Abstract
This article aims to identify the major factors which prove as motivation and influence for a bank while deciding what, when, how and whom to outsource. A survey questionnaire was developed and responses were collected from 434 bank employees from two major groups of public sector banks and private sector banks in India. Exploratory factor analysis has been used to find out the latent factors for outsourcing decisions. Results of the study find Strategic competitive advantage, better customer service, better use of resources, capitalization on technological advancements, and cost-effectiveness as the major motivating factors for outsourcing the IT/IS, HR, marketing services, financial and other services. The present research article will be of great help for banks to measure the impact of outsourcing on the profitability, productivity, liquidity, and market share of the banks.
Keywords
Introduction
To sustain in the competitive world of business, the firms should focus on what they can do in the best possible way, other activities could be outsourced to those who can perform better. Outsourcing is a strategic decision, where the activities, usually performed by the corporations themselves are served by third-party vendors in lieu of remuneration (Ravi et al., 2011; Weidenbaum, 2005). These vendors work for the corporations continuingly for an agreed period of the contract, at cheaper rates or in better quality than the organization itself (Narayanasamy, 2020).
Reserve Bank of India (RBI) has issued policy guidelines for the commercial banks who are outsourcing or intending to outsource some of their functions to third parties. All the departments concerned who intend to outsource a financial operation or service shall follow the principles, to allow sound and sensitive risk management practices for successful monitoring, due diligence, and risk management resulting from outsourcing activities (Gulla & Gupta, 2012; Pratihari & Uzma, 2018). Further, to protect the rights of banks as well as bank customers, the RBI has the power to access the book documents of banks stored and processed by the service provider. The identification of latent factors for outsourcing decisions in banks will give the better opportunity to understand their impact on the performance of banks, as these decisions are related to the operational activities, they may have both short term and long-term impacts on employee productivity, customer satisfaction, corporate image of the bank, market share of the bank (Jain & Natarajan, 2011; Mehra, 2012). These decisions are so crucial, that a single wrong decision can lead to the ultimate closure of the bank (Kumar & Prakash, 2019; Maheshwar, 2014). This research work will also benefit the service providers, the third-party vendors, and contractors performing on a large as well as small scale to update their code of conduct, which will help to reduce the outsourcing failures and resource losses in banks due to these failures.
The motivation behind conducting the present research is to identify the base for creating a research model to identify the impact of these factors on the performance of the banks in the areas of employee productivity, customer satisfaction, efficiency, and service quality. A structural model will be further developed to analyze the benefits and challenges of outsourcing on the performance of the banks, a comparative study will be done to identify if any differences exist in outsourcing policies of public sector banks and private banks in India, which are the two major representative sectors of the Indian banking system.
The technology acceptance model (TAM), resource-based view, and transaction cost economics (TCE) are taken as the theoretical base for the present research. The TAM (Davis et al., 1989) explains the individual’s behavioural attitude toward new technology acceptance. The success of any outsourcing contract is also related to its acceptance by the existing staff of banks. So, the individual employee’s attitude also influences the outsourcing contract and execution (Garg et al., 2017), which strongly provided the base for conducting the present research using employee’s perception. The resource-based view explains that different firms use different resource mixes and different strategic implementations to maintain their competitive advantage (Barney, 1991). So, their internal resources are the influencers of outsourcing decisions (Gulati & Khera, 2013). Banks in India also adopted outsourcing as a tool to achieve competitive advantages (Hanafizadeh & Zare Ravasan, 2018; Ravi et al., 2011). The TCE framework articulates that it is the ‘transaction cost’ which influences the decision to be taken or not. This theory supports the fact that low transaction costs decisions affect the economy positively (Bahli & Rivard, 2003; Schermann et al., 2016). It was found in the researches based on this theory that cost savings and increase in revenues were the basic influences of the IT and business process outsourcing decisions of many firms (Zhang et al., 2018).
The next sections of the research article include a brief of outsourcing concept in India, reasons for outsourcing, the review of earlier researches conducted in a similar field, the research methodology section includes the details of sampling and survey method, exploratory factor analysis (EFA), the descriptive statistics of the identified factors and the discussions of findings. Thereafter the implications of the present research are elaborated and the last section provides the conclusion and scope of future research.
