IT Outsourcing Strategies: The Case of Indian Banking Sector

Introduction

According to Federal Bank of New York (1999), not only there is a gradually growing trend in financial services sector in outsourcing, both in terms of nature and scope of activities outsourced, but also outsourcing has become critical imperative for survival of financial institutions in today’s business environment.

Ackermann (2003) observed that financial services have become the second largest sectoral user of outsourcing services after manufacturing. Basel Committee on Banking Supervision (2004) estimated that more than US$356 billion (represents 15 percent of the total industry’s cost base) of the US financial services industry would be outsourced, especially to offshore locations.

Accenture (2002) survey has shown that a number of banks in the USA outsourced not just functions like credit card processing, HR and IT, but also data sensitive finance and accounting functions like GL, tax accounting, fixed asset accounting, accounts payable and receivable, account management, reconciliation, treasury and capital management.

Some study also observed increasing trends of outsourcing (especially ‘offshoring’) of more complex, traditional core processes, white-collar business processes in the UK’s financial services industry. In fact this triggered a tremendous growth in outsourcing and off-shoring within the international BFSI sector.

Literature Review

As outsourcing decisions are key elements of organization’s strategy, it is very important to understand the implications of outsourcing on a particular activity/process/function. Both in practice and literature, various dimensions of outsourcing have been identified which need to be considered while taking an outsourcing decision. A few dimensions as identified in the outsourcing literature are – type of activities being outsourced; nature of services outsourced or service individualization; scope or extent of outsourcing; ownership of assets or transfer of assets (also called degree of independence); geographical location of service providers; and number of service providers engaged (i.e., service creation). The same can be summarized into four major dimensions, first, the sourcing model based on vendor type, second, shoring model based on vendor location/service creation, third, engagement model (based on number of vendors engaged), and fourth, the duration of the engagement based on the period of contract.

Outsourcing, as a business practice, is identified in two broad categories, namely Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO) (Fröschel, 1999). BPO involves outsourcing of business related and functional activities like payroll, accounting, customer support, recruitments etc. ITO involves outsourcing of all information technology related activities like IT application development, IT infrastructure etc. Fröschel (1999) also highlights that both ITO and BPO can encompass different activities such as development, operations, maintenance, customization and further development. This categorization of outsourcing is based on the nature of activities involved in an outsourcing engagement.

Lancellotti, Schein, Spang, and Stadler (2003) undertake a similar classification as they studied the “outsourcing stack”. Their classification of outsourcing was based on the type of outsourced activity. According to them, the outsourcing stack consists of IT infrastructure, IT applications and the respective business processes. They suggest that the service components of this “stack” can either be outsourced individually or as a bundle, i.e., the vendor may perform different activities, such as development, operation or maintenance, for each of these components.

Willcocks and Lacity (1998) describe six forms of the emerging models of outsourcing – Value added Outsourcing, Equity holding, Multi-sourcing, Co-sourcing, Spin-offs, and Creative contracting.