THE ADOPTION OF OUTSOURCING STRATEGY BY COMMERCIAL BANKS. A CASE STUDY OF COMMERCIAL BANKS IN NAIROBI – KENYA CHAPTER ONE: INTRODUCTION 1. 1 Background to the study. For many years, strategic management literature and practice have demonstrated the need for organizations to operate outside their boundaries and to establish strategic relationships with external stakeholders such as suppliers and distributors. Attention has been given to the growth of strategic alliances and joint ventures.

The trend has been the downsizing of organizations and outsourcing of a range of functions, which were previously considered to be an integral part of in-house operations (Walton, 1998). There has been a move towards subcontracting and franchising arrangement of some in-house operations. Not only are organizations operating outside their boundaries, but also individuals who are not in a conventional employer-employee relationship are increasingly conducting more and more organization’s functions.

Emerging economic trends such as globalization, rapid proliferation of economic technology, declining growth rates, competition from external enterprises and the need to lower costs of operation have forced many enterprises to adapt their activities to the changing environment in order to survive (Jarillo, 1998). To cope with these pressures, enterprises are repositioning themselves in the market place so as to gain competitive advantage (Sweezy, 1997) Outsourcing of jobs and functions has become a global business necessity in the majority of companies (Pearce & Robinson, 2007).

It has moved from simply seeking low cost manufacturing options to having product development, product design and indeed core innovations sought by some of the world’s best known companies. Different authors have defined outsourcing thus; Outsourcing refers to obtaining work previously done by employees inside the company from sources outside the company (Pearce and Robinson, 2007). It can also be referred to as the act of contracting work outside the company that was originally done inside the firm or any new work that could be done inside the company (Yabs, 2007).

Peter Drucker has called it ‘going back to the basics’- to what the firm was originally established to do as quoted by Yabs (2007). As a result of the continuous change in Information Technology taking place in the world today, more advanced and cost effective ways of doing business are being identified. Coupled with the ever rising costs of resources, organizations have to carry out an analysis of the Strengths, Weaknesses, Opportunities and Threats facing their operations, both internal and external in an effort to identify the source of its competitive advantage.

Such an analysis enables the company to identify its core competencies. It is after this analysis that a company is in a better position to identify and contract out some of the non-critical work to outsiders so that they can concentrate their efforts in the core business (Yabs, 2007). This is in line with the desire to increase efficiency through specialization and focusing on the core competencies of the company. In the early 1970’s and 80’s, the fashion in most firms in Kenya was to be self-sufficient in all the services (Yabs, 2007).

This has since changed and today most firms have outsourced their non-core work and have therefore released much needed resources for other purposes. Business Process Outsourcing is actually the most rapidly growing segment of the outsourcing services segment worldwide and is expected to sustain the growth to the foreseeable future (Pearce & Robinson, 2007). 1. 2 Statement of the Problem An increasing number of organizations are adopting outsourcing strategy as a way for minimizing costs, facilitation of efficiency and for competitive advantage.

While outsourcing has been found to have such tremendous benefits to an organization, if not done appropriately, it could lead to detrimental consequences (Jarillo, 1998). This is why it is important to find out if commercial banks that have outsourced some of their activities experienced expected benefits such as efficiency and reduced operational costs among others. The Key to outsourcing success is to determine which functions to outsource, to what extent they should be outsourced and which ones to keep in-house (Mondy & Wayne, 2000).

Making this important decision is a challenge to many organizations and especially commercial banks in Kenya because of inadequate information on the various issues on outsourcing. This is because, no research has been done particularly in the Kenyan context to determine the extent to which commercial banks within the country have adopted outsourcing, the benefits and challenges associated with the adoption of such a strategy and the contribution of such outsourcing activities to the overall profitability of the banks. This constitutes a knowledge gap that the proposed study intends to address.

Although Serem(2003), did a similar study that focused on the extent on which outsourcing has been adopted by enterprises, his study did not focus on the challenges and benefits of outsourcing, a gap which will be addressed by this study. Makhino(2006), also did a similar study touching on the benefits and challenges of outsourcing Human Resources(HR) activities within commercial banks and since her study concentrated on a single activity, it did not bring out the actual impact of such outsourcing activity on the organizations’ overall profitability.

This study therefore seeks to fulfill several objectives among them;- to identify the extent to which commercial banks have adopted outsourcing as a strategy, the benefits and/or challenges being experienced by these banks as a result of outsourcing and the impact of adopting outsourcing as a strategy on the overall profitability of commercial banks in Kenya. 1. 3 Overall Objective of the Study The overall objective of this study will be to determine the impact of adopting outsourcing as a strategy on the overall profitability of commercial banks in Kenya.

In an effort to fulfill this objective, the researcher will seek to achieve the following specific objectives. 1. 3. 1 Specific Objectives of the study. i. To establish the extent to which commercial banks in Kenya have adopted outsourcing. ii. To establish the benefits and challenges of outsourcing strategy to commercial banks in Kenya. iii. To determine the extent to which outsourcing as a strategy has led to reduced costs, enhanced performance and achievement of competitive advantage by on commercial banks in Kenya. . 4 Research Questions This study will be guided by the following research questions formulated to aid in gathering information regarding the research topic. i. Do Commercial banks in Kenya outsource any of their services and/or processes? ii. To what extent have they embraced outsourcing as a strategy. iii. What nature of services or processes have these banks outsourced? iv. What factors were considered to qualify a service or process as best outsourced? v.