Concept of Outsourcing by Indian Banks
Outsourcing as a facility is used by Indian banks for a long time back, but it emerged as a business solution after the implementation of a new economic policy in 1991 (Gulla & Gupta, 2012). The outsourcing of information technology and non-core business functions became a famous practice as a result of globalization and liberalization in the world of Indian banking (Hanafizadeh & Ravasan, 2018). The Liberalization allowed the new-aged private banks to use the international practices of non-regulated and large-scale adoption of technology (Gewald & Dibbern, 2009; Mann et al., 2015). The cut-throat competition in private and public banks exposed the public banks to high degree competitions and challenges (Kuriyan & Ray, 2009; Rana, 2019). The public banks for the sake of their survival adopted the practice of outsourcing their non-core and less-relevant functions to the third-party service providers (Ravi et al., 2011). Where the private banks adopted it robustly, the public banks adopted it, gradually under the regulated control of the government and RBI (Tauseef, 2011). Overall, the banking system of India faced robust technological advancements and horizontal integrations as a result, modern banking facilities such as ATMs, Debit cards, Mobile banking, Internet banking came into existence (Bhat & Bhat, 2013; Bhosale & Nalawade, 2012). These outsourcing practices also provided huge employment to the small domestic companies as well as international companies’ experts in IT, software, and hardware solutions (Srivani & Reddy, 2020). It also prepared the banks to tackle the changing business environment, increasing their competitiveness by increasing their abilities to adjust quickly to this altering environment and to achieve higher returns on assets (Pandey & Kumar, 2020).
India, itself has developed as an outsourcing destination for many industrial services. So, banks in India prefer to outsource within the country to the domestic service providers which are performing as leading service providers worldwide (Desai, 2009). This differs the outsourcing practices of India, a developing country, from the off-shoring practices of developed countries such as the United Kingdom, the United States of America and Germany (Alsamydai et al., 2012). The major activities outsourced by the Indian banks are the opening, settlement, and closing of accounts, issue, and processing of Cheques, Managing Customer queries (Call Centres), Recruitment, Selection, and Training of Personnel, Administration of Payroll and Taxation, Marketing of bank products, Cash management & collections, Technology infrastructure management, maintenance & support, Application development, maintenance, and testing (Bhosale & Nalawade, 2012).
Reasons for Outsourcing by Indian Banks
Earlier, any decisions of outsourcing were taken by banks due to the lack of internal resources, or due to any issue which banks were not able to resolve on internal levels (Aggarwal et al., 2016). Saving the time of staff and saving money was another stronger reason for outsourcing (Gulla & Gupta, 2012). Banks initially outsourced those functions which might not need much attention and which were considered non-significant to decision making (Baidya & Bejborah, 2015). When banks first started paying attention to outsourcing non-strategic functions, such as IT maintenance, payrolls, facilities management, and logistics, the aim was cost-cutting. However, there is a comprehensive set of reasons for outsourcing in the banking industry, which are common reasons for outsourcing in other industries (Gulla & Gupta, 2012; Jain & Natarajan, 2011; Ravi et al., 2011). The major ones are enhancing the operational performance, engaging resources into useful and productive activities such as application re-engineering by saving the resources, reducing overheads and operating costs, freeing up human resources and training prices, avoiding expenditure in terms of capital, improving speed, service, and efficiency which in turn enables a firm to focus on time-critical projects (Modi & Padiya, 2020; Narayanasamy, 2020).
India is a famous outsourcing destination for developed countries due to the availability of cheaper labour, and low service rates (Tjader et al., 2010). India has experienced major developments in technologies such as telecommunications, fibre optics, and satellite communications in recent years, which have made quick communication and faster transfer of data possible, opening new ways of outsourcing (Hanafizadeh & Ravasan, 2018). As a result of which Indian banks can meet the customer demand more efficiently and at cheaper costs. Indian banks are taking outsourcing decisions more aggressively than ever before (Patil & Wongsurawat, 2015).
