Outsourcing IT Development: Pros and Cons

CMPT 641
Information Technology for Managers

Abstract. Outsourcing can be defined as the transfer of any business function from one organization entity to another and its increasing acceptance as an alternative to in-house IT development and the use of IT services, propelled IT outsourcing to be a significant component of an organization's IT strategy. This paper aims at critically discussing the strengths and weaknesses of the IT outsourcing function on the banking industry, and the findings will enable the CEO, CFO and COO of bank BCIB to make a decision on whether to fully outsource the IT infrastructure of their bank or otherwise. A detailed background of the importance of IT on the banking industry over the years is given to illustrate the magnitude of the decision to be made for BCIB bank, and finally a personal rationale on the whole project of outsourcing IT for a bank, exploring the underlying challenges and concerns, and how to overcome them in order to fully benefit from the function of outsourcing IT.

Introduction and Background. Information Technology has become a key element in economic development and a backbone of knowledge-based economies in terms of operations, quality delivery of services and productivity of services (Oluwatolani, Joshua & Philip, 2011). Over the years, knowledge-based innovation has proved to be one of the leading competition for the dynamic economy. Organizations, industries and large corporations have embarked on the journey to invest in information technology to survive the competition and stay relevant. The banking industry has also been changing and growing remarkably. A good example is the Electronic Banking (e-banking), - IT application that has been responsible for a stiff competition in the banking industry for a while now. 20-30 years ago, when the technology was not yet as updated as it is today, a big percentage of banking activities were done manually. Books were balanced manually at the end of the day along the corresponding amount of cash, deposits and withdraws were done at an actual bank building/branch. What we see today, is sophisticated banking at its best; a customer of a bank is not actually tied to physically appearing at a branch for most of the banking activities, why? Because of the function of e-banking, easing the banking experience of customers and making it user friendly and reliable. The emergence of e-banking has provided a platform for many investing in the banking industry. A number of researches show that many banking and financial institutions joined the industry after the solid emergence of e-banking and updated information technology systems. The main reason is because they feel it is going to be easy to actually operate and fully function with the vast technological updates in today's economy. But other than that, what is really the role of IT to the banking industry?

GSM Banking. This mode of e-banking puts to use of the Global System for Mobile communication. In this particular mode of e-banking, mobile phones were the primary electronic devices for operation and execution of banking services/transaction by the customer, however, it has been updated to fit the services of customers operating a tablet and a computer.
Automated Teller Machines (ATM's). These are computer-controlled devices that dispense cash and provide other banking services to customers upon submission of identification in form of a Personal Identification Number (PIN). These machines are fully operational 24 hours a day unlike a branch where there is operational times basically during the day only.
On-line banking and Fund transfers. Information Technology has enabled customers to pay bills and perform other transactions electronically. The risk of running around with bulk amounts of cash has been mitigated by on-line banking where customers can debit and credit accounts within a few easy steps and/or purchase items without actually meeting the person selling that particular item. Alternatively, customers have also been enabled to wire funds across the globe and the recipient to be credited the same exact day, mitigating the risk of delaying to receive the funds that was dominant before the rise of information technology in the banking industry.
Electronic mail (e-mail). This is another aspect of information technology that has increased efficiency on both the banking industry and customers because of the easy communication process between the two parties or between one individual to another within the industry. Saving on postage and paper can also be looked at as an impact of the rise of the mighty electronic mail.
Security of data. The banking industry is one of the industries with a very high regard for high data security, the reason why, is because of the nature of data collected everyday in the execution of tasks. The banking industry collects very sensitive information and this once mishandled can lead to a major downfall of the industry. The information includes, personal information of customers, sensitive information of big corporations and their assets and information along those lines. Information Technology enabled the design of programs that can protect that information from internet burglars like hackers and viruses. To sum it all up in brief, the role of Informational Technology on the banking industry is to provide efficiency, reliability and security while spending less. Banks try to make sure all these facilities are fully functional because with these, they cut expenses in so many areas. With so many ATM's and on-line banking, less customers actually walk in the branch to do their day-to-day banking activities. This implies that banks higher less workforce, and save on other tasks performed by the function of Information Technology and at the same time benefit from the service fees of these facilities.