What has been the contribution of outsourcing to the respective Banks’ overall profitability? vi. What challenges have commercial banks experienced as a result of Outsourcing? vii. What other services or processes can be considered for outsourcing within commercial Banks in Kenya? 1. 5 Hypothesis Development. In making outsourcing decisions, firm managers assess all the perceived risks and benefits. These factors are aggregated in arriving at the final decision on whether to outsource a function or not.

Consistent with the above, it is plausible to argue that the decision to outsource is positively influenced by perceived benefits of outsourcing and negatively influenced by perceived risks of outsourcing, it would further be argued that adopting an outsourcing strategy has a direct contribution to the profitability of the organization. To this extent therefore, the following hypotheses will be tested;- H1a :- Over 80% of commercial banks in Kenya have outsourced at least 50% of their services. H1b :- Benefits realized from outsourcing by commercial banks outweigh the challenges associated with the same.

H1c :- Adopting outsourcing as a strategy leads to improved profitability by commercial banks in Kenya. 1. 6 Rationale of the Study One of the leading challenges in corporate management has been the inability to identify the core activities to be directly involved in and which to pay less attention to. Similarly, in the banking sector, commercial banking institutions are directly involved in processes that are not core to their original reason of establishment and which as such would be best and most profitably outsourced to providers outside the institution inorder to ensure optimal performance. . 7 Importance of the Study The findings of this research will help top management and policy makers within commercial banking institutions in Kenya to appreciate the impact of adopting an outsourcing strategy on their profitability. Strategic management executives will use the findings to enhance better service provision in the banking industry through the analysis of response strategies at various commercial banks. This way the Board of Directors of the various commercial banks can confidently and from a point of information advise on the need to outsource non-core activities.

Indeed, the survey will provide useful information to banking institutions in Kenya towards embracing outsourcing as a strategy to optimize their shareholders’ worth in the company. The study will also be beneficial to academicians. It will serve as a stimulus for scholars to carry out further research in the same and other related industries so as to increase the existing body of knowledge. 1. 8 Scope of the Study This will be a census study. All commercial banks operating in Kenya as at December 2010 will be studied.

A complete list of the commercial banks operating in Kenya obtained from the Central Bank of Kenya (CBK) indicates that there were 43 commercial banks as at December 2010 (Appendix I). These banks are categorized as either local or foreign owned. Although the banks have branches and regional offices spread across the country, they are all headquartered in Nairobi hence the focus location of this study. 1. 9 Assumptions of the Study. The researcher assumes that the various banks will cooperate in the study and that the respondents will give accurate and honest information during the study.

CHAPTER TWO: LITERATURE REVIEW. 2. 1 Introduction. Any investment activity undertaken by an individual or organization is always aimed at creating wealth for the investor. As such, it would defeat logic as to why an organization might decide to incur huge sums of capital investments without anticipating any positive returns from their organization. In the early 1970’s and 80’s, the fashion in most firms in Kenya was to be self-sufficient in all aspects which might impact their business in one way or the other (Yabs, 2007).

This is no longer fashionable due to the various advancements in technology as well as the increased knowledge and experience by Chief Executives Officers. Organizations have realized that for them to survive in the present competitive business world, they need to clearly identify what they need to commit their investments to and what they should not. It has become critical for organizations and especially within the banking industry to identify their core-activities. These are the activities which contribute to or constitute the core reason of the institutions existence (The Economist, March 5 2010).

Managers have found that as they attempt to restructure their organizations, particularly if they do so from a business process orientation, numerous activities can often be found in the organization that are not ‘strategically critical activities’ (The Economist, March 5 2010). These activities either add little or no value to the product or services of the company and they can be done much more cost effectively and competently by other businesses specializing in these activities. This way the business can enhance its competitive advantage by outsourcing the activities.

For a business entity to accurately identify these non-core activities, it must carry out an analysis of its internal as well as external environment in the crafting and execution of its chosen strategy. The organization must endeavor to identify the strengths and weaknesses existing within the organization in terms of the resources they hold as well as the entire internal environment. Such internal checks would help the firms to clearly identify their core competencies and therefore build their strategy along such competencies. 2. 2 Outsourcing and the decision to outsource.

Outsourcing is a management strategy by which an organization delegates major, non-core functions to specialized and efficient service providers, or as Corbett(1999), asserts, “Outsourcing is nothing less than the wholesale restructuring the corporation around our core competencies and outside relationships”. The world has embraced the phenomenon of outsourcing and companies have adopted its principles to help them expand into other markets(Bender 1999). Strategic management of outsourcing is a powerful tool in management, and outsourcing of innovation is its frontier (Quinn, 2000).

International Business Machines(IBM) strategist Bruce Harreld estimates that the world’s companies spend about US Dollars 19 trillion each year on sales, general and administrative expenses (The Economist, March 5 2010). Out of this, only US Dollars 4 trillion has been outsourced to other firms. Similarly, it is estimated that banking institutions currently deliver less than one percent of their services through outsourced partners forming a major global outsourcing opportunity. Outsourcing is currently the buzzword amongst company strategist and is immensely lucrative business for outsource suppliers.

The undisputed truism is that outsourcing has become big business, and its effective management is critical to the future success of an organization (Kakabadse & Kakabadse, 2002). Various reasons exist as to why a company may wish to delve into outsourcing. In general, some of the motivating forces thought to be behind outsourcing include lower costs and staffing requirements, improved flexibility, and access to specialized skill sets and creativity (Chesbrough and Teece, 1996; Deutsch, 2004; Linder, 2004; Lynch, 2004).