Outsourcing for many banks provides an opportunity to function with greater flexibility. Banks are selecting the service providers based on the extent of flexibility and innovative solutions so that changes in the business environment can be reflected more creatively (Baidya & Bejborah, 2015).
Besides the factors such as cost savings, access to experience focus on core activities, improving performance, and flexibility, the special necessity to outsource is observed when a certain resource, either equipment resources or manpower is not required full time, or the efforts to obtain the resource are not explainable enough (Baidya & Bejborah, 2015; Chang et al., 2012). For example, if technical maintenance or skillfulness is occasionally needed. Since the cost of hiring for a particular permanent job is too high, it will be beneficial for the firms to outsource such activities. Outsourcing enables corporates to access a highly qualified specialist, who may not be available to the client organization and allows the corporate to fully exploit the suppliers’ innovations, investments, and capabilities (Narayanasamy, 2020). Further, an essential reason for outsourcing is the achievement of efficiency in the performance that the third-party vendor might offer. Outsourcing can provide a variety of services and opportunities which will help to save the best available resources (Gewald & Dibbern, 2009).
Review of Literature
Outsourcing is a strategy managed by the Indian banks to provide some of the significant non-core functions to specialized and efficient service providers. Outsourcing helps in achieving strategic objectives by reducing costs and increasing efficiency (Glick et al., 2020). The base of the majority outsourcing in the organizations is reducing costs and increase efficiency by using the vast pool of talent of professional expertise unavailable inside the organizations. organizational, managerial, economic, strategic, technical, structural, and institutional factors have an impact on outsourcing decisions (Assaf et al., 2011; Gulla & Gupta, 2012; Hanafizadeh & Ravasan, 2018; Jain & Natarajan, 2011; Raina & Sharma, 2013). Managerial factors such as improvement in service quality, cooperation and participation with employees, prioritizing organizational goals by managers, applying strategic management, managing managers interaction, managers perception of using outsourcing management, and supervision influence the outsourcing decisions (Hosseini Golafshani & Samadzadeh, 2017; Reeshma, 2017; Sharma & Shrivastava, 2021). The outsourcing decisions are influenced by various critical factors such as perceived complexity, perceived costs, service observability to the client, the cultural fit between the client and supplier, perceived loss of organizational knowledge, prior outsourcing experience, external pressure, market volatility, and supplier power (Hanafizadeh & Ravasan, 2018). The risk analysis, and perceived IT security, trust, management style, technology innovation have influenced the technology adoption of the organizations in developing countries like India (Shrivastav, 2019). Outsourcing various activities provide various value-added services, increases the knowledge level, service quality, productivity, and profitability of the banks (Reeshma, 2017).
Outsourcing of functions such as debt recovery, loan settlement, and sanctioning of loan applications has helped the banks to increase their net loanable amount and helped in reducing the non-performing assets (Pandey & Kumar, 2020). The benefits arising from outsourcing are only one side of the coin, various disadvantages are also brought to the organizations through outsourcing which could result in outsourcing failure. The impromptu decisions of outsourcing may result in financial debacles to the organizations, loss of confidence of internal employees, and low retention of effective employees are affected by the firms’ outsourcing decisions (Alkhater et al., 2018). The wrong outsourcing decisions may affect the retention of good employees and it also has an impact on the internal environment at the team level, where the third-party employees may find the staff behaviour unsupportive (Srivani & Reddy, 2020).
Higher salaries, rewards, and recognitions and the bonus are the key factors influencing the retention of good employees in banks. If the key tasks of a job are outsourced, it may reduce the efficiency of the worker and could de-motivate him to achieve his goals (Srivani & Reddy, 2020). The outsourcing decisions also affect the job satisfaction levels and work engagement levels of bank employees, the more regulatory restrictions lead to less flexibility in the outsourcing process (Garg et al., 2017). The stress level of the employees also affects the attrition rate and job satisfaction among employees. The satisfied employee cooperates with the team of the outsourcing partner company and helps in achieving successful outsourcing contracts (Modi & Padiya, 2020). The efficiency of bank employees includes both quantitative and qualitative aspects of employee performance. Outsourcing may have both qualitative and quantitative impacts (Chitnis & Vaidya, 2018).
