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Strategic Outsourcing: An International JournalFactors influencing the outsourcing decisions: a study of the banking sector in IndiaRavi Kumar Jain, Ramachandran Natarajan,

Article information:To cite this document:Ravi Kumar Jain, Ramachandran Natarajan, (2011) "Factors influencing the outsourcing decisions: a studyof the banking sector in India", Strategic Outsourcing: An International Journal, Vol. 4 Issue: 3, pp.294-322,https://doi.org/10.1108/17538291111185485Permanent link to this document:https://doi.org/10.1108/17538291111185485

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https://doi.org/10.1108/17538291111185485

https://doi.org/10.1108/17538291111185485

Factors influencing theoutsourcing decisions: a studyof the banking sector in India

Ravi Kumar JainICFAI Business School, IFHE University, Hyderabad, India, and

Ramachandran NatarajanCollege of Business, Tennessee Technological University, Cookeville,

Tennessee, USA

Abstract

Purpose – This paper is an empirical study of outsourcing practices in the banking sector in India.The purpose of the paper is to investigate the impact of factors which influence the decision makers’attitude towards outsourcing.

Design/methodology/approach – Based on a review of the existing literature, an attitudinal modelof outsourcing was developed. This model was used to: identify the key factors of benefits, risks,roadblocks, and criticality of outsourcing; develop the instrument to measure the factors; andformulate hypotheses concerning the impact of these factors. The constructs in the instrument thatmeasured these factors were validated by factor analysis.

Findings – The impacts of perceived benefits, perceived roadblocks, and perceived criticality on theattitudes towards outsourcing were found to be strong and statistically significant. The impact ofperceived risk was weak and statistically insignificant. The model explaining the combined impact ofthese four factors on outsourcing attitudes was also statistically significant.

Research limitations/implications – An important insight from this study is that the clients, atleast in the banking sector in India, tend to value in outsourcing quality factors such as processimprovement, services improvement and cost transparency more than cost savings. The results of thestudy provide a basis for rethinking the value proposition offered by outsourcing vendors and forrefocusing the research on outsourcing of services in particular.

Originality/value – While most studies on outsourcing tend to be theoretical and/or focus onoutsourcing from developed to developing countries, this is an empirical study focusing onoutsourcing by organizations based in developing countries such as India. Therefore, the results arenot confounded by differences in culture-specific communications, business practices, and regulatoryregimes between the countries.

Keywords India, Banks, Outsourcing, IS outsourcing, Business process outsourcing,Outsourcing strategy

Paper type Research paper

1. IntroductionOutsourcing has emerged as one of the popular and widely adopted businessstrategies of this globalized era (Willcocks, 2010). Research indicates that the sheer sizeof spending on outsourcing and active involvement of top management executives makeoutsourcing decisions more strategic in an organization today than ever (Willcocks,2010). Since the 1980s there has been a trend of outsourcing among organizations acrossvarious industries starting with basic information systems (IS) outsourcing to advancedstrategic and transformational outsourcing, which involves outsourcing of core

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1753-8297.htm

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Strategic Outsourcing: AnInternational JournalVol. 4 No. 3, 2011pp. 294-322q Emerald Group Publishing Limited1753-8297DOI 10.1108/17538291111185485

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and strategic business functions (Schniederjans et al., 2007). Further, the globaloutsourcing market in terms of total contract value has grown from US$146 billion (Dunand Bradstreet Barometer Global Outsourcing Survey, 1998) in the year 1996 to US$1.3trillion in 2007 (ZagadaWaagstein Global Outsourcing 100 Index, 2011). Several globalresearch agencies including KPMG Report (2007), Potter (2007),PricewaterhouseCoopers (2007) and Technology Partners International Inc. (TPI,2009) have reported that world wide, outsourcing engagements have been growing andwill continue to grow consistently both in terms of number of contracts and their averagecontract value. The latest report by TPI shows a robust growth in global outsourcingtrend post-global financial crisis as more than 20 percent of new entries (companiesoutsourcing for the first time) are recorded across several industrial sectors in 2010, atthe same time AVC among Forbes Global 2000 companies across 27 sectors has grownby 5 percent in 2010 (TPI, 2011).

A great deal of literature has been devoted to studying this phenomenon of outsourcingand its various aspects such as the rationale for outsourcing, various manifestations ofoutsourcing as differentiated by the nature and scope of activities outsourced, andsourcing models in terms of the services delivery models and vendor location.

Further, arguably, the advanced industrialized economies such as the USA, Japan andWestern Europe are the principal candidates for the origin of outsourcing transactions(Koveos and Tang, 2004). Hence the literature, though it has addressed a wide array ofaspects of outsourcing, e.g. technical, motivational, cultural, organizational,strategic, operational, and performance related (as reviewed by Lacity et al., 2009),is primarily focused on understanding outsourcing phenomenon from developedcountries’ perspective. The literature does not address outsourcing from the developingcountry perspective. This lacuna in outsourcing literature is also echoed by recentstudies (Hansen et al., 2008).

Research on outsourcing phenomenon in the context of outsourcing amongcompanies (referred as “clientele” hereafter) based out of a developing economy such asIndia[1] can potentially provide a several new insights on outsourcing decisions.

For a simple reason that the factors influencing outsourcing decisions for anorganization based in India are likely to be very different from the one which is basedin a developed country such as the USA, the UK or Germany. For instance, labor costarbitrage, due to differential labor cost in developed vis-a-vis developing countries,which has been a predominant factor in offshore outsourcing decisions may not applywhen outsourcing client(s) and vendor(s) both are based in a relatively low labor costoutsourcing destination such as India. Similarly, factors that determine the perceptionof risks and benefits of outsourcing which further impacts the outsourcing decisionswill also be different when studied in the context of a country such as India. Further,with a legacy of highly restrictive regulations and prevalence of strong employeeunions the banking sector in India is often plagued with several roadblocks, internaland external factors which tend to exert undue influence on outsourcing decision.

