As industries become increasingly competitive, businesses look towards developing competitive advantages. The transferring of operations to another business, known as outsourcing has become an important aspect of many businesses strategies in achieving this. Advancements in technology have seen the rise of businesses outsourcing on a global scale. While outsourcing offers numerous benefits including cost saving and increased performance, outsourcing also presents considerable challenges and risks (McIvor, R. 2010).
2.0 Royal Bank of Scotland
The Royal Bank of Scotland Group (RBS) is a large multinational banking and financial services company. Established in 1727 and headquartered in Edinburgh the RBS group provides services across three divisions including Personal and Business Banking, Commercial and Private Banking and Corporate and Institutional Banking. Operating through a number of subsidiaries including its own name bank Royal Bank of Scotland as well as NatWest, Citizens, Ulster Bank and Coutts. With a customer base of over 30 million the RBS operates in over 50 countries across the United Kingdom, Europe, America and Asia (RBS, 2014a). In terms of the UK the RBS has over 24 million customers with over 1.9 million Ulster Bank customers in Northern Ireland and the Republic of Ireland. (Keynote, 2014)
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In 2009 RBS received government intervention in the form of a bailout as a result of the financial crisis, which led to government ownership of 80% of RBS as of March 31st 2014 (UKFI, 2014). RBS have continued to report a loss for each financial year since the financial crisis with annual reports for RBS year ending 2013 show a turnover of £26.458bn and an operating loss of £8.243bn (RBS, 2013). However 2014 3rd quarter results have shown promising progress with profit before tax estimated at £1.27bn (RBS, 2014b).
3.0 Financial Services External Business Environment
3.1 Financial Crisis
The financial crisis of 2007/2008 threatened the collapse of many large financial institutions not only in the UK but across the world. In order to prevent this in the UK the government provided bailouts to a number of financial institutions including RBS and Lloyds. Despite this bailout RBS is still considered one of the dominant five banks within the UK which includes RBS, Lloyds Banking Group, HSBC, Barclays and Santander (Keynote, 2013). However as a result of the financial crisis the financial sector has seen a number of new stricter regulations forced upon it by the government, including the introduction of the Independent banking commission on Banks in 2010 and the Banking Reform Act in 2012. All of which have been set up to ensure tighter regulations on banking practices, increase competition and to rebuild consumer confidence in the financial services sector (Gov.uk, 2013).
3.2 New Technology
The availability and adoption of high speed internet connection, now estimated at 87% of all UK house households (44.3million adults) has seen a major trend in how the financial service sector delivers its services. In particular the financial sector has increased the online services for personal banking, in order to meet the demand of customers to provide 24/7 banking services (Keynote, 2014). Mintel (2014) highlights the importance of consumer smartphone usage with data revealing that online and smartphone interaction is the most frequent format of interaction with financial services. Mintel (2014) further highlights that’s firms can gain a competitive edge by integrating smartphone applications and offering differential features. RBS has embraced this consumer technological adoption and provides both online and smartphone application banking and has reported a 200% increase in mobile banking in the last three years. (RBS, 2014c)
3.3 Branch Closures
The increasing use of technology by consumers has offered the financial service sector more cost effective platform to provide services as online services reduces the level of branch visits and customer interaction. This has however resulted in the closure of branches or reduction in operating hours by many banks (Keynote, 2013). In 2014 alone RBS is planning to close at least 5% of its branches equivalent to around 154 branches (Treanor, 2014).
3.4 Financial Service Sector Outsourcing Trend
The outsourcing of information technology is not a new concept and has long been a trend within the financial service sector. According to Gonzalez et al (2012) some of the first information technology outsourcing contracts within this sector date back to the 1980’s. Further to this Gonzalez et al (2012) highlights outsourcing of Information Technology is a continued practice and has in fact increased over the past number of years. However as with other operations within the financial service sector outsourcing practices also have regulations and guidelines enforced by Financial Conduct Authority (FCA, 2014).
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4.0 RBS Outsourcing Operations and Outsourcer
Infosys was established in 1981 and is a global leader in consulting, information technology and outsourcing solutions. Headquartered in Bangalore India, Infosys operates through a number of subsidiaries throughout America, Asia, Europe and the Middle East. With over 165,000 employees Infosys provides services to customers in over 50 countries. At the end of Infosys financial year 31 March 2013 it reported a turnover of £5.264bn and an operating profit of £1.262bn (Infosys,2014a).