As per the recent developments in the banking scenario, many organizations are taking outsourcing as a tool for Sustainable development (Rana, 2019). It has emerged as a tool for sustainable development of banks in developed countries such as the UK, USA, and Germany, but the rate of adoption and the extent of its practice is very much different in developing countries versus developed countries (Kumar & Prakash, 2019). Outsourcing as a strategic tool has helped the banks to gain a competitive advantage. It also helps in the effective utilization of internal and external resources (Isaiah Murithi, 2019). In underdeveloped countries like Indonesia, the outsourcing decisions of the firm provides opportunities for youth employment and poverty reduction, the online outsourcing of repetitive, less-skilled jobs is a new worldwide trend among industries, this has provided opportunities to the computer literate people having computer and internet connections (Glick et al., 2020).
Indian banks are also using outsourcing as a tool for maintaining social and environmental norms (Narayanasamy, 2020). Nowadays banks have adopted outsourcing solutions for performing their corporate social responsibilities and building brand image. Research has identified that Indian banks outsourcing their community-based CSR initiatives, environment and customer-based initiatives, relationship, and corporate personality building activities, mandated corporate social responsibilities to small organizations and NGOs (Pratihari & Uzma, 2018). Researchers found that a mix of the formal and informal control systems is required to be maintained between the service purchasers and providers to ensure the success of the outsourcing contract (Subramaniam et al., 2019). The researchers are now focusing on identifying the impact of intellectual capital performance on financial performance, as a result of outsourcing. The impacts are also measured in improving employee–customer motivation policy, employee productivity, and the effectiveness of long-term investments in technological advancements (Roy & Thangaraj, 2020).
Research Design
Data collection: The primary data was collected using a survey method with a questionnaire as a data collection tool. Indian Public sector banks and private sector banks were selected as the population. The Geographical area of study selected was the National capital region of India. The sample banks were selected based on their market capitalization and a large number of branches in the national capital region of India. The survey questionnaire was designed comprising of both open-ended and closed-ended questions. The primary responses of the bank employees were collected. The perception of bank employees was taken on a 5-point Likert scale where they expressed their responses from strongly agree to strongly disagree towards the factors affecting outsourcing decisions. Total 434 questionnaires were sent to the bank employees. 237 filled responses were received, out of which after eliminating the not completely filled questionnaires, a sample of 200 bank employees was taken for the final analyses, representing the 50% response rate which included the senior managers, deputy managers, branch managers, junior managers and clerical staff working at branches of the sample banks located in NCR, India. The sample was taken from Punjab National Bank, State Bank of India, Bank of Baroda, HDFC Bank, ICICI Bank, and Axis Bank respectively as three public sector banks and three private sector banks. The respondents were asked which activities their bank is outsourcing and for how long they have been outsourced by the bank. Eighteen statements are included in the questionnaire indicating the different reasons for the outsourcing of the selected activities. The EFA was applied to identify the factors followed by the descriptive analysis of the responses received from the bank employees.
Data Analysis
Commercial banks in India outsource different activities to different external firms due to different reasons. This article makes an effort to identify the different latent reasons motivating the banks to prefer outsourcing of different activities Using EFA. The responses of the bank employees are collected against 18 statements on the five-point rating scale influencing the decisions of outsourcing in banks. The adequacy of sample size is examined with the help of the KMO test (Brown, 2009; Hair et al., 2010) whereas the correlation between different statements is examined with the help of Bartlett’s test of sphericity (Brown, 2009; Hair et al., 2010). Table 1 represents the estimated values of KMO and Bartlett’s test.
KMO and Bartlett’s Test
Table 1 depicts the KMO statistics of 0.75 which is greater than the required value of 0.6 (Hair et al., 2010). This indicates that the sample size is adequate for factor analysis. Bartlett’s test of sphericity examines the correlation matrix between the statements. Table 1 reported that the Chi-square statistics estimated for Bartlett’s test is found to be 1356.217 with the probability value of 0.000. Thus, the correlation matrix is not an identity matrix and the items included in factor analysis are significantly correlated. Table 2 reported the factor loadings of statements included in the factor analysis, the rotated eigenvalue, the variable explained, commonalities of statements, and the provided name of the factor.