Banking and financial services sector in India is one of the robust and fast emergingsectors in the world (Jain and Natarajan, 2010b). It is globally observed that, given thenature of information technology (IT)-intensive business processes, the bankingindustry has a huge potential for benefiting from outsourcing (Winter, 2002; Tas andSunder, 2004). In fact, industry research indicates that Banking and Financial ServicesIndustry (BFSI) has been the largest sectoral user of outsourcing services worldwide,

Outsourcingdecisions

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next only to manufacturing (Ackermann, 2003). Further, the recent liberalization inregulations coupled with further advances in information and communicationtechnology has provided the Indian banking sector with an opportunity to useoutsourcing as a strategic tool to: focus on their core competencies; develop newcapabilities; improve their processes, service quality, and operational efficiency therebyincreasing the reach of their services and reducing the cost of service delivery; andaddress the impending challenges likely to arise from further liberalization of the sectorin the near future. Given the low rates of adoption of outsourcing in Indian bankingsector ( Jain et al., 2010) and the absence of sufficient academic research with specialfocus on India coupled with the increased scope and opportunity for banking andfinancial services organizations to adopt outsourcing in the future makes the presentstudy all the more relevant and timely as it sheds light on factors that influenceoutsourcing decisions in the Indian banking sector.

An objective of this study is to address the above-mentioned gaps in the literatureon outsourcing. The study attempts to identify and conceptualize various factors thatinfluence decision maker’s attitude towards outsourcing, with specific reference to thebanking sector in India. Drawing from the existing literature and theories such asperceived risk theory (Peter and Michael, 1976), innovation diffusion theories (Rogers,1983), resources theories (Barney, 1991) and other decision theories involving cost –risk analysis, etc. and Delphi model expert opinion, four theoretical constructs namely,perceived risk, perceived benefits, perceived roadblocks, and perceived criticality aredeveloped to conceptualize the influence of various factors on outsourcing decisions inthe context of the banking sector in India.

For several reasons banking sector in India has been chosen for the study. One beingthat the banking sector in India has been growing continuously for the last decade and half(post-banking reforms in the year 1992 and in 1997) with intensified competition thusrequiring the banking organizations to look out for new business practices in order toimprove and sustain their competitive positions. This becomes more relevant, especially,when further liberalization of the banking space in India is on the cards which possiblywill mark the entry of bigger and stronger foreign banks from developed nations thusintensifying the competition (Jain and Natarajan, 2010a, b). Moreover, Indian bankingsector is one of the highly regulated in the world where decisions (e.g. to outsource or not tooutsource) are heavily influenced by the prevailing regulatory mechanisms.

2. Literature reviewBenefits of outsourcingDrawing from theories such as transaction cost economics (Williamson, 1979), neoclassical economics (reviewed in Williamson, 1985), the argument of core competency(Prahalad and Hamel, 1990; Hamel and Prahalad, 1996; Quinn, 1999) and severalothers, a number of studies on outsourcing (reviewed by Lacity et al., 2009) have triedto understand and explain the various facets, including determinants, motivations, andrisks, of outsourcing. Outsourcing decision is often seen as a rational decision bymanagement motivated by expectations to generate several benefits such as:

. to reduce and control cost;

. to exploit the assumed economies of scale and scope offered by the outsourcingvendors (Loh and Venkatraman, 1992a, b; Slaughter and Ang, 1996; Ang andCummings, 1997; Ang and Straub, 1998; Casale, 2001; Janko and Koch, 2005);

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. to improve management’s focus on core competencies and get access to newtechnical skills and knowledge base for augmenting the organizations’ skill andknowledge gap (Lacity and Willcocks, 1998; Casale, 2001);

. to improve certain institutional aspects such as structure of the organization, style ofmanagement (Loh and Venkatraman, 1992b; Hu et al., 1997; Ang and Cummings,1997) and complementarity of organizational design (Milgrom and Roberts, 1995);

. to gain competitive advantage by achieving an unique winning combination ofin-house capabilities with that of the outsourcing vendors;

. to mitigate technological risk and uncertainty (McLellan et al., 1995); and

. to improve overall business performance, achieve process improvisation andenhancecustomerservice (DiRomualdoandGurbaxani,1998;Quinn,2000;Chrisetal.,2004) and for other strategic motives (Gulla and Gupta, 2009; Willcocks, 2010).

These studies collectively indicate that the management’s intent behind outsourcing isto realize a range of tactical, business, and strategic benefits it offers.

Some of the studies observed that, in practice, outsourcing decisions are often drivenby management’s desire to transform fixed costs to variable costs (Huber, 1993;Baldwin et al., 2001). The case in point was IS outsourcing by the Continental Bank, oneof the large banks in the USA. Another case study of British Petroleum (BP) by Cross(1995), observes that the primary reasons for IS outsourcing by BP were to cut costs, gainaccess to more flexible and higher quality IS resources, focus the IS resources on aspectsthat directly improve the overall business, and the desire to trade ownership for results.These reasons are also supported by Fisher et al. (2008) who confirm that cost saving andrelated benefits still remains a major agenda behind outsourcing engagements.

Other major benefits the management expects from their outsourcing engagementsare convenience and flexibility in development, implementation and scaling up ofprojects, change management, protection against technical risk, and improvement inproductivity and service quality (Clark et al., 1995; Chin, 2003). Adding an interestingdimension to the benefits of outsourcing, Quinn (2000) and Koch (2008) conclude thatoutsourcing enables the organization to better manage the business and organizationalknowledge and generate superior business intelligence, enable rapid innovation andintroduction of new products/services.

DiRomualdo and Gurbaxani (1998) have identified that after initial years after theland mark deal of Kodak, outsourcing has moved into the realm of strategicmanagement as organizations started looking beyond the tactical and operationalbenefits that the outsourcing engagements promises to offer. In their widely cited study,the authors concluded that organizations engage in outsourcing often with a strategicintent to achieve substantial improvisation of IT and business processes, innovation,customer service, and gain overall business efficiency. These conclusions were wellsupported by the subsequent research in this direction, for instance Quinn (2000),Chris et al. (2004) and latest by Willcocks (2010).

Risks of outsourcingGiven the long list of benefits that an organization can realize from its outsourcingengagements several studies pertaining to outsourcing in financial services sectorshow a gradually growing trend in outsourcing, both in terms of nature and scope


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of activities outsourced, and also emphasize that outsourcing is an inevitable andcritical aspect of financial institutions to survive in a rapidly changing businessenvironment. However, it is important for the management to understand the variousrisks their organization gets exposed to while engaging in outsourcing.