Conversely, some of the drawbacks of outsourcing innovation are thought to be opening the market to new entrants and exposing core competencies to imitation and substitution (Porter, 1980). These drawbacks however are mitigated by the inherent benefits derived from outsourcing. Now and into the future, much attention will be given to reducing costs as to strategically focusing the organization on gaining greater competitive advantage (Kakabadse & Kakabadse, 2000).

Organizations in the world are increasingly using outsourcing as a strategic tool which can be leveraged to allow them focus on their core competencies (Johnson & Scholes, 1999). In Kenya, many organizations have adopted the trend of outsourcing non-core services and this has been evidenced by the massive lay-offs and retrenchment of personnel in the recent years. For example, as part of government reforms, many government institutions have resulted to concentrating on their core business and subcontracting smaller firms to handle their non-core activities.

If the reasons for outsourcing are all compelling, the decision to outsource will depend on the answers to the following questions:-Is the activity a core one or peripheral, how efficiently is it run at present, and what contribution does it make to the financial well being of the organization(Armstrong, 2003). Outsourcing may well be worthwhile if it is certain that it can deliver better services at a lower cost. 2. 2. 1 Outsourcing as a strategy. Outsourcing strategy has been identified as one way of adapting to the environmental changes.

By mid- 1990’s, many organizations had turned their attention to reviewing “in-house” performance on activities that could be outsourced (Pearce & Robinson, 2007). The concept of outsourcing is brought about by the globalization phenomenon where by time and distance has shrunk. Two important principles should be noted when searching for candidates for outsourcing;- Firstly, that an outside supplier can provide better value for money than inhouse provision, but secondly, that core competencies should not normally be outsourced since these activities critically underpin competitive advantage.

Organizations in the 21st century will increasingly see their structure become an elaborate network of external and internal relationships. A phenomenon given the term virtual organization. This is a temporary network of independent companies:- suppliers, customers, subcontractors and even competitors linked by information technology to share skills, access to markets and costs (Robinson & Pearce 2007). Outsourcing requires managers to be more competent at maintaining performance through their management of suppliers (or distributor) relationship rather than through management control systems within their own organization.

This may take considerable attention. For example, suppliers and distributors will need to be educated about the organization’s strategies, priorities and standards and how their work influences the final performance of the product or service (Yabs, 2007). At one extreme, suppliers might be ‘tied in’ through Enterprise Resource Planning systems(ERPs). This might be possible and desirable where the requirements of the supplier are clear and unlikely to change quickly. 2. 3 Business Process Outsourcing (BPO) This refers to the new approach of restructuring and re-organizing internal esources for better efficiency. It involves a complete overhaul of the mindset on the part of managers to see things differently from the relationships and innovating new ways of using the same resources to attain better results. Business process outsourcing is higher up the outsourcing evolutionary chain and potentially more profitable for suppliers. However, such suppliers will have to be careful on how they price their services. Just as with Information Technology, the early demand for Business process outsourcing came from the financial services industry, but the business is now spreading elsewhere.

Business process outsourcing is the most rapidly growing segment of the outsourcing services industry worldwide(The Economist, March 5 2010). BPO includes a broad array of administrative functions- Human Resources, supply procurement, finance and accounts, supply-chain logistics, engineering as well as Research and Development. 2. 4 The Banking Industry. Industrial and services sectors have witnessed a rapid shift particularly in the last decade under the pressure of some forces affecting the operating environment (Liao & Cheung,2002).

One of the major forces behind these developments is technology which is breaking geographical, industrial and regulatory barriers creating new products, services and developing more information and systems oriented business and management processes. Further, the banking industry is characterized by intense competition and changes in customer awareness and demands. It is therefore important for a banking institution to clearly understand its core activities. This way it can clearly identify its Key success factors(KSFs).

Through understanding their key success factors, banks can gain sustainable competitive advantage by devoting their resources in the desired direction and effectively developing an edge that will significantly impact on their operational performance. However, the commercial banks may not enjoy this competitive advantage if they do not appreciate the impact of the various strategic decisions they adopt, outsourcing being one of them. 2. 4. 1 Global Trends of outsourcing in Banking. The operating environment facing the banking sector has been characterized by rapid changes.

Environmental changes have been catalyzed by worldwide factors including but not limited to global capacity market activities, interest rates and currency value fluctuations, industry and worldwide economic and statutory development, the effects of competition in the geographic and business areas in which they operate (Binks et. al 1998). Some of the current trends affecting banks comprise of privatizations, regulation and supervision, demographic factors and technological innovations (McDonnel & Keasy, 2003). As the influence of governments wanes, competitive relationship in the banking industry will undergo considerable change.

De-regulation of the financial sector will erode the obstacles that deny access to the market for new providers of financial products. On the other hand, we see an increase in national regulation especially in the area of consumer protection. Technological developments fundamentally alter the cost structure, output mix, and distribution channels of banks (White, 1998). He further asserts that the developments in Information Technology are the most fundamental forces for change in the banking sector. The growing importance of sustainable banking is a trend that cannot be denied.