Rotated Component Matrix
The second column of Table 2 represents the factor loadings of the statements. The factor loadings represent the correlation between the statements & their respective factor (Schmitt & Sass, 2011). The factor loading of all statements is greater than 0.7 (Brown, 2009; Hair et al., 2010) and each statement has 1 single high factor loading to one factor and low factor loading to remaining factors. The nature of the statements having high factor loadings is studied and a suitable factor name is provided to each factor. The provided factor names are ‘strategic competitive advantage’, ‘better customer service’ ‘better use of resources’, ‘capitalization of technological advancements’ and ‘cost-effectiveness’. The explanatory power of the factors is analyzed with the help of commonalities of the statements. The commonality of the statements included in the factor analysis can be defined as the proportion of variance of the different statements which can be explained with the help of extracted factors (Hair et al., 2010). The initial commonalities of the statements are assumed to be 1 and the extracted communalities are estimated for each statement. The extracted commonalities of all the statements are found to be greater than 0.5 which means that at least 50% of the variance of the selected statements can be explained with the help of the extracted factors. The EFA is applied with the help of principal component analysis with Varimax rotation which is an orthogonal rotation and provides independent factors (Brown, 2009; Dien, 2010; Hair et al., 2010) The varimax rotation also improves the explanatory power of the factors having less eigenvalue. In the PCA method, the eigenvalues of each factor are estimated and arranged in descending order to their eigenvalue (Brown, 2009; Hair et al., 2010). The first component has the highest eigenvalue and the last component have the lowest eigenvalue. In this study, only those factors are extracted for the analysis, which has an eigenvalue greater than 1. The results of PCA and Varimax rotation indicate that 18 statements can be explained with the help of 5 factors. These 5 factors can explain 66.68% of the variance of the included statements. The extracted factors are explained in the next section
Factors Behind the Outsourcing Decision of Banks
The EFA provides the five factors which are examined carefully and are named as
Factor 1: Strategic competitive advantage
Factor 2: Better customer service
Factor 3: Better use of resources
Factor 4: Capitalization of technological advancements
Factor 5: Cost-effectiveness
The above factors are extracted factors as discussed below.
Factor 1: Strategic Competitive Advantage
A bank that possesses a strategic competitive advantage has an edge over its competitors due to the superiority of such resources (Jain & Natarajan, 2011). The competition in the Indian banking sector has increased since the introduction of the financial reforms in this sector in 1991. The competition created by the new private sector banks by the innovation with the technology, new business practices, and the new products had undoubtedly re-energized the Indian banking sector as a whole (Meera & Sankaran, 2015). Factor one is found to have high factor loadings with four statements. Table 3 represents the descriptive analysis of the collected responses of the bank employees for the statements having high factor loadings with Factor 1.
Strategic Competitive Advantage
The results indicate that the mean score of the responses is found to be greater than 3.5 on the 5-point Likert scale. The statement with the highest mean score is found to be ‘Better services than competitors’ (mean score = 3.64). Banks face competition in giving better services than the others, the outsourcing of the activities results in ultimate competitiveness in providing better services than others (Meera & Sankaran, 2015). The next statement with the high mean score is ‘Risk management’ and ‘Focus on core banking business’ (mean score = 3.58). This indicates that outsourcing of the activities also provides the risk management tools which make the bank superior to the competitors (Jain & Natarajan, 2011). The RBI guidelines about outsourcing have mentioned the banks to design a well-defined risk mitigation programme before outsourcing any of the activity to a third party, and every bank is asked to prepare outsourcing policies of the bank, which helps the bank to gain customer trust and increases the competitive advantages for the bank. Similarly, the focus on the core banking business also helps the banks in gaining a competitive advantage by saving the time of employees (Gewald & Dibbern, 2009). The statement with the lowest mean score is found to be ‘Improvement of brand image’ (mean score = 3.50). The outsourcing of the few selected activities like marketing of CSR activities also helps in improving the brand image of the bank (Pratihari & Uzma, 2018). Factor one is found similar and in line with the earlier researches.