Advantages and Disadvantages of Outsourcing IT. As explained earlier, outsourcing is simply the farming out of services to a third party. In regards to Information Technology, this can mean outsourcing the whole management of IT to a service provider like IBM or HP or outsourcing a very small, easily defined service like disaster recovery. Other services that can be outsourced in the IT department include, data centre operations, help desk support, software development, e-commerce and network operations (Tesler, 2003). IT development outsourcing is not quite different from any other kind of outsourcing. The reasons for outsourcing IT from a business perspective may vary by situation, however the main reasons always include: 1. Financial savings: lower costs due to economies of scale or lower labour rates. 2. Market agility: access to innovation and thought leadership, industry changes and rapid growth. 3. Increased technical abilities: access to specific IT skills and increased efficiency. 4. The ability to focus on core competencies by ridding yourself of peripheral ones.
The advantages of IT outsourcing include:
Cost and expenses. Outsourcing IT development can be an effective way for a bank to stretch its budget. Planning an outsourcing project gives the bank a cut in its expenses to at least 30%, and this can be a remarkably good investment if explored effectively. Costs emerge in regards to buying and owning other than having a service provider run operations on your behalf, service and maintenance can also apart of these costs and regular upgrades without forgetting data protection from malwares and viruses. So basically, the bank gets quite a big relief in all of these aspects of saving costs and expenses. Other aspects of cost saving through IT outsource include not having to train or retrain your employees or even hiring new ones to run the technology. Once outsourcing is done and costs saved, it leads us to our next big advantage, focus on the future.
Focus on larger issues. A bank as a business entity is one of the businesses that will never run short of projects, be it cost reduction, customer retention, investment opportunities name it all, it is always looking to expand the business and acquire more profit. Information Technology is the most important part of the bank operations, with issues related to sensitive data security, processing and handling (compliance issues). Outsourcing IT enables the bank to have more resources (time and capital) to allocate to other projects which can be productive to the bank. However, one thing to note is that IT outsource cannot be done on a complete basis, as discussed in later sections of this paper.
High quality service. Outsourcing IT enables the bank to acquire the best quality of service for a heap price. Quality of IT outsourcing companies is always high-end profiled to influence or attract customers. Quality of the service is what attracts the customer, testimonies from other customers who have used the same service may be used to determine quality, but mainly the outcome of a project, the success of tasks executed by that specific company will determine its quality of service. Generally, outsourcing assures the bank to expect the best IT services, in compliance to the bank's policies on sharing and security of information.

Expand competitive advantage. An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers than its competition. This can range from a number of approaches, specifically for this case; cost structure, distribution network and customer support. A bank that outsources IT will open a gap in the competition because of better and higher quality service, meaning more savings on costs, and satisfied customers, thus higher customer retention rates.
Gaining valuable expertise. Outsourcing IT for a bank also enables it to gain valuable expertise in the IT department. Dealing with an experienced and highly qualified service provider will enable this. However, many service providers may attempt to set a dependency trap for the bank and this could be risky, but the bank does not necessarily have to acquire the dependency pattern, they just have to pick up the valuable expertise from the service provider and use it to the best of their knowledge.
The disadvantages of IT outsourcing include:
Quality problems. IT outsourcing may be tricky due to the terms of the contract. The outsourcing company is driven by desire for profit, so for this case, they will reduce costs and expenses on their part as long as they meet the contract specifics. New technology may advance within the contract term but to implement it they would require an upgrade fee and extra costs. All of these would enhance the quality of the service rendered and affect productivity of the operations of the bank.

