ABSTRACT
Thesis on outsourcing
as a strategy for reducing overhead cost in selected banks in Lagos
This investigated the
extent to which banks are applying outsourcing arrangement as a financial
strategy to cut cost, asses its inherent benefits and demonstrate how it puts
banks in favourable liquidity positions. It also examined the maintenance of
quality of service delivery irrespective of overhead reduction.
Primary data were
collected from 10 heads of department, with 5 selected from each bank.
Secondary data were collected through official records.
The findings of the
study showed that 'all things being equal' in the long run banks overhead costs
fall relatively due to impact of outsourcing strategy; the pictorial
representation clearly revealed this. Also, in banks that other strategies of
overhead control have not been deployed, we saw that the rate at which expense
grow was higher than that of the revenue, it was when outsourcing value were
taken cognizance of that the expense growth kept under revenue.
It can be concluded
from these findings that the concepts of outsourcing has not been fully
embraced in Nigeria
banks because of the sensitivity of the industry vis‑a‑vis the need to protect
the integrity of their records and customers' information. The banks were able
to manage their operating cost through the use of outsourcing because they
escaped issues like salary increase, inflation of consumables like cleaning
materials, security gadgets with other leakages in the banks' overheads by
fixing management fees or other chargeable fees.
And the impact of
outsourcing was seen to force the growth rate of real operating cost down below
the growth rate of the revenue or income of banks that diligently deployed the
use of outsourcing strategy in its operations.
TABLE OF CONTENTS
PAGES
Title Page ii
Certification iii
Dedication iv
Acknowledgement v
Abstract vi
Table of contents vii
List of tables x
List of graphs x
Chapter One – Introduction
1.1 Background
to the Study 1
1.2 Statement
of the Problem
3
1.3 Research
Questions 4
1.4 Objectives of Study 5
1,5 Significance of the Study 5
1.6 Scope and Limitations of the Study 6
Chapter Two – Review of Literature
2.1 Introduction
8
2.2 Various perceptions of
outsourcing 8
2.2.1 The managerial perception of
outsourcing 9
2.2.2 Taker and Third view of Outsourcing 11
2.3 Conceptual Clarification of Outsourcing 13
2.3.1 Definition of outsourcing 13
2.3.2 Various types of outsourcing 15
2.4 Theoretical and historical
background
of outsourcing
18
2.4.1 The theories of change 18
2.4.1.1 The individual perspective school 18
2.4.1.2 The group dynamics School 19
2.4.1.3 The open system School 20
2.4.2 Historical Background of Outsourcing 21
2.4.2.1 When and where outsourcing started 21
2.4.2.2 How outsourcing arrived in other parts
of the world
2.4.3 Phases in outsourcing development
2.5 The merit and demerit of outsourcing
2.5.1 The demerit of outsourcing
2.5.2 The merits of outsourcing
2.6 Assessing overhead costs in
outsourcing arrangement 26
2.7 Stages in outsourcing arrangement 28
2.7.1 The planning stage
28
2.7.2 Evaluation stage
28
2.7.3 Decision stage
32
2.7.4 Evaluation of result 33
2.8 Conditions guiding outsourcing
arrangement
33
2.8.1 Strategic atmosphere Conditions 33
2.8.2 Political atmosphere Conditions 35
2.8.3 Organisational atmosphere Conditions 36
2.8.4 Economic atmosphere Conditions 37
2.8.5 Technological atmosphere Conditions 37
2.8.6 Social atmosphere Conditions
2.8.7 Judicial-legal atmosphere Conditions 38
2.9 Outsourcing and the Future 39
2.10 Definition of Terms
41
Chapter Three – Methodology of the Study
3.1 Introduction
3.2 Criteria to Choice
3.3 Sources of Data
3.4
Data
Analysis Techniques
Chapter Four – Presentation Analysis and interpretation of data
4.1 Introduction
47
4.2 Data presentation, analysis and
interpretation 47
4.2.1 Findings through five years profit and loss
reports of the selected banks
4.3
Conclusion
on five years profit and loss
reports of the selected banks
Chapter Five – Summary, Conclusions and Recommendations
5.1 Summary 59
5.2 Conclusion 61
5.3 Recommendation 64
Bibliography 65
Appendix
LIST OF
TABLES
Pages
Table 1 – Five Years Profit and Loss Summary
Report for Zenith Bank Plc 48
Table 2 – Actual Operating Expenses based on
Index Trend Analysis Zenith Bank Plc 51
Table 3 – Five Years Profit and Loss Summary
Report for Guarantee Trust Bank Plc 53
Table 4 – Actual Operating Expenses based on
Index Trend Analysis GTBANK 56
LIST OF
GRAPHS
GRAPH
1 – IMPACT OF OUTSOURCING ON
ZENITH INTERNATIONAL BANK PLC’S OVERHEADS 52
GRAPH
2 – IMPACT OF OUTSOURCING ON
GTBANK PLC OVERHEADS
57
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The banking industry in Nigeria has
become a jungle of sorts where the rules of the game are not so clear cut any
longer. Some call it a battle arena where gladiators are expected to fight
according to laid down rules created and implemented by the bias arbitrator.