Factor 2: Better Customer Service
Banks have to make their customer banking experience more convenient, which is possible by outsourcing their services to other service providers. The increase in the number of service providers has aggravated the competition and customer acquisition costs in this industry (Tayauova, 2012). Under these circumstances, retaining the existing customers by enhancing customer loyalty and customer value has become a core marketing strategy of the service providers (Assaf et al., 2011). It has revealed that factors such as service quality, price, customer relationship management, and corporate image contribute to customer satisfaction which ultimately increases customer loyalty (Meera & Sankaran, 2015). It has also revealed that apart from satisfaction, customer service is also a significant factor affecting customer loyalty (Gewald, 2010). The factor two better customer service is found to have high factor loadings with four statements. Table 4 represents the descriptive analysis of the collected responses for the statements having high factor loadings with Factor 2.
Better Customer Service
The results indicate that the mean score of the responses is found to be greater than 3.45 on the 5-point Likert scale. The statement with the highest mean score is found to be ‘Advantage of expert services from outside’ (mean score = 3.53). For being the benchmark in providing customer service banks do not hesitate in taking help of expert services available in the market (Meera & Sankaran, 2015). To serve the customer with the best of the services, outsourcing is done to the market experts. Outsourcing brings fruitful results in terms of increased customer base and operational benefits. The next statement with the high mean score is ‘providing services effectively to a large number of customers’ (mean score = 3.51). The banking industry plays a large role in the economic development of the country and serving a large customer base where timely and effectively delivering customer services with all the secrecy of personal, financial, and transactional data is required, banks cannot afford to lose any single customer, outsourcing of some of the activities such as network management, management of ATMs, website management can help the banks in serving their customers better (Assaf et al., 2011). ‘Improvement in the service quality for the customers’ (mean score = 3.46). This indicates that outsourcing of the activities also provides the improved service quality mechanism, which makes the bank superior to the competitors. Outsourcing the activities such as management of social media, market research functions help the bank to have a close eye on service quality challenges (Meera & Sankaran, 2015). The statement with the lowest mean score is found to be ‘Better overall customer experience’ (mean score = 3.45). The outsourcing of the few selected activities also helps in improving the overall customer experience of the bank. These days bank provides multichannel connectivity of customer to his bank account like on a single account. The customer is given the facility of Internet banking, mobile banking (Singh & Sinha, 2016), offline banking, this can be possible effectively only with the help of outsourcing IT services such as Networking, website management, hardware maintenance, and outsourcing of software development, etc.
Factor 3: Better Use of Resources
When a bank recruits a vendor to perform business activities that are not worth the time or money then it provides ample opportunities to the banks to use their internal workforce and resources wisely for more critical and time-critical jobs (Gewald & Dibbern, 2009). Outsourcing for many companies provides an opportunity to function with greater flexibility. In outsourcing, to reflect changing business atmosphere, the contracts and the jobs of their workers depend on the extent of flexibility (Narayanasamy, 2020). Table 5 represents the descriptive analysis of the collected responses for the statements having high factor loadings with Factor 3.
Better Use of Resources
The results indicate that the mean score of the responses is found to be greater than 3.57 on the 5-point Likert scale. The statement with the highest mean score is found to be ‘Lack of internal expertise’ (mean score = 3.72). Due to the routine work pressures, lesser training makes the in-house personnel lacking in expertise (Meera & Sankaran, 2015). According to one of the respondent branch managers of a public sector bank, on one hand, the permanent employees are less interested in learning new skills, and on the other hand, banks have to maintain the competitiveness and use the internal staff at maximum utilization, banks due to lack of internal expertise outsource the activities requiring knowledge of latest technologies. Organizations may be particularly impacted by a lack of resources and the best alternative to solve this is to acquire the needed resources from an external provider (Garg et al., 2017). The next statement with the high mean score is ‘effective allocation of In-house personnel’ (mean score = 3.58). The effective allocation for the routine banking functions leaves no scope of delegating more workload on the existing staff. The high cost of new recruitment and selection procedures leads the bank to outsource some of the non-core functions (Gewald & Dibbern, 2009). The next statement is ‘to access to services unavailable in-house’ (mean score = 3.62). This indicates that outsourcing of the services unavailable in-house like space and infrastructure constraints leads the bank to outsource. The statement with the lowest mean score is found to be ‘effective utilization of bank resources’ (mean score = 3.57). The outsourcing of the few selected activities also helps in improving the use of the available resources of the bank.
