In the recent years there has been lot of criticism about outsourcing. But it has been noticed that although this principle is new it has been going on since ages. If we look at the history of outsourcing we can conclude that many companies in developed countries have outsourced services to nearby less developed counties.
Before the IT revolution, in order to cut costs, many companies in the Unites States outsourced manufacturing jobs to counties like Canada, Mexico and South America. Many even set up separate workstations and factories in these regions. The only difference which is noticed between the past and now is the pace by which this activity is carried out. Again as manufacturing jobs involved solid goods there was a need of transportation which gave rise to a different kind of employment opportunity. IT outsourcing does not involved any transportation from the manufacturing destination to the client's place. Apart from these differences outsourcing history seems to be quite an old thing.
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The purpose of this research is to identify the risk and benefits involved in outsourcing of the financial services to India and also study and examine the impact of outsourcing in the Indian economy. To study this relation I will analyse the outsourcing activities of two UK banks namely Barclays and HSBC Bank to India.
I am from India and I have seen many organizations, specially banking Industry, outsourcing their business to India. During my employment in India, I met various directors of Companies conducting this process. I always had a keen interest to find out what was the actual reason for this and if it is beneficial for my country. Was the main reason behind outsourcing to India was to make more profit, cost cutting, expand business or something else? Is there any risk involved in it for both the organization and the country? Due to my MBA being in International Business this is the right opportunity for me to base my research on outsourcing and find out the answers for these questions which generated in my mind in due course.
3. Literature Review:-
What is outsourcing
Outsourcing involves contracting for the provision of a service or good or execution of a task, previously undertaken in-house, to a third party to perform on behalf of the organizations (Reilly and Tamkin, 1996). The more traditional term sub-contracting has been substituted by the new term outsourcing. Van Mieghem (1999) defines subcontracting as the acquisition of an item (i.e. a product, component or service) which the firm is capable of developing whereas outsourcing involves the acquisition of an item which the firm is not capable of producing internally to a satisfactory level. Due to uncertain economic conditions, global competition and increased financial pressure large enterprises today are squeezing every possible return out of their investment. While looking for new ways to operate in a changing economic world, companies are increasingly turning to sub-continent outsourcing to help meet these challenges.
Financial Organization outsourcing
In the current economic climate financial services outsourcing is fast growing .It is the third largest segment in the outsourcing market after sales and software outsourcing. According to a recent study, it was found that financial services outsourcing grew at the rate of 10% every year to reach a whopping $40 billion in the year 2007. This was the reason why business process outsourcing and accounting outsourcing in particular were seen to be budding sectors.
In the recent years it is seen that most companies have outsourced their financial services to sun-continents like India, China, Philippines and Russia. As of now India is seen as a great destination to outsource financial services because of its relatively cheaper and efficient labour, good infrastructure and quality certified firms. Indian firms have high ability take care of both low end as well as high end financial services such as accounts payable and receivable, payroll administration, time reporting, expenses processing, tax management, accounting etc.
Another budding sector is predicted to be in the form of outsourcing safety services. The governments of various developing nations such as India and China are gearing up acquire the benefits that outsourcing of financial services and other IT services holds for them. India has started improving their communications infrastructure and investor friendly laws.
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Outsourcing to India
In the recent years a rapid growth has been seen in the outsourcing market of India. A huge number of big as well as small corporations are outsourcing their low end as well as high end services to India because of the relative benefits involved in terms of cheap and efficient labour, better infrastructure and stable government.
In a recent study the Benefits of outsourcing in India has been examined and it has been found that the following are the main reasons for companies being attracted to India:
Availability of cheap and efficient workforce
Computer savvy and English speaking workforce
Better infrastructure in terms of communications
Quality certified software firms
Relatively stable government
Investor friendly laws
These are the factors that make India stand out of the rest as one of the best destinations to outsource services. Outsourcing in India can be done in the metro cities like Bangalore, Chennai, Mumbai, Pune, Delhi and Kolkata. Outsourcing services Delhi holds huge potential as the government is actively involved in improving the infrastructure of the city being the capital of India. The government has also implemented some investor friendly laws and made sure that processes take place faster and smother.