It is evident from the experiences in outsourcing that more often than not outsourcingengagements lead to situations where client organization end up relying too much on theoutsourcing vendors (Earl, 1996; Aubert et al., 1999; Quelin and Duhamel, 2003;Chris et al., 2004) for their IT, IS, and business needs. The irony is that they often fail torealize benefits expected from outsourcing (Earl, 1996; Quelin and Duhamel, 2003;Adeleye et al., 2004). It is also evident that by outsourcing an organization is exposingitself to the greater risks such as loss of: internal competencies; innovation capabilities;cross-functional skills; and loss of control over the process and/or the vendor (Quinn andHilmer, 1994; Earl, 1996). Aubert et al. (1999), using transaction cost theory and agencytheory, emphasize the risks related to adverse selection of vendor, failure of vendor,service debasement, etc. which not only makes the vendor relationship management acomplex affair but also adds to the complexity in general business managementultimately defeating the very purpose of outsourcing. The subsequent studies supportthe argument that managing vendor relationship is one of the major risks associatedwith outsourcing, which if not managed properly can potentially lead to poor realizationof expected benefits and also damage the organization seriously (Baldwin et al., 2001;Kern et al., 2002; Rouse and Corbitt, 2003).

Moreover, for banking and financial services organization outsourcing brings inadditional set of risks related to regulatory violations and subsequent legal obligationsand reputational risk (Federal Bank of New York, 1999). Other major risks related tooutsourcing are compromises on data integrity and confidentially (Federal Bank ofNew York, 1999; Chris et al., 2004; Shankar, 2005). According to Khalfan (2004),data-related risks are more prominent than any other risk related to outsourcing.

It is important to understand at this stage that all the above-cited risks ofoutsourcing holds good to the entire spectrum of outsourcing from ITO to businessprocess outsourcing (BPO) with possibly a difference in the degree of impact eachfactor exerts on an organization (Gewald and Franke, 2005).

Roadblocks to outsourcingRoadblocks to outsourcing are those factors, as identified in this study, which are notdirectly risks due to outsourcing. These are the factors that impede the outsourcingprocess or contribute to the ill preparedness of the organization for outsourcing despitemanagement fully appreciating the possibilities of benefits and risks of outsourcingand being favorably disposed towards outsourcing.

For instance, it can be inferred from the study by Adeleye et al. (2004) on outsourcingamong Nigerian banks that the non-availability of a matured vendor market can be a bigroadblock which not only impedes the outsourcing activities but also contributes to thevendor-related risks of outsourcing. Similarly, it can be understood from the study onoutsourcing in the banking sector in the UK by Chris et al. (2004) and a study byYang et al. (2007) on BPO among Korean organizations that resistance from employeeunions can also be a serious impediment to outsourcing. It is important to note that thisfactor, resistance from employee unions, becomes a major force influencing outsourcingdecisions in the context of a highly unionized Indian banking sector. Similarly, the size

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and scope of operations of an organization is also an important factor the managementneeds to take into consideration while making outsourcing decisions (Nam et al., 1996;Ang and Straub, 1998).

As discussed above, outsourcing literature identifies several factors that influencethe manager’s attitude towards outsourcing. A study on German banking sector byGewald and Dibbern (2009) suggests, using a risks vs benefits framework, that whileperceived benefits exert a positive influence in favor of outsourcing decisions;perceived risks exert a negative influence against outsourcing decisions. Using thisframework, this study assumes that the perceived roadblocks to outsourcing will exertnegative influence on outsourcing decisions.

Criticality of outsourcingWillcocks (2010), in his study on IT outsourcing among 650 organizations(representing Europe, Asia Pacific, and the USA) sufficiently highlights that giventhe quantum of outsourcing expenditure and the strategic role outsourcing plays inmany businesses today, the top management perceives outsourcing as a highly criticalstrategic decision that has direct impact on the overall market value of the firm. Thus,it can be understood that outsourcing decisions depends a lot on the management’s(strategic level) perception about the criticality of outsourcing given the nature andscope of their business and industry.

Criticality of outsourcing to business refers the transformational effect an outsourcingengagement may have on the business by generating sustainable value creation for theshareholders and its long-term prospects. Criticality of outsourcing can also reflectthe possible adverse consequences or situations an organization may have to face in theabsence of outsourcing. Given this, the study identifies, based on a series of paneldiscussions and expert opinions using Delphi technique, management’s perception ofcriticality of outsourcing to their business as another important dimension that influencesthe decision on the scale and nature of outsourcing an organization may commit to.

3. Research objectivesThis study examines the outlook of the top management of scheduled commercialbanks[2] in India towards outsourcing. More specifically, the study focuses on theimpact of the perceived benefits, perceived risks, perceived roadblocks, and perceivedcriticality of outsourcing on the managerial attitudes towards outsourcing. The impactsof the above variables are considered at the individual (H1-H4) and collective levels(H5). With these objectives, the following null hypotheses were formulated and tested.The parametric versions of the null hypotheses are given in parentheses:

H1. Perceived benefits of outsourcing have no influence on the management’sattitude towards outsourcing (the b-coefficient for the “perceived benefits”independent variable in the regression model is zero).

H2. Perceived risks of outsourcing have no influence on the management’sattitude towards outsourcing (the b-coefficient for the “perceived risks”independent variable in the regression model is zero).

H3. Perceived roadblocks of outsourcing have no influence on the management’sattitude towards outsourcing (the b-coefficient for the “perceived roadblocks”independent variable in the regression model is zero).


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H4. Perceived criticality of outsourcing has no influence on the management’sattitude towards outsourcing (the b-coefficient for the “perceived criticality”independent variable in the regression model is zero).

H5. The attitudinal multiple regression model with the above four independentvariables does not explain any variation in management’s attitude towardsoutsourcing (the R 2 value for the multiple regression model is zero).

4. Research methodology4.1 Sample selection and data collectionThe multi-level stratified sampling method was used for sample selection of the study.Of the total 63 scheduled commercial banks (list can be made available on request) whichincludes eight new private sector banks, 16 old private sector banks, 28 public sectorbanks (including State Bank of India and its subsidiaries, and Industrial DevelopmentBank of India), and 11 foreign banks, a sample of 30 banks was selected for the study.This sample represents 47 percent of the universe of scheduled commercial banks. Andfurther, they disburse nearly 80 percent of the loans made by all the commercial banks inIndia. Using convenience sampling method, ten executives from the top management(chairman, directors, chief executives, and functional heads) of each of the sample bankswere selected (Table I), thus taking the number of participants (respondents) in the studyto 300 in total.