Factor 4: Capitalization of Technological Advancements
Various technological developments in telecommunications and satellite communications and advancements in fibre optics technology have increased internet-based communication possible and popular, with the help of increased ICT outsourcing, the transfer of data is possible that has helped the banks to provide better customer services and enhanced their efficiency (Hanafizadeh & Zare Ravasan, 2018). The increased competition has led the bank to use these technologies, but it requires huge investments and needs quick upgrades, so rather than making huge capital investments in these functions, banks outsource them (Jain & Natarajan, 2011). Table 6 represents the descriptive analysis of the collected responses for the statements having high factor loadings with Factor 4.
Capitalization of Technological Advancements
The results indicate that the mean score of the responses is found to be greater than 3.8 on the 5-point Likert scale. The statement with the highest mean score is found to be ‘Reduction of risk of technology obsolescence’ (mean score = 3.93). The number of service providers and availability of experienced and specialized service providers has increased, which provides latest and upgraded technologies such as use of latest software, latest accounting packages, networking technologies, use of updated marketing technologies, etc., the activities which were demanding for heavy investments in infrastructure and technology, when they were done in the house if outsourced results into Capitalization of technological advancements (Jain & Natarajan, 2011). The next statement with the high mean score is ‘Benefit of advance technology by the service provider’ (mean score = 3.92). Outsourcing of IT and IS activities also reduce the risk of obsolescence in technology, because the service provider invests in the technology and infrastructure, so banks become free from the risk of obsolescence of very fast-changing technology and the bank can take the benefit of updated technology (Meera & Sankaran, 2015). The statement with the lowest mean score is found to be ‘Better IT competencies’ (mean score = 3.88). The outsourcing of the IT activities also helps in reducing the investment in Software development, maintenance of programming, and networking system the bank. The banks can take benefit of Capitalization of technological advancements.
Factor 5: Cost-effectiveness
Public and private banks have recognized the importance of outsourcing to increase revenues and maximize efficiency along with maximum cost-cutting. Increases in the number of customers, along with the advanced knowledge of customers regarding the different financial policies and services, have become a vital problem for the banks (Sharma & Soni, 2015). Advancement in technology has powered banks to process many transactions and customers seeking additional requirements. In contrast, this achievement has become a big headache for many public and private sector banks to handle such rapid growth independently (Assaf et al., 2011). Therefore, outsourcing has become an excellent option to manage the increased workload efficiently (Baidya & Bejborah, 2015). Table 7 represents the descriptive analysis of the collected responses for the statements having high factor loadings with Factor 5.
Cost-effectiveness
The results indicate that the mean score of the responses is found to be greater than 3.6 on the 5-point Likert scale. The statement with the highest mean score is found to be ‘Saving of time by outsourcing the activities’ (mean score = 3.79). Due to the increased number of service providers the availability of experienced and specialized service providers has increased, outsourcing of the activities which were demanding heavy investments in infrastructure and technology in-house results in ultimate cost-effectiveness (Assaf et al., 2011). The next statement with the high mean score is ‘Cost saving’ (mean score = 3.74). Outsourcing of the activities also provides cost savings which makes the bank superior to the competitors (Meera & Sankaran, 2015). The statement with the lowest mean score is found to be ‘Avoid recruitment of additional staff’ (mean score = 3.62). The outsourcing of the HR activities also helps in reducing the investment in recruitment, training, and development of staff and provides cost-effectiveness to the bank (Hosseini Golafshani & Samadzadeh, 2017).