All these driving forces behind the structural changes in global banking not only have an independent effect on the structure of the market but also interact and can therefore reinforce each other. These factors have far reaching implications for the market structure, which encompasses features like concentration, capacity, competition, efficiency and profitability. In order to stay competitive and achieve goals and objectives, banks are periodically re-evaluating their strategies. Most banks strive towards achieving an integrated banking business which is operationally efficient (Groeneveld, 1999). . 4. 2 The Banking industry in Kenya. The banking industry in Kenya is governed by the Companies Act cap 486, the Banking Act, the Central Bank of Kenya Act and the various Prudential guidelines issued by the Central Bank of Kenya. The banking sector was liberalized in 1995 and exchange controls lifted. The Central Bank of Kenya(CBK) is responsible for formulating and implementing monetary policy and fostering the liquidity, solvency and proper functioning of the financial system. The CBK publishes information on Kenya’s commercial banks and other publications and guidelines.

All commercial banks in Kenya have come together under the Kenya Bankers’ Association(KBA), which serves as a lobby for the banks’ interests and also addresses issues affecting its members. The evolution of the banking industry has presented both challenges and opportunities to commercial banking institutions. Over the last several years, financial modernization, deregulation, shifting trend in borrowing and lending, globalization and emerging technology have influenced and affected how commercial banks operate. 2. 4. 3 Commercial banks in Kenya As at March 2011, there were forty three(43) Commercial banks in Kenya.

This is as per CBK website-www. centralbank. go. ke. The industry has been described as having oligopoly characteristics with only a few players dominating the market. It is estimated that five commercial banks namely Barclays Bank, Standard Chartered bank, Co-operative Bank, Kenya Commercial Bank and Equity Bank command 70% of the market leaving the other players to share the remaining 30 %. Nevertheless, this fact has not discouraged the ‘small’ banks as they too continue to prosper by concentrating on niche banking (Market intelligence 2005).

Commercial banks have had to re-strategize on the way they carry out their operations inorder to remain competitive and relevant in the market as well as satisfy the changing needs of customers. This has resulted in a tighter focus on specific market segments, looking for positions of strengths, rather than being involved in ‘everything’. There is a renewed interest in the Small and Micro Enterprise(SME) segment with a growing number of banks investing in branch expansion networks in the otherwise previously unbanked ural and remote town centres (CBK, 2005). In the recent past, competition within the banking industry has intensified with the entry of fully fledged Islamic banks after the Minister of Finance opened a window for Sharia-compliant products in his annual budget speech for 2006/2007 financial year. Promoters of Islamic banks who had expressed interest, are encouraged that Africa is an attractive emerging market for Islamic finance with Kenya positioned as the gateway to East and Central Africa.

Commercial banks are expected to sustain the strong performance witnessed in the past 10 years benefiting from an improved domestic economy, expanding business opportunities and a robust monetary policy stance (Market Intelligence 2005). Institutions are expected to continue rolling out new products as they expand the branch and ATM network. It is also anticipated that further consolidation will take place in the industry through mergers and acquisitions as institutions seek to achieve economies of scale required to effectively compete and expand into the increasing lucrative mass market.

However, due to the volatility of the banking sector, banks have to keep abreast with latest developments in order to stay relevant in this competitive industry. The type of products or services being offered and to whom they are being offered directly impacts on the strategic direction of a bank. It is critical that banks respond to the “forces of change” systematically and in a logical manner to avoid irrational decisions (Market Intelligence, 2005). 2. 4. 4 Trends in Outsourcing within commercial banks in Kenya. Outsourcing of business processes is one of the key outcomes of the technological advancement.

Due to its IT-intensive business processes, the potential for outsourcing appears to be particularly high in the banking industry (Gewald & Dibbern, 2005). Outsourcing is increasingly being used as a means of both reducing costs and achieving strategic goals (Basle Committee 2005). Globally, regulators’ concern is how banks manage risks associated with a third party offering certain key services. There is an Outsourcing risk which is manifested in loss of control on some key functions and likelihood of opportunistic expropriation by vendor (Ang & Cummings, 1997).

While outsourcing has profound benefits, it equally exposes firms to serious risks. The severity of outsourcing risks can be summarized as follows: “the mere occurrence of one incident, such as an IT shutdown, can exponentially increase the enterprise’s risks” (Beasley, Bradford & Pagach, 2004). Outsourcing poses multitudes of risks to a numbers of firm’s functions such as finance, human capital, IT and operations (Beasley et al. , 2004). Serem(2003) and Makhino (2006) in their studies on the outsourcing practices went short of establishing the impact of outsourcing strategy on the overall bank’s performance, the core matter of this study. . Benefits of outsourcing. Organizations do appreciate the fact that they cannot do all the things required to add value for the customers. As such, they should therefore concentrate on their core competencies and outsource the services that other companies are more experienced in and can perform better, faster and at a lower cost. This increases their efficiency in service provision(Quuinn, Julien & Negrin, 2000). Efficiency is a measure of the cost of attaining a given goal (Plunkett 1998).

It is concerned with how resources (money, time, equipment, personnel) are used to get the desired result; one is said to be efficient if they spent the minimum cost to obtain the desired goal. Firms within a given industry have to compete to retain and expand their market share and it is the most efficient firm which benefits most. A company that outsources a particular activity or process simply switches with ease to suppliers that have made the right technology choice whereas a company that chooses among several possibilities the wrong technology will perhaps be stuck with the decision for a longer time (Jarillo,1998).