Others call it a battlefield where it is only the strong and highly competitive
banks can survive. However, a state of anarchy ensues in the search by all to
be the best and be appreciated by all stake holders. (Osekita, 2002).
Profit is a function of
revenue minus cost; however, most business conscious people believe that for
you to make profit you should make more sales. This principle is not far
fetching from banking business, as pressure on deposit mobilization targets are
emphasis.
The most interesting
thing in the banking industry is that all banks market the same customers;
chase the same money in circulation and use the same personnel. Another
interesting thing to note is that all banks are branding the same products
using different style, logo and slogan.
The issue is that how do
we survive this war, since we know according to Charles Darwin [1801] that “it
is not the strongest species that survive nor the most intelligent but the ones
that are most responsive to change”.
The concept of change cannot be thrown aside in this heat intense banking
industry. Therefore, in search of what change that can assist to compete in the
banking environment is the concept of synergy which states 1+1=3. That is the
total been more than the sum of parts.
The concept of synergy is
then introduce into “cost reduction” strategy where it is expected that 1+0 = 2 that is, at same equilibrium level of revenue
and a reduction in cost produces increase in profitability and still maintain
same quality of service delivery thus giving the organization unbeatable “competitive niche”.
One of the ways of
reducing overhead cost in the bank is to introduce outsourcing. Cost reduction is not the only target of outsourcing.
Outsourcing is instrumental in increasing the business productivity. It also
allows organization to have access to best-of-breed talent and technology. This
means outsourcing creates values.
The answer to why outsourcing should be more than cutting
costs include creating value – value for the company through re-engineered
processes, value for customers through better service and value for
shareholders because the markets reward companies that focus on their core
business. Although value can mean
different things to different people for instance, in outsourcing, value can
mean long-term cost-effectiveness. It can mean increased revenues, profits and
rewards for shareholders. It can also mean greater competitive advantage, the
result of more responsive processes and improved levels of service. At its
best, value should mean all of these and more. In fact, there are degrees of value that an outsourced
process will have on the larger organization. For example, a company that out
sources its finance and accounting (F & A) function could expect to obtain
immediate demand for value.
The dynamic and volatile
global economy which fueled the ideas of “globalization”
have forced several banks to seek ways of establishing an effective and
efficient match-using strategies to find or facilitate connection with their
competences, opportunities and risks resulting from environmental change.
One of the strategies
employed by few Nigerian banks since the ingredients of their services delivery
had been the same or recycled personnel, products, branding, customers and even
ideas, it thus become necessary to change profit formulae.
This formula concentrates
on cost reduction strategy and still maintains same quality of service
delivery. Two banks were studied, Zenith bank and Gtbank. Annual reports and
other privileged information of these banks indicate the unreserved interest of
management to make profit and be on top especially through the use of cost
minimization strategy which outsourcing is predominately used.
1.2 STATEMENT OF THE PROBLEM
Liquidity is one of the major reasons
why many banks avoid high wage bills despite acclaimed level of income
generation. Besides, many of the banks revenue are paper income that cannot, on
the real generate money profit. Many banks that failed today like commerce
bank, eagle bank, metropolitan bank, etc face this type of problem where they
spend real cash above the real income generated. (Osekita 2002).
Past studies postulate general
theories to outsourcing applicable only in the Europe,
societies where to increase profitability, a reduction in cost must suffice and
not an increase in sales as sales is maximized having in mind a single objective
paradigm.
