL7, NO.2.
24. Kumar, K. and J. v. Hillegersberg; "New Architectures for Financial Services,"

Communications of the ACM, (47:5), 2004, pp. 27-30.
25. Lammers, M.; N. Löhndorf and T. Weitzel; "Strategic Sourcing in Banking - A

Framework," European Conference in Information Systems, Turku, Finland, 2004.
26. Lacity, M.C., and Willcocks, L.P. Global Information Technology Outsourcing:
In Search of Business Advantage, Wiley, Chichester, 2001.
27. Linder, J. C., Cole, M. I. and Jacobson, A. L. (2002) Business Transformation

through Outsourcing. Strategy and Leadership, 30(4), pp 23 – 28.
28. Saxton, K. (2003). “Winning with industry value”, Presentation by Keith

Saxton,Director, Fnancial Markets, IBM, Dealing with Technology conference, The
Brewery, City of London, April 30,2003.
29. Mullin, R. (1996), “Managing the outsourced enterprise”,Journal of Business
Strategy, Vol. 17 No. 4, pp. 28-32 .
30. Erber, Georg/Sayed-Ahmed, Aida (2005): Offshore Outsourcing: A Global Shift

in the
Present IT Industry. In: Intereconomics, Vol. 40, No. 2, 2005, pp. 100-112.
31. Lacity, M.C.; Willcocks, L.P. & Feeny, D. F.(1996) "The Value of Selective IT
Sourcing", Sloan Management Review, Spring, pp. 13-25.
32. Lacity, Mary C./Willcocks, Leslie P. (1998): An empirical investigation of

information
technology sourcing practices: Lessons from experience. In: MIS Quarterly, Vol. 22,
No. 3, 1998, pp. 363-408.
33. Hirschheim, Rudy/Lacity, Mary (2000): The myths and realities of information
technology insourcing. In: Association for Computer Machinery, Vol. 43, No. 2,
2000, pp. 99-107.
34. Stephan Weinert, Kirsten Meyer, The Evolution of IT Outsourcing: From its
Origins to Current and Future Trends, 2005, pp 12.
35. Dibbern, J., Goles, T., Hirschheim, R., and Jayatilaka, B. (2004) Information
Systems Outsourcing: A Survey and Analysis of the Literature, The DATA BASE
for Advances in Information Systems, 35 (4): 6-102.
36. Lee, J.-N., Huynh, M.Q., Kwok, R.C.-W., and Pi, S.-M. (2003) IT Outsourcing
Evolution--Past, Present, and Future, Communications of the ACM, 46 (5): 84-89.
37. Hendry, J. 1995. Culture, community and Networks : The hidden cost of
outsourcing. European Management Journal. 13(2). 193-200.
38. Kern, T., and Willcocks, L. (2000) Exploring information technology

outsourcing
relationships: theory and practice, The Journal of Strategic Information Systems, 9
(4):
December 2000, 321-350.
39. Power J. Mark, Desouza C. Kevin, Bonifazi Carlo. 2006. The Outsoucing
Handbook, How to implement a successful outsourcing process, London: Ed. Kogan
Page.
40. Siva Prasad Ravi, Ravi Kumar Jain and Hari P. Sharma, An Analysis Of
Business Process Outsourcing Strategies Of Public And Private Sector Banks In
India, 2011.
41 Outsourcing Policy of South Indian Bank, Version Number 1.0 Dated 15th July
2009.
42. Chan, T.C.T., & Chin, K.S. (2007). Key success factors of strategic sourcing. An
empirical study of the Hong Kong toy industry. Industrial Management & Data
Systems, 107(9), 1391-1416.
43. Rajabzadeh, A., Rostamy, A.A.A.,&Hosseini, A.(2008). Designing a generic

model for outsourcing process in public sector: evidence of Iran, Management
Decision, 46 (4), pp 521-538.
44. Liou, J.J.H., & Chuang, Y. (2010).Developing a hybrid multi-criteria model for
selection of outsourcing providers. Journal of Expert Systems with Publications,
37(5), 3755-376.
45. Miles,R.E.,& Snow, C.C. (2007). Organization theory and supply chain
management: An evolving research perspective. Journal of Operations Management,
25(2), 459-463.
46. Bailey W., Masson R., Raeside R.. Outsourcing in Edinburgh and Lothians.
European Journal of Purchasing and Supply Management .Vol. 8, 2002, pp.83-95.
47. Kennedy C., O’Connor. Winning Major Bids, the Critical Success Factors.
Policy Publications, 1997, Bedford.
48. Bahli, B., & Rivard S. (2003). The information technology outsourcing risk: A
transaction cost and agency theory-based perspective. Journal of Information
Technology, 18(3), 211-221.
49. Basel Committee on Banking Supervision, February 2003, “Sound practices for
the management and supervision of operational risk,” http://www.bccr.fi.cr
50. Featherman, M. S. and P. A. Pavlou; "Predicting e-Services Adoption: A