Outsourcing only is meaningful if it is measured for the ROI (Return On Investment). There are many top service providers in India who offer outsourcing software measurements services to facilitate the activity.
India Verses China
China is the only nation who seems to be having the capabilities of becoming a competitor to India. The limitations on offshore outsourcing posed by the lack of infrastructure in India can be met by China in the years to come which is a big threat to the Indian market. China has a backdrop on the English language which is keeping them behind, but now it is seen that they have been improving English language among their youth to cover this limitation. So in the future there are high changes that China can become the major destination for outsourcing offshoring services.
What are the benefits of outsourcing?
Outsourcing to sub-continents provides opportunities to expand capabilities, reduce costs, gain access to scarce resources, skills and technologies in an effort to improve services. The growth of outsourcing is because of organisations seeking ways of becoming more flexible and responsive to customer requirements. The outcome of increased outsourcing has been the restructuring of organisations from hierarchies performing the majority of business processes to more network-oriented structures working with specialist service providers (Sako 2006). Gottfredson, Puryear and Phillips (2005) has suggested that competitive advantage from a capability perspective is no longer concerned with a company's ownership of capabilities but more exactly about its ability to control critical capabilities, whether owned or outsourced.
Risk of outsourcing
Due to the current credit crunch it has become necessary for the banks to outsource a majority of their part to sub-continent. Being a financial organization it is very critical for a company to decide on various aspects of outsourcing. During the 1990s the reductions in cost and increased capacity of telecommunications and computing facilitated the global outsourcing of various business activities 'offshore' to places where the labour supply is both cheap and plentiful. India, the Philippines and increasingly China were well known as the key locations for this work. Over the last decade, many UK banks have outsourced parts or all of their in-house accounting and finance, HR and other functions to India. However, this presents significant risk due to poor performance and vendor opportunism. A previous report focussed on financial services (FSA 2005) identifies the complexities of achieving suitable management oversight and control from a distance. The same report points to the need for appropriate governance frameworks, risk management systems and controls to identify and mitigate risk. What are these controls and risk management systems and how effective are they in mitigating risks from outsourcing? The study this Briefing is based on aims to improve our understanding benefits and the risk of mitigation by providing case studies of two UK banks engaging in outsourcing to India.
Global Impact of outsourcing
The global impact of outsourcing according to many economists is found to be very positive. Though there are speculations in the first world nations like US and UK about the global impact of outsourcing, they are considered only to be temporary.
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Globally outsourcing has given rise to thousands of quality jobs in developing countries like India, China, Mexico and Philippines which has made them economically rich. This has led to an increase in the standards of living in these nations. This has also led to strengthening of relationships between different countries across the globe.
A global outsourcing research will clearly suggest that outsourcing in the long run is going to be beneficial both to the first world as well as third world nations. The current mayhem caused due to the jobs lost due to outsourcing is seen by most economists as a temporary phenomenon which will subdue once the US economy develops. The future holds huge potential for everyone with the technology it outsourcing challenges being taken care of and with better it outsourcing governance and laws.
An Institute of Chartered Accountants in England and Wales (ICAEW) report4 has
established the importance of offshore outsourcing of the majority of Banks function of to India and other locations. However, there is currently sparse in-depth research on the practices and mechanisms involved in managing offshore outsourcing relationships. My report will aim
to fill this gap in the literature and complements.
4. Research questions and objectives
As we already discussed it is still argued as to which are the activities of an organization to be outsourced. However history reflects that parts like customer care, payroll, recruitment, training and development, accounting etc. These are basically supporting activities that are common across industries independent of the nature of the business of an organization.
Now taking into account the preliminary literature review of Outsourcing and how it started, where it is now and the direction where it is focusing to , it has come to my understanding the it is a very big decisions as there many risk involved for any financial organization to make.
A previous report focussing on financial services (FSA 2005) identifies the complexities of achieving suitable management oversight and control from a distance. The same report points to the need for appropriate governance frameworks, risk management systems and controls to identify and mitigate risk. This begs the following questions:
What are the requirements and benefits of outsourcing in a financial organization?
What are the risks of outsourcing to sub-continent, specially India?
