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Outsourcing in UK banking

? strategic importance of information systems (IS) in banking is extensively substantiated (OECD 1992; Office of Technology Assessment 1987). Yet, in spite of this, some banks, for example Continental Bank (Huber 1993), have outsourced their entire information services function (American Bankers Association 1990) and ? trend to outsource part or all of their information technology (IT) activities seems to be accelerating rather than tapering off (O’Henry 1996).

In this regard, ? trend in banking is same to that of many other international enterprises that are increasing their rate of IT outsourcing at 9% per annum (Weill and Broadbent 1997). The embryonic literature on IT outsourcing offers ? variety of explanations for why outsourcing occurs. Many of these arguments have ? basis in economic theories. One of ? most commonly cited reasons, for example, is that managers feel that they can gain cost advantages by hiring outsiders to perform certain services and produce certain products (Alpar and Saharia 1995; Loh and Venkatraman 1992a).

Transaction cost theory (Grover et al. 1996; Nam et al. 1996), which typically frames outsourcing as ? decision about drawing organization boundaries (Mosakowski 1991) or as vertical integration (Harrigan 1985), offers another economic perspective. This research argues that we can

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improve our ability to explain outsourcing within ? larger context of organizational responses to their strategic environment by focusing on such economic considerations. ? findings suggest which factors play into ? outsourcing decision and their relative importance in sourcing choices.

? key contribution of ? present research is to examine for ? first time ? direct, concurrent effect of both production and transaction costs on ? sourcing decision. ? benefits of IT outsourcing in ? banking and finance industry (BFI) seem to be quite well understood from both an academic and ? practitioner’s perspective (Ang and Straub 1998; Baldwin, Irani and Love 2001; Lancellotti, Schein, Spang and Stadler 2003; Adeleye, Annasingh and Nunes 2004).

Though, we still lack ? thorough and empirically validated understanding of ? risks of outsourcing, especially concerning business processes. This raises questions about ? impact of hazard facets for example financial, strategic, performance and social risks on outsourcing decisions in organizations and ultimately challenges ? field to propose sound outsourcing decision support that considers benefits and risks in one model. As financial processes are almost fully digitizable, ? banking and finance industry heavily relies on information technology.

Accordingly, IT has been ? strong driver of developments in ? BFI with ATMs being ? renowned example (Benaroch and Kauffmann 2000). Powerful information systems have made ? processing of large transaction volumes possible (e. g. , payments and securities processing), at ? same time enabling new E-Commerce products and services like online banking. But despite its long history and ? success of many organizations, ? overall industry structure is still surprisingly unchanged and modern network-like structures like supply chains are widely unknown.

? main reason is that outsourcing as ? main pillar of restructuring value chains has long been much more complicated or even impossible due to regulatory constraints in ? BFI. Recently, ? change in regulation tendencies together with further advances in IT has provided banks with ? opportunity to use outsourcing as ? means to reduce costs and focus on core competencies. This is expected to enable ? industry to move towards value network structures as has been successfully done in other industries (Homann, Rill and Wimmer 2004).

While banks have gained some experience in IT outsourcing (ITO) over ? past decade, business procedure out-sourcing (BPO), i. e. , procuring ? business procedure together with ? relevant IT from ? market is quite ? new challenge. BPO is widely seen as an opportunity – enabled by advancements in IT – to make business architectures sufficiently flexible and efficient. Accordingly, BPO is considered to be of substantial importance in ? banking and finance industry (Kumar and Hillegersberg 2004; Lammers, Lohndorf and Weitzel 2004).

In fact, ? survey of Uk’s top 500 banks reveals that 9 out of 10 banks plan to focus on core business functions and that ? present wave of BPO in ? BFI is just ? beginning of ? main trend (Wahrenburg, Konig, Beimborn, Franke, Gellrich, Hackethal, Holzhauser, Schwarze and Weitzel 2005). Accordingly, in ? survey 80. 5% of ? banks expect BPO to enable cost savings in banks, and 79. 4% ? focus on core competencies. Nevertheless, few banks have so far outsourced any processes, and only 14. 2% have selectively outsourced one or two sub-processes.

While ? benefits of BPO to banks are obvious, ? role of hazard is substantially under-researched. This paper aims to viaduct this space by revealing ? importance of diverse hazard facets for BPO in ? banking and finance industry. From ? theoretic perspective, ? thorough understanding of ? risks associated with outsourcing will be ? building block towards ? more complete understanding of outsourcing. ? managerial contribution is to pinpoint key risks and develop solutions for market sides, outsourcing organization as well as vendor.

Methodologically, ? problem is measuring ? associated risks and ? effectiveness of hazard reducing actions. While there is usually abundant loss data and financial evaluation for high frequency low impact events (e. g. , delayed execution of client orders due to high order volume), many low frequency high impact events (e. g. , 9/11, fraud) and outsourcing specific risks (e. g. , anticipated cost savings cannot be achieved, outsourcing vendor service quality decreases over time) are largely unaccounted for. ? way to evaluate these risks despite ? non-availability of quantitative data is to use ? expert judgment of BFI managers.

Supported by studies showing that ? actual outsourcing decision is strongly influenced by ? particular manager in charge of ? procedure (rather than by ? monolithic organization) and is thereby an individual rather than ? group decision (Barthelemy and Geyer 2001; Kakabadse and Kakabadse 2002), it becomes obvious that ? manager’s individual perception of outsourcing risks and benefits plays ? main role as an antecedent to corporate outsourcing. We specifically focus our research on ? risks of BPO as managers perceive them, contrary to any objective hazard measure.

This is done as, though ? BFI is an industry sector which professionally deals with hazard as one of its main functions in developed economies (Grill, Perczynski and Grill 2005), ? coherent model to objectively measure ? risks inherent in outsourcing has not yet been published (Gewald and Hinz 2004). So, if managers are involved in ? decision procedure towards BPO it is of utmost importance how they perceive ? risks as no reliable objective measure is currently available. Therefore, our research question is: What is ? influence of ? risks BFI managers’ associate with business procedure outsourcing on their outsourcing intention?

In ? following, we first review ? present literature on business procedure outsourcing and ? reported risks of BPO. To analyze ? manager’s hazard perceptions, we then apply Perceived Hazard Theory (Bauer 1967) and ? Theory of Reasoned Action (Ajzen and Fishbein 1980) to develop ? structural equation model. ? hypotheses of ? model are explicated and ? overall model is tested in ? UK BFI. For this purpose, ? questionnaire was sent to 593 BFI managers in charge of one of four designated business processes in UK’s 200 largest banks.

218 usable questionnaires were returned, resulting in ? response rate of 36.8% covering 63% of ? targeted banks and 90% of ? cumulated UK BFI balance sheet. ? analysis indeed reveals ? strong impact of performance, financial, strategic and psychosocial hazard on ? perception of overall hazard. ? four hazard facets were derived from Perceived Hazard Theory and applied to ? outsourcing context by arguing with Transaction Cost Economics (Commons 1934; Coase 1937), Agency Theory (Eisenhardt 1989) and Resource Dependency Theory (Thompson 1967; Aldrich 1976; Pfeffer and Salancik 1978) as well as empirical evidence from former studies.

Overall, hazard has ? strong negative influence on ? manager’s attitude towards business procedure outsourcing. ? attitude towards outsourcing, in turn, has ? strong impact on ? manager’s intention to outsource business processes, which adds to present findings on outsourcing decision research. Our findings thereby contribute to antecedent research on ? outsourcing decision and to ? literature on outsourcing in ? BFI.

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