Perceived Risk Facets Perspective," International Journal of Human-Computer
Studies, (59), 2003, pp. 451-474.
51. Earl, M. J. (1996). The risks of outsourcing IT. Sloan Management Review,
37(3), 26-32.
52. Lacity, M. C., & Willcocks, L. P. (1995). Information systems outsourcing in

theory and practice. Journal of Information Technology, 10(4), 203-207.
53. Clark, T.D., Zmud, R.W. and McCray, G.E. (1995). The outsourcing of
information services: Transforming the nature of business in the information
industry. Journal of Information Technology, 10, 221-237.
54. M. Lacity and R. Hirschheim (1993b). “The Information Systems Outsourcing

Bandwagon”, Sloan Management Review, Vol. 35, No. 1, pp. 73-86.
55. R.L. Glass (1996). “The End of the Outsourcing Era”, Information Systems
Management, Vol. 13, No. 2, pp. 89-91.
56. Clark, T.D. et al. Op.cit.53
57. Chakrabarty, S., Whitten, D., and Green, K. "Understanding Service Quality and
Relationship Quality in IS outsourcing: Client Orientation & Promotion, Project
Management Effectiveness, and the Task-Technology-Structure Fit," Journal of
Computer Information System, 2008, pp. 1-15.
58. Ghobadian, A., Speller, S. and Jones, M. , 1993. Service quality : concepts and
models, International Journal of Quality&Reliability Management, Vol.11, No.9,
43-66.
59. Chow-Chua, C. and Komaran, R., 2002. Managing Service Quality by

Combining Voice of the Service Provider and Voice of Their Customers, Managing
Service Quality, Vol. 12 No. 2, 77-86.
60. Warrington, P.T., 2002. Customer evaluations of e-shopping: the effects of

quality-value perceptions and e-shopping satisfaction on e-shopping loyalty, PhD
Thesis, The University of Arizona.
61. Das, A., Soh, C. W., and Lee, P. C. "A Model of Customer Satisfaction with
Information Technology Service Providers: An Empirical Study," Proceedings of the
1999 ACM SIGCPR Conference on Computer Personnel Research, 1999, pp. 190-
193.
62. Gavin, D. A. "Competing on The Eight Dimensions of Quality," Havard Business

Review, 1987, pp. 101-109.
63. Whyte, G., Bytheway, A., and Edwards, C. "Understanding User Perceptions of
Information Systems Success," Journal of Strategic Information Systems, 1997, pp.
35-68.
64. Goo, J., Kishore, R., Rao, H. R., and Nam, K. "The Role of Service Level
Agreement in Relational Management of IT Outsourcing: An Empirical Study," MIS
Quarterly, 2009, pp. 119-145.
65. Larson, K. D. "The Role of Service Level Agreements in IT Service Delivery,"

Information Management & Computer Security, 1998, pp 128.
66. Yoon, Y. K., and Im, K. S. "Evaluating IT outsourcing customer satisfaction and
its impact on firm performance in Korea," International Journal of Technology
Management (43:1-3), 2008, pp. 160-175.
67. Chakrabarty, S.et al. op.cit.57
68. Bowers, D.J. 1990. The stragegic benefit of logistics alliances. Harvard Business
Review 68(4):6-45.
69. Gupta, M. and D. Zheuder. 1994. Outsourcing and its impact on operations
strategy. Production and Inventory Management Journal 35(3):70-76.
70. Greer, C.R., S.A. Youngblood, and D.A. Gary. 1999. Human resource
management outsourcing: The make or buy decision. Academy of Management
Executive 13(3):85-96.
71. Casale, F.J. 1996. Introduction to outsourcing. The Outsourcing Institute.
72. Kotabe, M., J. Murray, and R. Javalagi. 1998. Global sourcing of service and
market performance: Au empirical investigation. Journal of International
Marketing 6(4): 10-13.
73. Sinderman, M. 1995. Outsourcing gains speed in corporate world. National Real
Estate Investor(Aug.) 37:42-50.
74. Crane, D. 1999. Renewed focus on financial performance. www.Outsourcing-

Journal.com/issues/jan.
75. Quinn, B.J. 2000. Outsourcing innovation: The new engine of growth. Sloan
Management Review41(14):13-23.
76. Lever, S. 1997. An analysis of managerial motivations behind outsourcing

practices in human resources. Human Resource Planning 20(2):37-47.
77. Steensma, K.R. and K.G. Corley. 2000. On the performance of technology-
sourcing partnerships: The interaction between partner interdependence and
technology attributes. Academy of Management Journal 43(6):1045-1067.
78. Parasuraman, A, Zeithaml, V & Berry, L 1984, A conceptual model of service

quality and its implications for future research, Marketing Science Institute.
79. Lee, J-N & Kim, Y-G 1999, ‘Effect of partnership quality on IS outsourcing
success: conceptual framework and empirical validation’, Journal of Management
Information Systems, vol. 15, no. 4, pp. 29-61.
80. Kern, T 1997, ‘The gestalt of an information technology outsourcing