However, a more pratical approach and
applicable to the peculiar environment in which Nigerian banks operates would
be recommended here. As there exist room for more sales, since according to CBN
circular, 45% of the monies are outside the banks
Therefore this study is meant to
address this peculiarity of nature of the Nigerian environment and entrenched
in the knowledge that reduction in cost plus increase in sales would equal
increase in profitability.
1.3 RESEARCH QUESTIONS
The following questions guide the
study on "outsourcing as a strategy in reducing overhead cost in the
selected banks, Zenith bank and GTBank in Lagos".
The questions include:
1. What is
the meaning of outsourcing?
2. What
are the steps involved in outsourcing?
3. What
are the subsisting conditions guiding outsourcing arrangements?
4. What
are the merits and demerits of outsourcing?
5. How can outsourcing, as a financial
strategy be successfully applied in the banking industry with resounding
success?
6. Does
outsourcing have direct relationship to overhead cost reduction?
7. How
does outsourcing affect the standard of service delivery in banks?
1.4 OBJECTIVES OF STUDY
The main objective of the study is to
investigate "outsourcing as a strategy in reducing overhead cost in some
selected banks in Lagos".
The specific objectives of the study
can be aptly put as follows;
To investigate if banks are applying
outsourcing arrangement as a financial strategy to cut cost, and the extent of
its application. To assess the benefits inherent in the use of outsourcing
arrangement as a financial strategy and its attendant demerits/disadvantages To
demonstrate how outsourcing puts banks in favourable liquidity position To
examine the maintenance of quality of service delivery irrespective of overhead
reduction To examine how outsourcing as a financial strategy can be used to
reduce overhead cost in banks.
1.5 SIGNIFICANCE OF THE STUDY
The study is significant and highly
relevant in the following ways;
1. The study will show banks and similar
financial institutions how outsourcing can be used to improve the quality of
service delivery to customers, which will help banks to remain competitive and
successful in the face of stiff competition existing in the financial industry.
2. It will show the practical ways banks
and other financial institutions can implement and incorporate outsourcing in
their operations.
3. Overhead costs unarguably account for a
large proportion of bank expenses. The study will therefore reveal how
outsourcing can be used to reduce such costs [overheads].
4. The study is also expected to contribute
to the existing body of knowledge on outsourcing as a financial strategy and
arrangement.
1.6
SCOPE OF THE STUDY
The research work
concentrates majorly on strategy to reduce overhead cost in banking industry
and at the same time achieve excellent service delivery.
Data for the study are
limited to Zenith bank and GTbank in Nigeria.
CHAPTER TWO
REVIEW OF LITERATURE
The chapter reviews the
relevant literatures on issues relating to outsourcing. Specifically, the
chapter considers: Perceptions of outsourcing, theoretical and historical
background of outsourcing, types of outsourcing, conditions guiding outsourcing
arrangement, implementing outsourcing and the future of outsourcing, and merits
and demerits of outsourcing.
2.1 VARIOUS PERCEPTIONS OF
OUTSOURCING
Various stakeholders in
the organization or industry perceive outsourcing in different ways and Veruska
Evanir Pereira (Washington DC, 1999) in his research work titled “the
techniques of outsourcing – A Global view in Brazil” identified these various
perceptions as follows:
2.1.1 THE MANAGERIAL PERCEPTION OF
OUTSOURCING
Outsourcing is an
extensive word that indicates the existence of another company or party called
“third” that has competence, specialty, and quality which operates in
partnership conditions, come to render services to a contracting company called
“the taker”.
Outsourcing, with no
doubt, will command the managerial activities, in this decade. With it a new
managerial horizon appears, where the great corporations become thinner, agile
and they move with energy and investments for the improvement and the
development of their end products, in other words, their products become more
competitive, winning quality and affordable prices.
But most of the
entrepreneurs, directors, managers, supervisors and bosses look for outsourcing
as an efficient and effective alternative that generates the managerial
flexibility, with quality, providing the agility, simplicity and
competitiveness in the companies. In this situation, companies understand that
the implantation of outsourcing projects will bring countless advantages and
benefits, turning the companies to more flexible and adapting more easily to
the fast changes of the market and with that they become leaders in their
segment, with considerable gain.