The participants, after receiving their confirmation, were sent structuredquestionnaire (with close-ended questions) or interviewed, as per their convenience, torecord their responses. The data so collected pertained to two aspects of outsourcing –first, to assess the level and the nature of outsourcing practices among banks in India onselect (five) parameters; second, to understand and assess the factors that influence theoutsourcing decisions. This paper presents the results and observations of the secondaspect (sections 5-8 of the questionnaire) (the Appendix).

4.2 Model developmentFor testing the hypotheses, a framework of perceived risks and benefits is used toassess whether the perceived benefits, risks, roadblocks, and criticality of outsourcingsignificantly influence the decision of top management to outsource business processor IT-related activities. For this purpose an attitudinal model of outsourcing isdeveloped and tested.

The study draws from the work of Gewald and Dibbern (2009) to understand theinfluence of the perceived risks, benefits, roadblocks, and criticality in adoption of BPOby banks. Though the study uses model suggested by Gewald and Dibbern (2009) as thebase model, the elements of the constructs of perceived risks, and perceived benefits ofoutsourcing were appropriately modified to suit the context of Indian banking sector.

S.no. Category/designation of the respondents No. of respondents

1 Chairman and managing directors 302 Chief general managers/presidents 1503 Deputy general managers 120

Total 300

Table I.Description of therespondents at samplebanks

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Further, new constructs of perceived roadblocks and perceived criticality were includedin the present study to develop an attitudinal model of outsourcing. A list of the elementsof risks, benefits which are widely identified in the outsourcing literature, was preparedand was further screened by using multiple rounds of panel (with six members)discussions and seeking expert opinions involving senior bank managers,academicians, and outsourcing vendors. The other two constructs namely perceivedroadblocks and perceived criticality were included to understand in the context of Indianbanking sector, the influence of the factors other than those identified in ITO and BPOliterature on outsourcing decisions. Various elements of the construct were identifiedand further screened using the same approach used for the other two constructs.

A five-point Likert’s scale, with 1 – being very high and 5 – being very low, is used tomeasure the degree of perceived risk, perceived benefit, perceived roadblock andperceived criticality for every element (indicator) of the constructs of the conceptualmodel (Table II).

4.3 Theoretical frameworkThe review of literature on outsourcing made it apparent that while positive perceptionsare often equated with the advantages of outsourcing and the criticality of outsourcingfor the organization; negative perceptions are equated with the risks of outsourcing andthe roadblocks for implementing outsourcing decisions. Therefore, the study applies a“risk versus benefits” (Gewald and Dibbern, 2009) framework to understand the factorsinfluencing the attitude of decision makers towards outsourcing.

Attitude towards outsourcing is positively influenced by the perceived benefits andperceived criticality of outsourcing; and negatively influenced by the perceived risks andperceived roadblocks for implementing outsourcing. Thus, they constitute the constructsof the attitude towards outsourcing. These constructs are further disaggregated intovarious indicators of benefits (11 indicators), risks (eight indicators) and roadblocks (fiveindicators), criticality (one indicator), respectively. The indicator validity with respect toeach construct is established by using confirmatory factor analysis using principal

S. no. ConstructNumberof items What it measures Literature reference

1 Perceivedbenefits

11 The impact of perceivedbenefits on the attitude towardsoutsourcing decisions

Gewald (2010) and Gewald andDibbern (2009)

2 Perceivedrisks

8 The impact of perceived riskson the attitude towardsoutsourcing decisions

Gewald et al. (2006), Gewald andDibbern (2009)Perceived risk theory, Peter andMichael (1976)

3 Perceivedroadblocks

5 The impact of perceivedroadblocks on the attitudetowards outsourcing decisions

Nam et al. (1996), Ang andStraub (1998), Chris et al. (2004),Adeleye et al. (2004) and Yanget al. (2007)

4 Perceivedcriticality

1 The impact of perceivedcriticality (in strategic terms) onthe attitude towardsoutsourcing decisions

Willcocks (2010)

Total 25

Table II.Constructs for analyzing

the impact of perceivedbenefits, perceived risks,

perceived roadblocks,and perceived criticalityon the decision makers’

attitude towardsoutsourcing


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component analysis for component extraction and varimax method for componentrotation (cut-off loading 0.60). And the association among indicators and their fitness tothe overall construct (construct reliability) is established by calculating Cronbach’s acoefficient (Table III).

Using these elements, an attitudinal model of outsourcing is developed. The overallstructure of the model is shown in Figure 1.

The results of factor analysis for all the constructs are presented in the followingsection.

4.4 Testing the scale reliabilityIt is very important to test the scale reliability of any instrument before using it for thestudy. The reliability and internal consistency of a construct vary with the type of scaleused (Peter, 1979). Further, previous researches also suggest that a reliabilitycoefficient of 0.50-0.60 is sufficient to establish the indicator reliability of a construct(Nunnally, 1967; Perry, 1973; Peter and Michael, 1976). It is also argued that for a basicresearch a reliability of over 0.80 is not required because at that level the correlationsget attenuated very little by measurement error. The indicators which collectivelymeasure the impact of perceived benefits, perceived risks, and perceived roadblocks onthe attitude towards outsourcing have a reliability coefficient, Cronbach’s a, of 0.818,0.892, and 0.645, respectively. Thus, reflecting a high construct reliability or, in otherwords, the indicators of each construct measure what they are expected to measure.

5. Data analysis5.1 Construct I: perceived benefitsThe confirmatory factor analysis (Table IV) of the construct “perceived benefits”reveals that all the 11 indicators confirm to the four major factor components, whichcan be identified under the following headings:

(1) quality improvement of products and services (rotated sum of squaredloadings ¼ 24.84 percent);

(2) access to new capabilities, skills and resources (rotated sum of squaredloadings ¼ 20.47 percent);

(3) cost-related benefits (rotated sum of squared loadings ¼ 20.20 percent); and

(4) process and business intelligence improvement (rotated sum of squaredloadings ¼ 13.11 percent).