Legal liabilities This would mainly apply in the situation where the service provider is situated abroad or offshore. The bank would have to meet the legal liabilities of that particular location and comply to any rules and regulations, including taxation and refund systems. This could sometimes delay the execution of some tasks due to red-tapes in the bureaucracy. Other forms of issues related to legal liabilities would be different time zones, different cultural aspects and language barriers in the process of effective communication.
Data and security breaches. As mentioned earlier, the life of the banking industry is the information that keeps it running. Banks gather and store a wide range of sensitive information on individuals and large corporations. Mishandling that information could be a major downfall for an bank. Similarly, when outsourcing, the bank provides access to the service provider to a vast range of confidential information, and there is a risk of confidentiality of this information to be compromised. By the most part, it may appear like it is inevitable and maybe the bank has to just trust the outsourcing company, however, a critical analysis of the outsourcing company should be done to make sure the information will be safe in their hands and strict penalties to apply to any mismanagement of data. This point is also explained further in the next section.
Limited client-organisation contact. IT outsourcing also limits the direct communication between the bank and the client. For example outsourcing a call centre; call centres facilitate contact between the bank and the client and in the long run, the bank has kept minimal contact with its actual client because of the function of the middle-man, the call centre. This affects the customers' banking experience with the direct bank and may lead to low customer retention rates and low customer satisfaction.
Loss of managerial control. The bank may sign a contract outsourcing the entire IT department or just a single function of the IT department, either of the two means that the bank will not actually have any managerial control over that function or department as it will belong fully to the outsourcing company. The outsourcing company is not driven by the same standards and mission that drives the bank and therefore will concentrate to make a profit off the services rendered to the bank and any other businesses. This loses focus on the goal to be attained in the IT department for a particular time of period.
Recommendation.
Managing the outsourcing relationship. Following a decision to outsource some or all of its IT function, both the client organization and the vendor(s) involved must structure and manage their relationship to successfully achieve their mutual and specific objectives (Aubert & Rivard, 2008). It is important for both the parties to get acquainted to each other before the venture and see if the chemistry is alright. From the perspective of the bank, a thorough investigation on the credibility and reliability of the service provider should be conducted prior to the agreement, studying in detail the background of the potential service provider, analysing the objectives expected of the service provider, creating and finding meaning of assumptions surrounding this particular decision to outsource with this particular company. The need for control and coordination in the process of outsourcing could also fall under this category of managing the outsourcing relationship by establishing contact between the two parties. The bank should lay down the control measures it expects its operations to undergo, and so should the service provider. This facilitates to find a mutual ground and formulation of common rules and coordination in the way of executing tasks. Uniformity can be a determinant of productivity in any business venture (Aubert & Rivard, 2008).
The multi-sourcing approach. This refers to the division of activities and/or services involved in the execution of an essential business function among a combination of providers, both internal and outsourced, in order to gain more control over costs and accountability while reducing dependence on any provider. Effective multi-sourcing is all about forming partnerships. It can be very difficult for two or more organisations with vastly different cultural backgrounds to work well together, so ideally it would be important for the bank to analyse its business strategy and align that to the sourcing strategy. If done effectively, multi-sourcing provides options by giving the bank the opportunity to 'pick and choose' amongst the service providers and pick the best one of them all (Sohail, 2012). Not quite a chance exposed to many organisations out there so I think the bank would benefit from this opportunity to work with the best.
Bundling.
Bundling services means paying an IT services provider one price that has more than one IT service or product lumped together. Itemizing products and services keeps the service provider more accountable and enables the buyer to be able to charge back the usage fees to its various user departments. However, this may have a few weaknesses to it and may not be recommended from time to time due t the fat that, agreeing to the bundling of certain IT services will force the bank to buy the whole package of service even if it does not need them for that particular time, resulting into extra costs (Suryanarayan & Sabyasachi, 2013).
Cloud outsourcing. This is an interesting change happening in the IT industry right now and it will shape the nature of the IT outsourcing approach specifically in the systems integration space. 'IT support and IT outsourcing and that will further accelerate as the base of SMBs grows. Instead of costly customized solutions, the subscription-based software-as-a-service (SaaS) model has become more appealing to SMBs as they streamline and optimize their business processes' (Poh Mui, 2013). Cost has been a major influence when it comes to IT outsourcing and cloud adoption, in addition to other factors like growth incentives, lack of skilled in-house talent, changes in government policies and favourable tax schemes. For example, the Singapore Infocomm Development Authority of Singapore provides assistance schemes that fund up to .65% of a company's development cost when they move their business applications to the cloud. To encourage investment in innovation and productivity improvements amongst SMBs, the first S$400,000 (US$313,000) incurred by businesses to acquire cloud computing services would qualify for a 400% tax deduction and a 60% cash payout under the Productivity and Innovation Credit Scheme (Poh Mui, 2013). However, there is a catch, system integrators moving into this model have to consider cash flow and their go-to-market strategy.

Do it yourself. Outsourcing can be have quite some good impact as discussed earlier, cost savings and high quality service and so on. However, if a bank has allocated a very good amount to invest in its IT department, then I would recommend they go for it and own it entirely. The issues and risks associated to outsourcing especially for a bank can be severe once the venture turns out into a failure and/or collapses. Sensitive data is one of the pillars of any successful bank and once mismanaged the repercussions would turn out to cost the bank even more than it would have invested in to own its own IT infrastructure. However, given the nature of costs involved with actually owning an entire IT department for a bank, another option would be to agree to outsource apart of the IT department but keep the section with the most sensitive data. This gives the bank quite more power over the control of what is out there and it can be easy to solve any data mismanagement issues when the data is not very sensitive.
Challenges and Concerns. Recommendations can always seem appealing when on paper, however in practice they can be challenged. Outsourcing IT would be an easy and effective process for this bank if done with a perfect partner / service provider, however in today's man-eat-man economy where everybody wants to survive, sometimes a background check on a company may not even bring up any red alerts about that particular company and therefore end up signing a contract with an incompetent company. At this moment it could be a matter of trusting own instincts because if everything checks out all the bank is left with is to trust that other company that it will deliver as agreed and put the interest of the bank before its own or other customers. Multi-sourcing and bundling would also prove to be more expensive by adding extra fees to their processes. The point is to get a higher quality service at a cheaper price. These also put the question of quality in doubt due to multi-tasking, focus may be emphasized more on one task than the other thus low productivity in some tasks, lack of coordination and control. Doing it yourself would also require a large amount to take off where as cloud outsourcing would affect the cash flow and the market strategy.
Conclusion.
The question at this point is will IT outsourcing profit the bank? The answer is it depends. Since we do not know the budget to this process that the bank has allocated, I can only assume that if the bank has explored the reasons in this paper and noticed it made less more than it invested in the IT department, then I would say go for outsourcing the IT infrastructure with a regard on the budget to determine if it will go for a full outsource or just a partial outsource. Choosing a service provider should be a very important and thorough process here and keep in mind this could result in higher losses or profits depending on the competency of the service provider and their quality of service.

References.
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Oluwatolani, O., Joshua, A., & Philip, A. (. June, 2011). The Impact of Information Technology in Nigeria's Banking Industry; Journal of Computer Science And Engineering, Volume 7, Issue 2.
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