RBS selected Infosys to outsource part of their Information Technology operations and has been engaged in IT outsourcing contracts with RBS since 2002, having worked on a number of initiatives including the development of software and testing services (Infynews, 2007). In 2007 Infosys received the RBS Best Technology Supplier Award, RBS Director of IT development Mike Errington stated that Infosys is “consistently enabling commercial benefits while also working with us to provide an exceptional level of service and quality improvements” (Infosys, 2014b).
4.2 RBS IT Outsourcing Failure
A major challenge with outsourcing is the risk that the outsourcer may fail to carry out the required task with the potential to seriously damage the reputation of the business outsourcing. In June 2012 RBS experienced this, a technical glitch that affected over 6.5 million customers across RBS’s own brand bank, NatWest and around 100,000 Ulster Bank customers (Hall, 2012). The glitch affected costumers for several weeks, with Ulster Bank customers receiving the longest delays in service. The computing error meant the customers were unable access their funds which caused costumer uproar (Hall, 2012). The cause of the computer error was widely blamed by RBS’s IT outsourcing practices in India (Furness, 2012). The outcome of the error resulted in RBS paying £175 million in customer compensation and an investigation by the Financial Conduct Authority resulting in a fine of £42 million and £14m fine by the Prudential Regulation Authority for failure to put in place a sufficient IT system that could handle the risk of IT failure (Financial Conduct Authority, 2014).
5.0 HR Opportunities and Challenges relating to Outsourcing
5.1 Labour Market/Advanced Infrastructure
According to McIvor (2010) outsourcing to foreign country can offer many opportunities, emerging economies such as India have heavily invested in information technology infrastructure and have significance high levels of education making them an attractive outsourcing market for businesses. Javalgi et al (2013) further highlights that India has a strong emphasis on mathematics, science, and technology resulting in a large number of graduates within these areas. Alongside world class universities and an estimated 350 million English speaking population with around 100 million fluent in the language both written and spoken.
5.2 Implementation and Management
Businesses outsourcing any operation must insure that the outsourcer has been sufficiently trained. Taplin (2008) stresses that the transfer of skills from the business to the outsourcer is critical to the success of the outsourcing operation. The design and process of training should incorporate attributes from all levels of the organisation from HR and Managers to the users of the system to ensure knowledge is effectively transferred. This point has particular relevance to RBS with some aspects of RBS legacy computer system and coding formats dating back 40 years, it is of particular importance that outsourcer Infosys has a complete understanding of the system (Flinders, 2014).
5.3 Employee Morale
The outsourcing of operations within a businesses can have a negative effect upon the remaining employees within a business. Gonzalez et al. (2012) indicates that employees within an organisation that is outsourcing operations can become uncertain of their employment situation and can develop low morale which can lead to reduced levels of productivity.
5.4 Security Issues
The privacy and security of customer’s financial information is a specific issue to financial service sector outsourcing. Unlike the outsourcing of manufacturing RBS’s outsourcing of IT system will mean the transferring and processing of high volumes of personal financial information of millions of customers to Infosys. RBS needs to ensure that the correct measures are put in place to protect this information, as June et al (2010) indicates that the financial service sector in the EU and US accountable to full liability of all operations including those that have been outsourced.
6.0 Strategic HRM and Planning
6.1 Core Business Processes
A key strategic advantage of outsourcing is that it allows businesses to focus on core operations (McIvor, R. 2010). Businesses can use outsourcers to carry out non-core, time consuming and routine activities while businesses can focus on the development of operations that add value and competitive advantage to the business (Tayauova, 2012). Within Information Technology outsourcing in the financial services there are many routine tasks, RBS can insure that routine tasks such transaction processing are carried out by Infosys while RBS can focus on developing new information technology strategies and policies, such as RBS’s announcement that it is investing £1bn by 2017 in its digital services for personal and small business owners (Dunkley, 2014).
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6.2 Opportunity to integrate new technology
The use of IT within financial organisations such as RBS may no longer be seen as a simply back office operation instead Gonzalez et al (2012) highlights that IT can be seen as a crucial part of the financial service sector enabling efficient operations and also creating competitive advantages and services. Outsourcing not only allows for the processing and maintenance of existing IT operations but also enables the access to develop new technologies and competitive advantages. RBS’s has adopted this principle and has signed a contract worth £300 million with both Infosys and IBM in order to design a state of the art computer system for a new bank William & Glyn’s, which RBS are planning to launch in 2015. The new banks computer system will be based around RBS existing IT platform (Quinn, 2013).