The total rotated sum of squared loadings of these four-factor components indicate that78.6 percent of the variance is explained by these four factors collectively.

Further, high factors loadings of all the indicators, except one, of perceived benefits(Table V) reflect that the decision makers perceive that outsourcing is likely to deliverthese benefits. It is to be noted that three indicators cross-loaded in this construct,however, there is a gap of at least 0.2 between the primary and cross-loadings in all butone case. Further, in the case where the gap is less than 0.20, the face validity (meaningof the indicator) is strong and hence it is understood that the cross-loading does notaffect the interpretation of the identified factors.

It is important to note that among all the indicators of perceived benefits ofoutsourcing, the benefit of being able to access new technologies (loading ¼ 0.930),

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outs

ourc

ing

toac

hie

ve

imp

rov

emen

tin

pro

du

ctiv

ity

ofop

erat

ion

s

0.84

7L

ohan

dV

enk

atra

man

(199

2a),

McL

ella

net

al.

(199

5),

Cla

rket

al.

(199

5),

Bal

dw

inet

al.

(200

1)an

dL

ance

llot

tiet

al.

(200

3)Im

pro

ved

cust

omer

serv

ice:

use

outs

ourc

ing

tob

eab

leto

del

iver

imp

rov

ised

serv

ice

toth

ecu

stom

ers

0.88

3C

lark

etal.

(199

5),

DiR

omu

ald

oan

dG

urb

axan

i(1

998)

and

Ch

riset

al.

(200

4)

Ach

iev

eb

ette

rfo

cus

onco

reco

mp

eten

cies

(cor

eb

usi

nes

s):

outs

ourc

ing

tak

esaw

ayu

nw

ante

dlo

adof

fth

em

anag

emen

tan

den

able

them

tofo

cus

all

ener

gie

s/re

sou

rces

onth

eco

reb

usi

nes

sca

pab

ilit

ies/

com

pet

enci

es

0.86

1Q

uin

n(1

999)

,B

ald

win

etal.

(200

1),

Th

eJo

int

For

um

,20

04O

uts

ourc

ing

inF

inan

cial

Ser

vic

es(2

004)

and

Ch

riset

al.

(200

4)

Cos

tsh

ifti

ng

(fro

m“fi

xed

”to

“var

iab

le”)

:ou

tsou

rcin

gw

ill

enab

leth

eco

nv

ersi

onof

fix

edco

stco

mm

itm

ents

tov

aria

ble

cost

sli

nk

edw

ith

pre

defi

ned

del

iver

able

s/re

sult

s/ou

tpu

t

0.71

5H

ub

er(1

993)

and

Bal

dw

inet

al.

(200

1)

Acc

ess

ton

ewan

du

pd

ated

tech

nol

ogie

son

con

tin

uou

sb

asis

:ou

tsou

rcin

gw

ill

faci

lita

tein

gai

nin

gq

uic

kan

dco

nti

nu

ous

acce

ssto

the

late

stte

chn

olog

ical

dev

elop

men

tsre

lev

ant

for

the

bu

sin

ess

0.93

0M

cLel

lanet

al.

(199

5),

Cro

ss(1

995)

,C

asal

e(2

001)

,L

acit

yan

dW

illc

ock

s(1

998)

,C

hri

set

al.

(200

4)an

dA

del

eyeet

al.

(200

4)

Acc

ess

ton

ewca

pab

ilit

ies

and

skil

lse

ts:

outs

ourc

ing

wil

lfa

cili

tate

toac

qu

ire

new

skil

lse

tsan

db

usi

nes

s/te

chn

ical

/op

erat

ion

alca

pab

ilit

ies

asan

dw

hen

req

uir

ed

0.94

9M

cLel

lanet

al.

(199

5),

Cro

ss(1

995)

,C

lark

etal.

(199

5),

Lac

ity

and

Wil

lcoc

ks

(199

8),

Bal

dw

inetal.

(200

1),C

asal

e(2

001)

,Ch

risetal.

(200

4)an

dA

del

eyeet

al.

(200

4)

(continued

)

Table III.List of various elementsof four constructs with

their factor loadings andthe construct reliability

scores


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embe

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17 (

PT)

Con

stru

ctC

onst

ruct

ind

icat

ors

and

thei

rd

escr

ipti

onF

acto

rlo

adin

gL

iter

atu

resu

pp

ort

Pro

cess

imp

rov

emen

t(r

estr

uct

uri

ng

and

pro

cess

stan

dar

diz

atio

n):

outs

ourc

ing

wil

lfa

cili

tate

pro

cess

imp

rov

isat

ion

by

way

ofre

stru

ctu

rin

g,

re-e

ng

inee

rin

g,

stan

dar

diz

atio

nof

pro

cess

es

0.72

9D

iRom

ual

do

and

Gu

rbax

ani

(199

8),

Qu

inn

(200

0),

Bal

dw

inet

al.

(200

1)an

dC

hri

set

al.

(200

4)

Intr

odu

cen

ewp

rod

uct

s/se

rvic

es(w

ith

qu

ick

tim

e-to

-mar

ket

):ou

tsou

rcin

gw

ill

enab

lein

nov

atio

nan

dra

pid

dev

elop

men

tan

din

trod

uct

ion

ofn

ewp

rod

uct

san

dse

rvic

es

0.61

1M

cLel

lanet

al.

(199

5)an

dQ

uin

n(2

000)

Man

agem

ent

con

ven

ien

ce(s

pre

adin

gri

sk):

outs

ourc

ing

wil

lm

ake

thin

gs

flex

ible

and

con

ven

ien

tfo

rth

em

anag

emen

tb

yen

abli

ng

them

tosc

ale

up

the

oper

atio

ns

and

also

spre

adth

eri

sk

0.70

6M

cLel

lanetal.

(199

5),C

lark

etal.

(199

5),H

uetal.

(199

7),

Bal

dw

inet

al.