Implications: Managerial, Academic, and Research
Managerial Implications
The results reported that Indian banks are outsourcing their services/activities to third-party service providers due to different strategic reasons namely strategic competitive advantage, cost-effectiveness, technological advantages, optimum resource utilization, and better customer services. To some extent, lack of internal expertise is also one of the reasons found behind outsourcing. The senior managers working with Indian banks can aim to maximize their profits by adopting high-quality outsourcing activities. Further, the banks can create delight for their customers by providing benchmark services and providing innovative solutions to their problems to sustain their business (Kumar & Prakash, 2019;). Increased technological developments have helped the banks gain benefits from technological advancements happening in the country in the field of Information, communication, and digital banking technologies. The outsourcing of technological functions not only makes the banks advanced but also helps the banks to achieve cost-effectiveness by reducing the operating costs and investment costs in these functions (Rani, 2015; Ravi et al., 2011)
Academic Implications
The banking sector is providing employment opportunities to young business graduates. This study provides an insight to the academicians to incorporate the outsourcing strategies in their syllabus to enhance the skills of the students and to make them ready to work with the banks. This article provides information on the factors influencing the decision of what to outsource and what not to outsource. This knowledge helps the banks to make better use of their existing resources. The factors identified through factor analysis can also be used as a base for further research for analyzing the impacts of outsourcing on the performance of Indian banks. As banking is related to other non-banking financial services and insurance services the findings of this study will help these sectors too to make their outsourcing experience better. The findings of this article will be taken as a base for developing a structural model to examine the impact of outsourcing on the performance of Indian banks. The banks in developed countries are off-shoring to improve their innovativeness and reducing the operating costs of non-core functions to cheaper locations such as India and China. The Indian banks are using domestic outsourcing, in which they outsource to the domestic vendors working Internationally and locally. Gaining a strategic competitive advantage is the strongest reason for the banks in India, as there exists strong competition in public and private banks. Private banks are performing outsourcing more liberally than the public banks to give benchmark services. The employees’ perception contributed positively to the second factor found, which is providing better customer services.
Conclusion
This article finds out the different reasons behind the outsourcing activities of Indian banks. This article is different from existing literature in the terms that the factors extracted in the article are different and more relevant in today’s context especially post covid scenario. The outsourcing of the activities by the banks is found to be motivated by different reasons. The article identified the five factors from the EFA analysis applied to the 18 statements included in the survey. These 5 factors can explain 66.68% of the variance of the included statements. These factors are a strategic competitive advantage, better customer service, better use of resources, capitalization of technological advancements, and cost-effectiveness. The outsourcing of the activities allows the banks to achieve superior margins compared to their competitors’ banks and generates value for its shareholders. Outsourcing provides the banks with an edge over their competitors due to the superiority of selected vendors. The customer experience with the best of the services helps in retaining the existing customers by enhancing customer loyalty. Better service quality, price, customer relationship management, and corporate image contribute a lot to customer satisfaction which ultimately increases customer loyalty. The outsourcing of activities provides an opportunity to utilize the existing resources of the banks with greater flexibility. The development in technology including telecommunications, information technology, and fibre optics technology has opened new ways for outsourcing in Indian banks. The banks take the help of customer care services to enhance their efficiency and stand out in the market. The banks have recognized the importance of outsourcing to increase revenues and maximize efficiency along with maximum cost-cutting. Increases in the number of customers, along with the advanced knowledge of customers regarding the different financial policies and services, have become a reason for banks to outsource their activities.
Scope of Future Research
The outsourcing decisions have developed as strategic decisions in recent years, which may have an impact on the profitability, employee productivity, customer satisfaction, and service quality of banks in India. The examination of the impact of outsourcing failures, challenges, and barriers faced by banks can be an area of interest for future research. The outsourcing of services such as research and development, knowledge process outsourcing can also be focused on for future research. The study can be conducted on the impact of outsourcing practices on other types of banks such as cooperative banks, regional rural banks, and foreign banks. Due to the similar nature to banks, the same study can be conducted on non-banking financial companies, the insurance industry. The findings of this article will be taken as a framework for developing a theoretical model to study the impact of outsourcing strategies adopted by Indian banks on their performance. The Indian banks are gradually moving towards global performance which is one of the research areas to explore by researchers. Banks in developed countries are found to be off-shoring to improve their innovativeness and reducing the operating costs of non-core functions to the cheap location such as India and China is further a research topic to explore.
Footnotes
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.