Partnering with an organization with world-class capabilities can offer access to new technology, tools, techniques that the organization may not currently posses, better career opportunities for personnel through transition to the outsourcing provider and competitive advantage through expanded skills (Quinn, Julien & Negrin,2000). Every organization has limits on the resources available to it. Outsourcing permits an organization redirect its extra resources from non-core activities towards activities that have greater return in serving the customer (Quinn, Julien & Negrin,2000).

By outsourcing a non-core value creation activity to a supplier that has a distinctive competency in that particular activity, the company may also be able to better differentiate its final product. A network of suppliers can provide an organization with the ability to adjust the scale and scope of their production capability upward or downward at a lower rate. As such, outsourcing can provide greater flexibility than the vertically integrated organizations (Carlson, 1989 & Harisson, 1994).

Outsourcing enables the company to concentrate scarce human, financial and physical resources on further strengthening its core or distinctive competencies. It enables companies to be flexible and responsive to market conditions. The belief is that, unencumbered by commitments to internal suppliers, a company can switch more easily between providers of non-core value creation activities in response to changing market conditions than can a comparable company that undertakes those activities itself (Quinn, Julien & Negrin,2000). 2. 6 Challenges of outsourcing. Challenges” in this paper refers to new or difficult tasks that test the outsourcing ability and skill of an organization. In strategic terms, outsourcing creates a major dilemma for senior management. One of the biggest challenge of outsourcing is the introduction of service providers who are not in an employee-employer relationship. Such service providers could be self-employed consultants or volunteers, members of the general public such as part-timers who may not appreciate forthwith the core values of the organization contracting them.

Business strategies, that is, the technical and systems related issues are in the vast majority of cases much better thought through than the people strategy (Holbeche, 1998). She points out that once key decisions have been taken, the damage is done, but the expectations are generally that people will accept and come to terms with the new realities. She observes that while the idea of outsourcing non-core activities is initially attractive, the experience is that these are actually harder to manage.

If the company does not make the right decision on what to do outside and what to do inside, it may find itself working “on the wrong”, that is, least profitable activities of the business system even if at the beginning it does not look like that (Carillo,1998). Also by outsourcing the company may end up emptying its contents, “hallowing it out” by subcontracting, the company lets outsiders capture positions in their business system, eventually the company finds itself squeezed out of the more interesting activities.

Carillo further observes that by subcontracting the company may transfer its competitive advantage to a subcontractor who might become a successful competitor. In outsourcing an activity, a company may lose both the ability to learn from the activity and may in the long run put the company in a distinctive disadvantage in as far as carrying out the activity is concerned (Hill & Jones, 2001). A hostile union may seize the opportunity to derail management decision to outsource.

An organization may become too much dependent on a particular supplier. In the long run this may hurt the company if performance of that supplier deteriorates or if the supplier starts to use its power to demand higher prices from the company. At the same time, by outsourcing an activity, a company loses the ability to learn from that activity and the opportunity to transform it into a distinctive competency. Lack of a distinctive competency may place an organization at a competitive disadvantage.

In its enthusiasm for strategic outsourcing, a company might go too far and outsource value creation activities that are central to the maintenance of its competitive advantage. By doing so, the company might lose control over the future development of a competency and as a result its performance might ultimately decline (Jarillo, 1994). Clearly, from the above, a poorly conceptualized, developed or maintained outsourcing strategy could mean loss of control and flexibility, quality control problems and information security problems with the provider.

However, none of this is meant to imply that outsourcing strategy should not be pursued, but it does indicate that managers should carefully weigh the pros and cons of the strategy or put in place strategies to overcome the identified weaknesses before pursuing it. 2. 7 Conceptual Framework. In 1999, Federal Reserve Bank of New York conducted a survey on banking industry practices for outsourcing arrangements. Findings suggested that banks outsourced financial services for a number of reasons such as, enhanced performance, cost reduction, access to superior expertise, and strategic reasons (Gatere & Dulacha, 2008).

The study also indicates that although there are many benefits derived from outsourcing of financial services, the arrangement give rise to potential risks which include strategic, reputation, credit, compliance as well as transaction (Gatere & Dulacha, 2008). In 2004, Federal Reserve Bank of San Francisco conducted a survey on outsourcing by financial services firms, and noted a number of similar motives for outsourcing as those by Federal Reserve Bank of New York namely: operational efficiency, efficient use of resources, and quick and reliable service delivery.

A survey conducted by European Central Bank in 2004 reveals that although the benefits of outsourcing are evident, in practice, many banks believe that outsourcing introduces new challenges and risks (Gatere & Dulacha, 2008). The study highlighted the benefits of outsourcing which include: cost reduction, access to better technology and infrastructure and strategy of focusing on core activities, economies of scale which leads to improvement in synergies, achieve diversification benefits or streamline services, focusing on core activities, free scarce resources, quality services and flexibility.

As with the US studies, the European study also revealed several risks associated with outsourcing namely: operational, legal, strategic, country, reputational, loss of flexibility, loss of control and cultural/social problems. Results of a study conducted on offshore outsourcing in the European Union’s financial services industry indicated that banking institutions may choose to outsource certain activities for various motives.

Some of the motives cited are: cost reduction, access to new technology, focus on core activities, improvement of quality of services and greater flexibility (Pujals, 2004). The study identified the following risks associated with outsourcing of financial services: loss of control over service, operational risks, loss of internal skills, loss of flexibility, cultural and social problems, technical constraints, decline in quality and competitive advantages.