(200

1)an

dC

hin

(200

3)

Imp

rov

edb

usi

nes

sin

tell

igen

ce/k

now

led

ge

man

agem

ent:

outs

ourc

ing

(wit

hre

fere

nce

toce

rtai

nsp

ecia

lize

dse

rvic

es)

ven

dor

sb

rin

gin

new

erca

pab

ilit

ies

ofd

ata

and

kn

owle

dg

em

anag

emen

tan

dg

ener

ate

sup

erio

rb

usi

nes

sin

tell

igen

ce

0.79

1Q

uin

n(2

000)

,Ja

nk

oan

dK

och

(200

5)an

dK

och

(200

8)

Per

ceiv

edri

sks

(con

stru

ctre

liab

ilit

ysc

ore

Cro

nb

ach

’sa

–0.

892)

Dat

ase

curi

ty:

risk

rela

ted

tolo

ssof

dat

a0.

944

Fed

eral

Ban

kof

New

Yor

k(1

999)

,C

hri

set

al.

(200

4),

Kh

alfa

n(2

004)

and

Sh

ank

ar(2

005)

Dat

aco

nfi

den

tial

ity

:ri

skre

late

dto

dat

aco

mp

rom

ises

and

bre

ach

ofd

ata

pri

vac

y0.

953

Fed

eral

Ban

kof

New

Yor

k(1

999)

,C

hri

set

al.

(200

4),

Kh

alfa

n(2

004)

and

Sh

ank

ar(2

005)

Los

ing

pro

cess

con

trol

0.76

7Q

uin

nan

dH

ilm

er(1

994)

,Ear

l(1

996)

,Ker

netal.

(200

2),

Ch

riset

al.

(200

4),

Kh

alfa

n(2

004)

and

Sh

ank

ar(2

005)

Reg

ula

tory

vio

lati

ons

and

leg

alob

lig

atio

ns

0.59

2F

eder

alB

ank

ofN

ewY

ork

(199

9)an

dC

hri

setal.

(200

4)C

omp

lex

ity

inv

end

orre

lati

onsh

ipm

anag

emen

t0.

765

Qu

inn

and

Hil

mer

(199

4),

Au

ber

tet

al.

(199

9),

Bal

dw

inet

al.

(200

1)an

dR

ouse

and

Cor

bit

t(2

003)

(continued

)

Table III.

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Con

stru

ctC

onst

ruct

ind

icat

ors

and

thei

rd

escr

ipti

onF

acto

rlo

adin

gL

iter

atu

resu

pp

ort

Ov

erre

lian

ceon

ven

dor

s0.

766

Ear

l(1

996)

,F

eder

alB

ank

ofN

ewY

ork

(199

9),

Au

ber

tet

al.

(199

9),

Rou

sean

dC

orb

itt

(200

3),

Qu

elin

and

Du

ham

el(2

003)

and

Ch

riset

al.

(200

4)In

crea

sed

man

agem

ent

com

ple

xit

ies

0.86

7B

ald

win

etal.

(200

1)U

nab

leto

real

ize

exp

ecte

dd

eliv

erab

les/

ben

efits

0.69

7E

arl

(199

6),

Bal

dw

inet

al.

(200

1),

Qu

elin

and

Du

ham

el(2

003)

and

Ad

eley

eet

al.

(200

4)P

erce

ived

road

blo

cks

(con

stru

ctre

liab

ilit

ysc

ore

Cro

nb

ach

’sa

–0.

645)

Infr

astr

uct

ure

inad

equ

acy

refl

ects

abse

nce

orin

suffi

cien

cyof

nec

essa

ryin

fras

tru

ctu

resu

chas

lev

elof

com

pu

teri

zati

on,

pro

cess

stan

dar

diz

atio

nan

dd

igit

izat

ion

and

net

wor

kco

nn

ecti

vit

y

0.74

4N

ewen

try

Reg

ula

tory

and

pol

icy

rest

rict

ion

sre

fer

toth

era

ng

eof

stat

uar

yob

lig

atio

ns,

asp

resc

rib

edb

yth

eR

BI,

un

der

wh

ich

ban

ks

are

sup

pos

edto

mak

ed

ecis

ion

san

dop

erat

ein

Ind

ia

0.87

3N

ewen

try

Res

ista

nce

from

emp

loy

eeu

nio

nre

fers

toth

ere

sist

ance

toch

ang

efr

omth

ew

ork

forc

eof

ban

ks

wh

ile

adop

tin

gou

tsou

rcin

g

0.42

5C

hri

set

al.

(200

4)an

dY

anget

al.

(200

7)

Siz

ean

dsc

ale

ofth

eop

erat

ion

s/or

gan

izat

ion

0.67

6N

amet

al.

(199

6)an

dA

ng

and

Str

aub

(199

8)A

bse

nce

ofm

atu

red

ven

dor

mar

ket

refl

ects

the

non

-av

aila

bil

ity

ofq

ual

ity

outs

ourc

ing

ven

dor

,es

pec

iall

yw

ith

refe

ren

ceto

BP

O

0.93

1A

del

eyeet

al.

(200

4)

Per

ceiv

edcr

itic

alit

yR

eflec

tsth

em

anag

emen

tsp

erce

pti

onof

the

stra

teg

iccr

itic

alit

yof

outs

ourc

ing

toac

hie

ve

com

pet

itiv

ead

van

tag

eor

over

all

succ

ess

ofth

eor

gan

izat

ion

NA

New

entr

yW

illc

ock

s(2

010)

Notes:

Per

ceiv

edb

enefi

ts,

per

ceiv

edri

sks,

per

ceiv

edro

adb

lock

s,an

dp

erce

ived

crit

ical

ity

per

tain

ing

toou

tsou

rcin

g

Table III.


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skills and resources (loading ¼ 0.949) on continuous basis are the predominantindicators that contribute to the overall perceived benefits while the indicators such asthe ability to introduce new products/services more frequently (loading ¼ 0.611) are notwell considered by the decision makers. It is also interesting to note that, the benefits ofbeing able to improve operational efficiency (loading ¼ 0.847), customer service(loading ¼ 0.883), and focus on core competency (loading ¼ 0.861) are favored morethan the benefits related to cost cutting (loading ¼ 0.830), cost shifting(loading ¼ 0.715), and convenience (loading ¼ 0.706).