In the face of the new
economical and financial reality and of the competitiveness of the market, the
development of outsourcing projects is an important goal to be reached. The
search of the modernization and of the administrative efficiency; it should be
constant and allow the suitable positioning of the companies and always
contemplating the progress of the competitors.
The administrative and
managerial improvement of companies is an essential condition that must happen
before the sensitive changes in the direction of a new positioning of the
extremely competitive market comes. The companies that already noticed that
there is a road to follow already glimpse the considerable advantages of
outsourcing.
The progress of this new
technique of administration is not only more accentuated because many companies
worry about the labour judicial occurrences that already projected casual labour
as a badly drifted and administered management technique. But, having the full
knowledge of what to do, when, why, how and where, the labour risks are avoided
and outsourcing process starts to have the appropriate safety, that is, it will
guarantee the implantation and development with great managerial results,
outlining the labour implications. It is essential that the entrepreneurs
become aware that the opening up of its power and control; and the
decentralization is still the beginning towards the walk for the success of
outsourcing projects.
The world focus on
outsourcing as partnership, re-dimension of structures, the de-verticalization,
the associations, the strategic alliances, the unions of companies, the
internal entrepreneur’s search. The type of management arrangement is very
advantageous, providing important and sensitive managerial improvements in the
development of the organizations.
The application of
outsourcing technique is processed in two ways. This is simply purchase and the
sale of services arrangement where the relationship between client/supplier
exists. The services rendered that defines “society” relationship and
commitment, and finds the actions of the taker and of the supplier as the only
objective and interest for the same effective result. Many imagine that
outsourcing is a simple sub hiring that frequently takes the taker to be
interested only in how much he will gain. The distrustful and insecure posture
exists, inducing the taker to look for immediate gains, with the choice of
supplier that will in a moment allows it to achieve its interests. The largest
concerns is with the price and those forms of outsourcing that the taker would
obtain to gain the largest advantage of the contractual relationship as the
supplier.
In a process, real
outsourced companies accomplish a smaller number of activities which allow them
to have a better control on their operational inputs, qualitative performances,
administration of the product, making possible to produce more and better with
lower costs and intensifying the means of information. The implantation of
outsourcing technique is fundamental so that takers can answer with agility and
discover other business opportunities in an atmosphere of internal and external
strong competition.
2.1.2
TAKER AND “THIRD” VIEW OF OUTSOURCING
Both the taker (the
company that outsourced) and the third (outsourced company or personnel) have
similar interest, in other words, they should be perfect partners integrated
and informed of the needs of each other. However, we can still observe some
conservative attitudes/perception as takers seek for earnings with a short
period, economical price offered to the thirds for their services; also, the
thirds may not be concerned with the improvement of the quality of taker’s products
and so on.
The great progress of
outsourcing technique is gradually showing that the behaviour of the takers and
that of the thirds is changing consciously for a partnership relationship.
As this
inter-relationship changes, the conservative position of the taker and the
third gradually disappeared, thus developing activities for the taker, changing
the situation of acting with the taker, in other words,
committed with the qualitative results of its activities.
However, in the vision
of the taker the following areas of concern still exist:
·
The
need to invest in the training of the third;
·
Internal
resistance for the changes amongst taker’s employees;
·
Some
labour union pressure;
·
Adaptation
of the managerial cultures;
·
Producer/third
with deficient quality;
·
The
fear of transfer of technology, which can fall in the hands of competitors; or
the third, who can become a competitor.
The focus of the taker/
third include the followings:
·
The
intention of the taker to reduce labour costs, without being interested in the
quality, specialty and the partner’s competence of the thirds;
·
To
maintain their activity with the taker without submitting to its economical
interests;
·
That
the taker becomes aware that the services of the thirds exist, specialized and
updated in agreement with the most modern techniques in the taker’s branches;
·
That
the taker believes in the operational capacity of the thirds to execute their
tasks, that is different to the end-activity of the taker, in ways more
competent, effective and efficient.
·
That,
in spite of improper, inconvenience and risk, the taker does not interfere nor
try to supervise the activities of the thirds;
·
That
the taker specially requests to the thirds to execute any service that is not
included in their area of specialty;
·
That
the taker monitors the activities of the third, always evaluating the quality
of the results and informing the positive points and the negatives
appropriately.
Finally both are
motivated for together they progress in the development of the partnership,
conscious that the posture of win-win which is expected to prevail
in outsourcing.
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