6.3 Staffing Requirements/Workload Flexibility
The outsourcing of operations which are subject to varying levels of demand and workload can be particularly beneficial to businesses. This is significant within the financial services industry and RBS, as the demand for transaction based services varies on a daily basis. Overstaffing increases expense and reduces profitability while understaffing can reduce efficiency and may cause problems. By outsourcing part of the operation financial organisations can design contracts with outsourcers to handle the changing work load levels while providing financial organisations with much more predictable operating costs (Basu and Nair, 2012).
7.0 Cultural Considerations
7.1 Communication and misinterpretation barriers
Offshore outsourcing can pose potential miscommunication and misinterpretation problems. Raju (2012) highlights that foreign countries such as India have a large English speaking and educated population however cultural and linguistic variations of its spoken form can cause confusion in cross cultural outsourcing teams. In turn this confusion can lead to inefficiency and reduced work productivity. In order to ensure that cross cultural outsourced operations are carried out effectively, outsourcers must ensure that there are sufficient intercultural training programs in place.
7.2 Religious Practices
India’s culture is religiously diverse with the main religions including Hindu, Muslin, Christian and Sikh. This diverse range of religions sees many religious holidays and festivals take place throughout the year in India. When outsourcing to India RBS should aware of these religious practices and any affect that these might incur. (Melik, 2012) highlights one of the largest Muslin religious festivals is Ramadan in which Muslin cannot eat or drink during daylight hours. During this period of Ramadan it has been reported that working performance and productivity declines due to shorter working hours and changes in behaviour.
7.3 Time Zone
When outsourcing to a foreign a county RBS should be aware of the potential difficulties of working across different time zones. India for example where outsourcer Infosys is based is 5 hours and 30 minutes headed of the UK time zone. While this is not the largest time zone difference it still represents a significant communication limiting factor. As communication between RBS and Infosys may be limited to certain number of working hours, specifically if complex tasks need to be queried, if the working time of either country has finished confirmation and progress may be delayed until the next day (Lee-Kelly and Sankey 2008).
8.0 Financial Assessment
8.1 Lower wages
Outsourcing to an outsourcer in another country can offer significant savings for RBS. Because of lower wage rates companies such as Infosys can offer significant savings to carry out the same tasks. Bummer (2012) reported that graduate jobs with experience of using the software program CA-7 which is used for a number of operations within RBS’s computer system were advertised with salaries between £9,000 and £11,000 which is a significant saving on what a worker would be paid for carrying out the same job in the UK. However RBS should be aware of the increasing levels of inflation within countries such as India, as high levels of inflation can increase the cost of outsourcing, this is of particular importance in long term outsourcing contracts (Javalgi et al., 2013).
8.2 Reduced Operational Costs
RBS can benefit from outsourcers economies of scale, due to the fact that outsourcers such as Infosys employee a large number of employees specialised within the same areas such as IT, this enables them to carry out the same transaction processes as businesses such as RBS but at a lower cost (Hecker and Kretschmer, 2010). These efficiency savings enable Infosys offer RBS cost savings.
8.3 Recruitment Costs
As mentioned previously outsourcing to India provides the opportunity to access an attractive labour market. However the cost of recruitment and training of any individual can be costly and time consuming process. However the outsourcing of operations allows for the cost to be carried by the outsourcer (McIvor, R. 2010). Offering access to India’s skilled labour force without the negatives of recruitment and training.
8.4 Hidden Costs
The outsourcing of operations can be a complex process and has the potential to undermine the cost saving strategies through unexpected costs. Larsen et al (2011) further indicates that hidden costs can occur at a number of stages of the outsourcing contact, including the cost of initial selection of an outsourcer and unexpected high levels of coordination during the implementation stage. Further hidden costs can arise from additional training when outsourcing complex tasks as well as previously mentioned when outsourcing to a foreign country cultural issues may introduce hidden additional training costs.
In conclusion it is clear that outsourcing of non-core operations can provide the RBS with the opportunity of focus of core operations that add value and competitive advantages. While outsourcers can offer many benefits including significant cost savings, increased workload efficiency and enabling access to highly qualified labour markets. In the case of RBS it can also be concluded that IT can also be classified as an operation that is not only a back office operation but a platform that can provide value and competitive services through the development of new technologies.
However outsourcing for RBS is not without its challenges, such the training of its complex legacy system, possible communication barriers and time zone differences as well as the consideration of outsourcing on its own staff. The risks of failed outsourcing can be extremely damaging, in the particular RBS’s IT glitch in 2012, which results in consumer compensation of £175m and a fine £56m while also significantly damaging RBS reputation. Whilst outsourcing offers RBS many benefits it is unknown whether this disaster could have been prevented if IT had not been outsourced.