Initial eigen valuesExtraction sum of squared

loadingsRotation sum of squared

loadingsIndicatorsofperceivedbenefits Total

Variance(%)

Cumulative(%) Total

Variance(%)

Cumulative(%) Total

Variance(%)

Cumulative(%)

1 4.242 38.561 38.561 4.242 38.561 38.561 2.732 24.841 24.8412 2.146 19.505 58.066 2.146 19.505 58.066 2.252 20.473 45.3143 1.212 11.021 69.087 1.212 11.021 69.087 2.222 20.195 65.5094 1.049 9.532 78.619 1.049 9.532 78.619 1.442 13.110 78.6195 0.721 6.558 85.1776 0.554 5.041 90.2187 0.471 4.285 94.5038 0.278 2.530 97.0349 0.226 2.050 99.084

10 0.077 0.696 99.78011 0.024 0.220 100.000

Notes: Results from data analysis using SPSS; extraction method: principal component analysis

Table IV.Factor analysis ofperceived benefits ofoutsourcing

Figure 1.Attitudinal modelof outsourcing

PerceivedBenefits

PerceivedCriticality

PerceivedRoadblocks

PerceivedRisks

Data securityImproved business intelligence

Management convenience

Improved time to market

Process restruecturing andimprovement

Access to new skills andcapabilities

Access to new technologics/mitigate technology risk

Cost shifting(from fixed to variable)

Focus on core competencies

Focus customer service

Improved operationalefficiency

Cost cutting/labor arbitrage

Inadequate infrastructure

Regulatory resistance

Employee resistance

Size + Scale of operations

Absence of maturedvendor market

Data confidentialityLoss of process controlRegulatory violationsComplexity in vendorrelationship managementOver reliance on vendorsIncreased managementcomplexityUnable to realizeexpected benefits

Attitudetowards

Outsourcing

Source: Compiled by the authors

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5.2 Construct II: perceived risksThe confirmatory factor analysis of the perceived risks of outsourcing reveals that allthe eight indicators of the construct confirm to two major factor components, identifiedunder the headings:

(1) management and policy-related risks; and

(2) data-related risks, explaining about 72.7 percent of the variance (rotated sumsof squared loadings ¼ 72.7) (Table VI), of which data-related risks appearedpredominant.

And this is substantiated by higher factor loading (Table VII) with data confidentiality(loading ¼ 0.953) and data security (loading ¼ 0.944) risks being the major factorscontributing to the overall perceived risks.

The data also reveal that various management and policy-related risks suchas increased management complexities (loading ¼ 0.867), risks of losing processcontrol (loading ¼ 0.767), risk of vendor lock-ins and/or over-reliance onvendor (loading ¼ 0.766) and the complexities in vendor relationship management(loading ¼ 0.765) are loaded high and hence indicate that they contribute significantly tothe risk perception of the decision makers towards outsourcing. At the same time, it isimportant to note that regulatory violations and legal obligations (loading ¼ 0.592) hasnot loaded high enough to be considered for analysis and the risk of not beingable to realize the expected benefits out of outsourcing engagements(loading ¼ 0.697) also contributes relatively weakly to the over all risk perception ofthe decision makers.

5.3 Construct III: perceived roadblocksThere are several factors that are beyond the direct control of a decision maker; moreso in the context of the highly regulated and unionized banking sector in India. Suchfactors are the roadblocks that have a negative influence on the decision maker’s

Factor componentsa

Perceived benefits 1 2 3 4

Cost cutting/labor arbitrage 0.830Improved operational efficiency 0.847Improved customer service 0.883Achieve better focus on core competencies (core business) 0.861Cost shifting (from “fixed” to “variable”) 0.419 0.715Access to new and updated technologies on continuous basis 0.930Access to new capabilities and skill sets 0.949Process improvement (restructuring and process standardization) 0.729Introduce new products/services (with quick time-to-market) 0.406 0.611 0.499Management convenience (spreading risk) 0.706 0.460Improved business intelligence 0.791

Notes: a1 – Quality improvement of products and services, 2 – access to new capabilities, skills andresources, 3 – cost related-benefits and 4 – process and business intelligence improvement; resultsfrom data analysis using SPSS; rotated component matrix after rotation converged in six iterations;extraction method: principal component analysis; rotation method: varimax with Kaiser normalization

Table V.Factor loadings of the

indicators of perceivedbenefits of outsourcing


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attitude towards outsourcing. These are basically policy, organizational andmarket-related factors.

The five key indicators of perceived roadblocks identified and run through theconfirmatory factor analysis (Table VIII) confirms to two major factor components thatcan be identified under the two major heads:

(1) organizational factors; and

(2) market-related factors.

These two factors put together explain 63.8 percent of the variance, of which theorganizational and policy-related roadblocks are predominant (rotated sum of squaredloading of 39.12 percent) when compared to the market-related roadblocks (rotated sumof squared loading of 24.6 percent).

The indicators “regulatory and policy restrictions” (loading ¼ 0.873), “infrastructuralinadequacy” (loading ¼ 0.744), “scale of operations” (loading ¼ 0.676) and “the lack of amatured vendor market” (loading ¼ 0.931) loaded high indicating a greater contributionto the decision makers’ perception of roadblocks to outsourcing. While, the indicator

Factor componentsa

Perceived risks 1 2

Data security 0.944Data confidentiality 0.953Losing process control 0.767Regulatory violations and legal obligations 0.592Complexity in vendor relationship management 0.765Over reliance on vendors 0.766Increased management complexities 0.867Unable to realize expected deliverables/benefits 0.697

Notes: a1 – management and policy-related risks, 2 – data-related risks; rotated component matrix;results from data analysis using SPSS; rotation converged in three iterations; extraction method:principal component analysis; rotation method: varimax with Kaiser normalization

Table VII.Factor loadings of theindicators of perceivedrisks of outsourcing



loadingsIndicatorsof perceivedrisks Total

Variance(%)

Cumulative(%) Total

Variance(%)

Cumulative(%) Total

Variance(%)

Cumulative(%)

1 4.626 57.820 57.820 4.626 57.820 57.820 3.455 43.183 43.1832 1.196 14.951 72.771 1.196 14.951 72.771 2.367 29.587 72.7713 0.760 9.499 82.2704 0.526 6.573 88.8435 0.422 5.274 94.1176 0.315 3.941 98.0587 0.122 1.531 99.5898 0.033 0.411 100.000


Table VI.Factor analysis ofperceived risks ofoutsourcing

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“resistance from employees” loaded very weak (loading ¼ 0.425) reflecting that it is notperceived to be a serious roadblock for pursuing outsourcing (Table IX). Whether thisindicates a changing trend among banks’ employees to accept new technologies and newmanagement practices is a subject for further research investigation.