Serem (2003), did a study that focused on the extent to which outsourcing has been adopted by enterprises in Kenya. His study only concentrated on identifying enterprises which have embraced outsourcing but did not seek to appreciate the impact this outsourcing has had on the firm’s performance nor the benefits and/or challenges associated with adopting outsourcing as a strategy. Makhino (2006) did a study touching on the benefits and challenges of outsourcing Human Resources(HR) activities within commercial banks.

Makhino’s study, just as Serem’s did not bring out the impact of such outsourcing activities on the organizations’ financial performance together with the study being concentrated on one particular organizational activity- HR. All these studies both outside Kenya and within Kenya have something in common, although they have gone to great length in researching on outsourcing practices within the banking sector, identifying some of the benefits and challenges of outsourcing, they have all fallen short of establishing the actual impact of outsourcing strategies onto the organization’s financial performance.

They did not seek to answer the question ‘Is it worthy outsourcing some of an institution’s activities? ’. This particular study therefore seeks to establish the actual impact or contribution on an organization’s financial performance attributable to the adoption of outsourcing as a strategy by such organizations. 2. 7. 1 Conceptual Model. Independent Intervening Dependent Variable Variable. Variable CHAPTER THREE: RESEARCH METHODOLY. 3. 1 Research Design.

The study will adopt a descriptive research design in a census involving all the commercial banks in Kenya as at March 2011. A descriptive approach is useful in locating and obtaining data for the study and describes issues as they are (Gay, 1981). He says that descriptive study determines and reports the way things are and commonly involves assessing attitudes and opinions towards individuals, organizations and procedures. 3. 2 Study Population. This will be a census study. All commercial banks operating in Kenya as at March 2011 will be studied.

A complete list of the commercial banks operating in Kenya obtained from the CBK indicates that there were 43 commercial banks as at March 2011 (Appendix I). The proposed respondent will be the functional head incharge of operations in each bank. This is a senior officer of the bank and is taken to have a fairly good understanding of the bank’s operations and therefore would give a fair response on the actual undertakings in their respective banks. 3. 3 Data collection instruments. The researcher will collect data by use of questionnaires which contain both open-ended and close-ended questions.

The open-ended questions will enable the respondent to give any extra information in their domain which may be useful to the study and has not been taken care of by the questionnaire while the close-ended questions will ensure that the respondents provide specific information necessary in addressing specific objectives of the study. These will be administered to the proposed respondents who will be expected to provide information on outsourcing activities and strategies of their banks, the impact of such strategies on the bank’s overall profitability as well as providing any other necessary information for the study.

The researcher will use the drop-and-pick method of administering the questionnaires. The use of questionnaires is preferred for this study because it is the typical method through which descriptive data is collected (Gay, 1981). 3. 3. 1 Validity and Reliability of the Instrument. Validity refers to the degree to which a test actually measures the variables it claims to measure (Kathuri & Pals (1993). In an effort to ensure the instrument of data collection is valid, the researcher will make use of colleagues, research supervisors and assistance of other lecturers who will scrutinize the research instrument to ensure it’s validity.

Further, the preliminary questionnaire will be pre-tested on a pilot set of respondent managers for comprehension, logic and relevance. Reliability is the measure of the degree to which a research instrument yields consistent results after repeated trials (Mugenda & Mugenda, 2003). The reliability of the instrument will be estimated using Cronbach’s Alpha Coefficient which is used to assess the internal consistency or homogeneity among the research instrument items. Feedback obtained will be used to refine the research instrument before embarking on data collection and/or analysis. 3. Data collection Procedures. Both primary and secondary data will be used in this study. The primary data will be collected through a semi-structured questionnaire using the key informant method of data collection. Primary data collection will involve the following;- i. Getting introductory letter from Chuka University college-Department of Business Administration to the respective institutions introducing the researcher as a student of the same university and outlining the purpose of the study. ii. A visit to the commercial banks to organize and book appointments with the functional heads to be interviewed. ii. The actual data collection by administering the questionnaire to the respondents. Secondary data will be collected from the banks’ published financial statements, CBK economic reviews, and published banking surveys that shed light on relevant performance indicators such as profitability. The Banking Act requires all commercial banks operating in Kenya to publish in at least two national daily newspapers their financial statements by 31 March of each subsequent year following the end of their financial year, which is 31 December for all banks.

Since the data for the proposed study will be collected within 2011, only 2010 full-year published financial statements will be available. 3. 5 Data analysis. On receiving the questionnaires back, the data collected will be thoroughly checked to ensure completeness, consistency, accuracy and uniformity. To achieve the objectives of this study, the data will undergo content analysis using descriptive statistics tools such as frequencies and/or percentages, mean and standard deviation with the application of the Statistical Package for Social Sciences(SPSS) software. WORK PLAN

