Outsourcing the core or non-core activities is a strategic decision for banks, as it can affect the quality and cost of services and above all the bottomline of a bank. The maintenance of information technology emerges as a major activity to outsource the world over. There are e-business suites on demand offering a complete and cost- effective package for administering, managing and maintaining information technology.
The concept of outsourcing is as old as the existence of the human community. As everyone in the civilized work environment focuses on his or her core competency, everything else is outsourced. However, with the division of labor and specialization of occupation, the complexity of functions has increased and the core competency has become more narrowly and clearly defined.
In terms of outsourced activities, these typically begin with non-core activities (such as HR administration, payroll, travel logistics, IT infrastructure, etc.) and go on to the core operational areas of the institution. An example of outsourcing core activities in the banking sector is where banks decide to focus purely on loan origination and pass on loan management to other companies through securitizations. Another example is the emergence of asset reconstruction companies, which exclusively focus on delinquent loan collections, while banks concentrate solely on origination and servicing of loans. In the private sector we also see outsourcing of customer servicing activities through call centers.
Banks need to keep in mind the rationale behind outsourcing before defining outsourcing priorities. The focus in outsourcing has often been on cost saving, as specialized entities can provide the same services at a lower cost due to learning curve efficiencies and economies of scale/scope (scope because they can apply best practices of one industry in another industry). Drivers for outsourcing also include the need for consistency in processes. In addition, outsourcing enables banks to free employees for areas more aligned with the core competency/strategic priorities and other activities like business development. Before a bank decides to outsource a particular activity, it has to be convinced that it is comfortable sharing information regarding its employees, customers and business with the insourcing entity. |