What constitutes 'suitable management oversight and control from a distance'?
What are 'appropriate governance frameworks, risk management systems and controls'?
What is the impact of outsourcing in India? Is it a big growth for the Indian economy ?
Research Objectives :
To critically analysis the requirements and benefits of UK Banks outsourcing.
To identify the risks of offshore outsourcing.
To identify suitable management oversight and control from a distance.
To identify the types, role and impact of control and trust in managing risk.
To examine and analyse the impact of outsourcing in India. Specially its impact on the economy of India.
5. Research Plan
Both quantitative and qualitative data from the secondary and primary data (from interviews and questionnaires) will be used and the research will be of a realist nature. Both deductive and inductive reasoning will be used in order to achieve the objective.
A comparative study design is to be used where two cases of, Barclays Bank and HSBC outsourcing to India will be extensively examined.
Data Collection Method
There will usage of three different data collection method to give a good triangulation.
Secondary data on the topic will be collected from existing resources such as textbooks, Journals, articles and the internet .I have started reading a few textbooks which are Nicholson, B. and Sahay, S. (2004), 'Embedded knowledge and offshore software development', Information and Organisation, The Economist (2004) 'Business: Growing up - Outsourcing in India' . I will collect the newsletters of both the companies Barclays and HSBC to have an update on their current operations. There are various journals will be used to examine the research. They are - A passage to India : offshoring in financial services by IRS Employment review, Barclays and Accenture in £450m deal by Huber, Legacy tracker helps HSBC assess offshore project risk by Kamath, What effect does outsourcing to India have on a lender's operations? By Griffin, Managing offshore outsourcing contracts by Vowler.
The online data base such as Emerald and EBSO will be interrogated.
The first and the second objective of the research will be aimed to achieve by this data.
I tend to interview both middle and senior management of Barclays and HSBC to address the - objective. I will use the semi structured interview so that I have the flexibility to explore any new ideas. I will discuss the questions with my supervisor for the interview. The interview will be of 40 minutes. I have my relatives and close friends working with these companies who have given me the opportunity to carry out these interviews. I will interview 5 people, 3 middle manager and 2 senior managers of each banks. My sampling process will be a combination of purposive and snowball. The data acquired from interview will answer the third and the fourth objective of the research.
I wish to seek view of the people of UK if they would like their country outsourcing business to India. And also I would like to know how the people of India react towards the growth of outsourcing. Is the impact of outsourcing to India positive for the people living there? The best way of doing this is by questionnaire. The questionnaire will be send to 300 people, mixture of both UK and India and a return rate of 50 per cent is expected.
Analysis of Data
Jewell, S(2007) stated that " research in a management area must have some criteria attached to it and said that they must be valid ,reliable ,general and transparent". As I am using primary and secondary data I should be able to identify the real area under investigation and determine the correct judgement to avail accurate answer.
NVIVO is qualitative data analysis computer software produced by QSR international. I will use this software to analyse the result of the interview. It is very user-friendly software which will be perfect for my research. For the questionnaire I will upload the data to excel and use its statistic facilities for presentational, descriptive analysis.
Barclays and HSBC are two very big organizations of UK and as I will be interviewing the senior managers my first limitation will be of validity .I will have to be very careful and identify and investigate the accurate answer. I must guard my data and write my research not fully addressing the key concepts within Barclays and HSBC. I will continually reflect and redefine the key issues within the subject.
The second limitation is of reliability. As the management staffs are very busy hence I will hold the interview at their convenient time to the respondent to ensure that other distraction will not affect the reliability of the process.
As my research is a comparative study there will be limitations to its generalizability. However I will try to generalise to other UK banks outsourcing to India.
7. Ethical Considerations
I will follow the low risk approval form before I commence research and will insert a copy in my dissertation .
I will use a participation leaflet for the interviews and questionnaires and in addition a consent form for the interviews. I will take the advice of my supervisor while preparing the consent form. I will also discuss the questions for my interview and questionnaire with my supervisor.
I will keep the data secure, confidential and will not use it for any other purpose.
I understand what plagiarism is and whenever I use work of others I will give an acknowledgement and paraphrase into my own words whitelist being true to the original context.