YEAR 2011 |Jan |Feb |Mar | |Proposal Development & Presentation. | | | |- ? realm fulscaps |280. 00 |140. 00 | |- 2 realms printing/photocopying papers | | | |- 5 biros |400. 00 |800. 0 | |- Typesetting and printing ~150 pages. |30. 00 |150. 00 | |-Photocopying ~ 400 copies | | | |- Loose Binging – 7 copies |25. 00 |3,750. 00 | |- Transport (Nairobi- Chuka)- 7 trips |3. 50 |1,400. 00 | |-Subsistence (Chuka)- 7 days |40. 0 |2,800. 00 | |- Transport (Within Nairobi) | | | | |1,000. 00 |7,000. 00 | | |800. 00 |5,600. 00 | | |- |3,000. 0 | |Subtotal |24,640. 00 | |Piloting | | | |-Typesetting and Printing of the questionnaire ~ 10 pages | | | | |25. 00 |250. 0 | |-Photocopying the questionnaire ~ 150 copies | | | | |3. 00 |450. 00 | |1 dozen biros- 12 pieces | | | | | | | |-Transport(within Nairobi) |30. 0 |360. 00 | | | | | |-Subsistence (Nairobi) |- |4,000. 00 | | | | | | |- |2,500. 00 | |Sub-Total |7,560. 0 | |Data collection. | | | |1 realms- printing/photocopying paper. | | | | |400. 00 |400. 00 | |12 biros | | | | |30. 0 |360. 00 | |Typesetting and printing of questionnaires- 50 pages | | | | | | | |Photocopying of questionnaire –(50pgs x 45 copies) |25. 00 |1,250. 0 | | | | | |Transport(within Nairobi) | | | | |3. 00 |6,750. 00 | |Subsistence (Nairobi) | | | | |- |8,000. 0 | | | | | | |- |6,000. 00 | |Sub-Total |22,760. 00 | |Report preparation & presentation. | | | |Typesetting and printing ~ 150 pages | | | |30. 00 |4,500. 00 | |Photocopying -1000 copies | | | | |3. 00 |3,000. 00 | |Hard binding- 7 booklets | | | |Transport to and from chuka- 4 times |300. 0 |2,100. 00 | | | | | |Subsistence- Chuka – 4 days |1,000. 00 |4,000. 00 | | | | | |Transport & subsistence -Nairobi |800. 00 |3,200. 0 | | | | | | |- |2,000. 00 | |Sub-Total |18,800. 00 | |Gross Total |73,760. 00 | |Plus: Contigencies (10%) |7,376. 0 | |Grant Total |81,136. 00 | References Ang, S. and Cummings, L. (1997). Strategic Response to Institutional Influences on Information Systems Outsourcing. Organization Science Ansolf, H. I (1997). The new corporate strategy, John Wiley & Sons, Newyork. Armstrong, M. (2001). A handbook of Human Resources Management practice. Kogan Page ltd, UK. CBK (2005)(2). Risk Management guidelines, August 2005. CBK (2006)(1). Banking Supervision Annual Report. Corbett, M.

F. (1999). Multiple factors spur outsourcing growth. www. outsourcing- journal. com/issues/jan. pp. 1-6. Gewald, H. and Dibbern, J. (2005). The influential role of perceived risks versus perceived benefits in the acceptance of business process outsourcing: Empirical evidence from the German Banking Industry Holbeche, L (1998). Motivating people in lean organizations, oxford, Butterworth Heinman. http://en. wikipedia. org/wiki/stratified_sampling Jarillo, J. C (1998). Strategic Networks: Creating the borderless Organization,GB Johnson, G and Scholes, K. (1999). Exploring Corporate Strategy.

Prentice-Hall, India. Kakabadse, A. P. , & Kakabadse, N. (2005). Outsourcing-current and future trends. Thunderbird International Business Review, Vol. 47(2) 183–204 • March– April 2005. Kathuri, J. N. and Pals, D. A. (1993). Introduction to Educational Research. 1st Ed. Educational Media Centre. Njoro. Kipsang, N. (2003) ‘A survey of Outsourcing I. T services by commercial Banks in Kenya. ’ An unpublished MBA project paper, University of Nairobi. Liao, Z and Cheung M. T (2002). Internet based e-banking & consumer attitudes; an empirical study, information and management.

Vol. 39. no 4. Macdonnel, O & Keasey, K. (2003). The feature of retail banking in Europe: A view from the top, John willey & sons ltd. England. Makhino, I. N (2006). ‘Benefits & Challenges of Outsourcing: A survey of Commercial Banks in Nairobi, Kenya’. An unpublished MBA dissertation, University of Nairobi. Market Intelligence. (2005). The Banking Survey. Issue no. 1029-2195. Pearce, J. A. R (2004) Retail Banking Strategy. BMO financial group. Canada. Pearce, J. A & Robinson R. B (2007). Strategic Management: Formulation, Implementation and Control. McGraw-Hill Irwin. Porter, M.

E (1980). Competitive Strategy: Techniques for Analysing Industries and competitors; Sustaining superior performance. Harvard Business School press. Boston. Pujals, G. (2004). Offshore Outsourcing in the European Union Financial Services Industry. Quinn J, Julienne F and Negrin M (2000). Outsourcing strategy: Managing Strategic Risk, Global Focus, John Wiley & Sons Vol. 12 No. 3. Serem, S. J. C (2002). ‘A survey of outsourcing of HR services by Banks in Nairobi’ An unpublished MBA dissertation, University of Nairobi. The Economist Magazine, March 3, 2005.

Wayne, M,R. (2002). Human Resource Management, 8th ed. Prentice Hall. White ,B. (1998). The coming transformation of continental European Banking, B15 Working paper no. 54. APPENDIX I: LIST OF COMMERCIAL BANKS IN KENYA. Institutions interms of Shareholding. 1. Foreign Owned Institutions. a) Foreign owned not locally incorporated i. Citibank N. A ii. Habib bank A. G Zurich iii. Bank of India ltd iv. Habib Bank ltd v. Bank of India Finance ltd b) Foreign owned but locally incorporated Institutions(Partly owned by locals) i. Barclays bank of Kenya Ltd ii. Standard chartered bank ltd iii.