relationship: An exploratory analysis’, paper presented to Proceedings of the
Eighteenth International Conference on Information Systems,
81 Peter, J.P. and Olsan, J.C., 2005. Consumer Behaviour and Marketing
Strategy, The McGraw-Hill Companies,Inc., New York
82. Hawes, J.& Rao, C. (1985). Using importance-performance analysis to develop

health care marketing strategies, Journal of Health Care Marketing, 5(4), 19-25.
83 .Downing, C.E., Field, J.M. and Ritzman, L.P. "The Value of Outsourcing: A
Field Study," Information Systems Management, Volume 20, 2003, pp. 86-91.
84. Saunders, MNK, Lewis, P and Thornhil, A 2000, Research Methods for Business
Students, Prentice Hall, London.
85. Ary, D., Jacobs, L.C., Razavieh, A. & Sorensen, C. (2006). Introduction to
research in education (7th ed.). Canada: Thomson Wadsworth.
86. Likert, Rensis (1932). "A Technique for the Measurement of Attitudes". Archives
of Psychology 140: 1–55.
87. Mason D. J. and Zuercher S. L. June 1995. Pilot studies in clinical nursing
research. Journal of New York State Nurses Association. 26(2). 11-13.
88. Cronbach LJ (1951). "Coefficient alpha and the internal structure of

tests". Psychometrika 16 (3): 297–334.

07 - Chapter 1

Uploaded by

Copyright:

Available Formats

07 - Chapter 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

07 - Chapter 1

Uploaded by

Copyright:

Available Formats

CHAPTER I

INTRODUCTION AND RESEARCH METHODOLOGY

Outsourcing is a management strategy, by which an organization delegates

major non-core functions to specialized and efficient service providers. Outsourcing

organizations outsource some of the functions they used to perform themselves.

perform activities traditionally handled by internal staff and resources. Due to

widespread outsourcing practices, it has become a frequent topic in literature.

Outsourcing is promoted as one of the most powerful trends in modern management.

The rationale for outsourcing some functions and/or processes includes

substantial financial economies, increased ability to focus on strategic issues, access

to technology and specialized expertise and an ability to demand measurable and

improved service levels. Outsourcing differs from alliances, partnerships or joint

phenomenon according to Captain Raghu Raman2.

banks. Advances in information technology has revolutionized the way organizations

conduct business. In this 21 st century, where everything is driven by technology and

means to remain competitive. Outsourcing is gaining importance as an essential

According to Jones (2004)3 outsourcing can strengthen the competitive position of

1.2 Need for outsourcing by banks

Banking services are increasingly becoming process drivers. Technology has

seeking different requirements. This increased demand by customers involves a huge

achieve strategic aims.

concept, observations from previous research citations are given below:

Quinn J.B.4 highlights the importance of focusing on core activities and

growth on their own. They have to work in a competitive atmosphere and

outsourcing is an important solution.

“Outsourcing is the practice of hiring “functions experts” to handle business

organizational decision to turn over part or all of an organisation’s IS functions to

external service provider(s) in order for an organization to be able to achieve its

goals.” Altinkenmer7 has defined outsourcing as “the act of subcontracting a part, or

all, of an organisation’s Information Systems work to external vendor(s) to manage

degree of advantage, typically in the form of economic, technological or strategic

benefits in an outsourcing relationship.

Outsourcing is used as a strategic element in market differentiation strategies to gain

huge number of transactions and a large number of customers who have to be

1.3 Information Technology Outsourcing vs. Business Process Outsourcing

process outsourcing (BPO). Outsourcing first started with information technology

information technology outsourcing and business process outsourcing. ITO is

typically service-based. It is a vendor-driven market with its main objective being to

wherein, it has to do with improving the performance, efficiency and productivity of

outsourcing. BPO is focused on changing and improving competitiveness in the

overall productivity, efficiency and competitiveness of processes, which can result in

huge gains. The main difference between BP outsourcing and traditional IT

outsourcing is that BPO can help organisations achieve transformational outcomes

technology, to make it better.

Business process outsourcing can be defined as the delegation of one or more

is the combination of traditional information technology outsourcing and the

outsourcing of non-IS business functions15.

Further, business process outsourcing (BPO) refers to the delegation of one or

more information technology enabled business processes to an external service

involve the manipulation of either physical or informational objects18.

It is evident from the above references, that, IT is integral to process execution

and management in BPO. This is true of transactional processes such as

administration or processing services, where IT performs simple automation or

business information to process workers in a timely fashion. (Mani et al. 2010)19.

technology, information technology has been a strong driver of developments in the

Well developed information systems have made the processing of large

transaction volumes possible. While banks have gained some experience in

from the market, is quite a new challenge (Heiko Gewald et al.2006)23.

used outsourcing to generate significant savings. BPO is widely seen as an