Development bank of Kenya ltd iv. CFC-Stanbic bank ltd v. Bank of Baroda ltd. vi. Diamond Trust bank ltd vii. K-Rep bank ltd 2. Institutions with Government participation. a) Kenya Commercial Bank ltd b) Housing Finance Corporation of Kenya Ltd c) CFC-Stanbic bank ltd d) Industrial bank of Kenya ltd e) National bank of Kenya ltd f) Consolidated bank of Kenya ltd. 3. Institutions locally owned. a) Commercial Bank of Africa ltd b) Transnational bank ltd c) Credit bank ltd d) Guardian bank ltd e) Family bank ltd f) First American bank ltd g) Investment & Mortgages bank ltd h) Middle East bank ltd i) Fina Bank ltd ) Imperial bank ltd k) Victoria Commercial bank ltd l) Prime bank ltd m) Equatorial bank ltd n) Giro Commercial bank ltd o) African Banking Corporation ltd p) Chase bank ltd q) City Finance bank ltd r) Charter House bank ltd s) Paramount Universal bank ltd t) ECO bank ltd u) Bank of Africa ltd v) Southern Credit bank ltd w) Fidelity Commercial bank ltd x) Co-operative Bank of Kenya ltd y) National Industrial credit bank ltd z) Equity bank ltd Source: CBK website (www. centralbank. go. ke) APPENDIX II: QUESTIONNAIRE. SECTION A. General Information. 1. Name of Bank ______________________________________________ 2.

Ownership Local Foreign Joint (Tick appropriately) 3. Listed in the Nairobi Stock Exchange? Yes No. 4. How long has your bank been in business? 1-3 years 4-5 years 6-10 years over 10 years 5 . a) Has your bank outsourced any of its activities or processes? Yes No b) If no, go to number 16. c) List the activities/processes already outsourced or can be outsourced. i. ______________________________________ ii. ______________________________________ iii. _____________________________________ iv. ______________________________________ v. ______________________________________ vi. ______________________________________ vii. ______________________________________ viii. ______________________________________ ix. ______________________________________ d) Factors considered/to consider in selecting activities or processes to outsource i) _____________________________________________ ii) _______________________________________________ iii) ______________________________________________ iv)_______________________________________________ v) _______________________________________________ i)_______________________________________________ vii) ______________________________________________ SECTION B. 6. To what extent does your bank outsource the following activities/processes? ‘A very Great extent’ 80% and above, ‘A great extent’ 60 to 79%, ‘A moderate extent’ 40 to 59%, ‘A low extent’ 20 to 39%, ‘A very low extent’ 1 to 19% ‘N/A’ – 0% |Activity/Process |A very great |A great Extent |Moderate Extent |A low Extent |Very low Extent |N/A | | |extent. | | | | | |ATM Services |[pic] | | |[pic] |[pic] |[pic] | |Customer care |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |ICT |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |Human Resource Mgt. [pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |Shareholders’ Register |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |Mgt. | | | | | | | |Document Management. |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |Stationery printing. [pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |Any Other(Please specify)|[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | | | | | | | | | | | |[pic] |[pic] |[pic] |[pic] |[pic] | | |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | | |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | | |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | 7.

Has outsourcing as a strategy benefited your bank? Yes No. 8. If yes, to what extent has your bank’s financial performance benefited as per below indicators from outsourced activities. ‘A very Great extent’ 80% and above, ‘A great extent’ 60 to 79%, ‘A moderate extent’ 40 to 59%, ‘A low extent’ 20 to 39%, ‘A very low extent’ 1 to 19% ‘N/A’ – 0% |Benefit |A very great |A great Extent |Moderate Extent |A low Extent |Very low Extent |N/A | | |extent. | | | | | |Less Liabilities/ Risks |[pic] | | |[pic] |[pic] |[pic] | |Cost Reduction |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |More choices |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |More time to focus on |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |core business | | | | | | | |Greater competitiveness |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |Improvement in efficiency|[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |in service provision | | | | | | | |Ease in changing |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |suppliers | | | | | | | |Access to world class |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |capabilities | | | | | | | |Better use of resources |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |Economies of scale. [pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |Any Other(Please specify)|[pic] |[pic] | |[pic] |[pic] |[pic] | | |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | | |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | | |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | | | |[pic] |[pic] |[pic] |[pic] |[pic] | 9. What can your bank do to improve on the current benefits of outsourcing? ____________________________________________________________ ________ 10. Has your bank faced any difficulties in outsourcing? Yes No 11. If yes, to what extent has your bank faced the following challenges as a result of adopting an outsourcing strategy. ‘A very Great extent’ 80% and above, ‘A great extent’ 60 to 79%, ‘A moderate extent’ 40 to 59%, ‘A low extent’ 20 to 39%, ‘A very low extent’ 1 to 19% ‘N/A’ – 0% Challenge |A very great |A great Extent |Moderate Extent |A low Extent |Very low Extent |N/A | | |extent. | | | | | | |Increased use of |[pic] | | |[pic] |[pic] |[pic] | |non-regular employees | | | | | | | |Confidentiality issues |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |Exposure to competitors. [pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |Poor quality services |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |Inability to control |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |contracted providers | | | | | | | |Loss of control of |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |outsourced services. | | | | | | | |Loss of learning |[pic] |[pic] |[pic] |[pic] |[pic] |[pic] | |opportunities from the | | | | | | | |outsourced activity. | | | | | | |Any other(Please specify)|[pic] |[pic]