5.4 Validity of the modelA multiple regression analysis is used to test the validity of the attitudinal model ofoutsourcing. Here the “perceived benefits”, “perceived risks”, “perceived roadblocks”,and “perceived criticality” are the independent variables and the “attitude towardsoutsourcing” is the dependent variable. It is also intended to assess the predictability ofthis structural model.

The Pearson’s correlation coefficients reveal that both perceived benefits andperceived criticality have a strong positive influence, while, both perceived risks andperceived roadblocks have a weak negative influence on the manager’s attitudetowards outsourcing (Table X). This is consistent with the theoretical foundationestablished in the review of literature pertaining to the factors influencing outsourcingdecisions.

The standardized b-coefficients reveal that the perceived benefits (b ¼ 0.532),perceived roadblocks (b ¼ 20.357), and perceived criticality (b ¼ 0.330) of outsourcinghave a strong influence on the attitude of the management towards outsourcing. It isinteresting to note that the perceived risks (b ¼ 0.123) have the least influence among allother factors on the attitude towards outsourcing (Table XI). This is quite contrary to theestablished belief endorsed by the current outsourcing literature.

Factor componentsa

Perceived roadblocks 1 2

Infrastructure inadequacy 0.744Regulatory and policy restrictions 0.873Resistance from employee union 0.425Size and scale of the operations/organization 0.676 0.476Absence of matured vendor market 0.931

Notes: a1 – Organizational factors and 2 – market-related factors; results from data analysis usingSPSS; extraction method: principal component analysis; rotation method: varimax with Kaisernormalization, rotated component matrix: rotation converged in three iterations

Table IX.Factor loadings of the

indicators of perceivedroadblocks of

outsourcing



loadingsIndicators ofperceivedroadblocks Total

Variance(%)

Cumulative(%) Total

Variance(%)

Cumulative(%) Total

Variance(%)

Cumulative(%)

1 2.157 43.133 43.133 2.157 43.133 43.133 1.956 39.123 39.1232 1.032 20.632 63.765 1.032 20.632 63.765 1.232 24.641 63.7653 0.829 16.586 80.3514 0.643 12.859 93.2105 0.339 6.790 100.000


Table VIII.Factor analysis of

perceived roadblocksof outsourcing


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It can also be inferred that the perceived benefits are more important influencing factorsthan the perceived roadblocks and perceived criticality on the attitude towards outsourcing.The positive influence of perceived benefits is dominating the negative influence of bothperceived risks and perceived roadblocks. Interestingly, perceived criticality also emergedas an important positive influencing factor in outsourcing decisions.

The t-values (Table XI) suggest that H1, H3 and H4 be rejected as the impacts ofperceived benefits, perceived roadblocks, and perceived criticality on the attitudetowards outsourcing are statistically significant. At the same time, the impact of theperceived risks is not statistically significant at 5 percent level of significance andhence H2 should be accepted.

Table XII reveals that 49.5 percent (R 2 ¼ 0.495) of the variation in the dependentvariable, that is, change in attitude towards outsourcing, is explained by the fourindependent variables (perceived benefits, risks, roadblocks, and criticality ofoutsourcing). H5, i.e. R 2 ¼ 0, is rejected at 1 percent level of significance (Table XII)implying that the overall fit of the model is statistically significant.

Further, it can be concluded that the constructs of the attitudinal model developed inthis study explain nearly 50 percent of the attitude of the decision maker towardoutsourcing. What other factors or conditions can explain the remaining 50 percent is amatter for further research.

6. Conclusions6.1 Perceived benefitsFrom the above data analysis, it is evident that the decision makers, at least in Indianbanking sector, are strongly positively influenced by their perception that outsourcing

Unstandardizedcoefficients Standardized coefficients

Model B SE b t-value p-value

Constant 1.463 0.194 7.527 0.000Perceived benefits 0.152 0.047 0.532 3.261 0.003a

Perceived risk 0.028 0.037 0.123 0.748 0.461b

Perceived roadblocks 20.195 0.079 20.357 22.460 0.021a

Perceived criticality 0.059 0.027 0.330 2.220 0.036a

Notes: aThe null hypothesis is rejected; bthe null hypothesis is accepted; results from SPSS usingmultiple regression analysis on the data from questionnaire; dependent variable: attitude score

Table XI.Beta coefficients of theattitudinal model ofoutsourcing

Constructs Mean SD Pearson correlation coefficients p-value (one-tailed)

Perceived benefits 2.1758 0.57740 0.529 0.001 *

Perceived risk 2.3792 0.73291 20.252 0.089 * *

Perceived roadblocks 1.6333 0.30210 20.296 0.056 * *

Perceived criticality 2.1000 0.92289 0.423 0.010 *

Notes: *Correlation is statistically significant and * *correlation is not statistically significant; resultsfrom SPSS using multiple regression analysis on the data from questionnaire

Table X.Mean, standarddeviation, Pearsoncorrelation coefficients,and significance scores ofthe constructs of theattitudinal model ofoutsourcing

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outsourcing


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will enable them to achieve improvement in operational efficiency and customerservices and also allow them to focus on their core competencies. It is also evident thatthe indicators such as the ability to access new technologies, skills andresources/capabilities and cost cutting and cost shifting contribute heavily to shapethe decisions makers’ perception towards the benefits of outsourcing.

While this is partly in line with the conclusions drawn by Gulla and Gupta (2009) intheir study of outsourcing decisions in Indian context, it contradicts the popular beliefestablished by global outsourcing studies that firms outsource primarily for cost-relatedbenefits (Fisher et al., 2008). It can also be inferred that despite outsourcing, arguably,not being very prevalent among banks in India ( Jain et al., 2010), decision makers in theIndian banking sector have been paying attention to the learnings from the globaloutsourcing phenomenon. Another possible reason, arguably, for cost-related benefitsnot perceived to be very important in this case is the non-existence of labor costarbitrage, especially when the client and the vendors both are located in India, exposedto same legal and economic conditions and are drawing from the same labor pool.Moreover, given the fact that India is one of the lowest cost outsourcing destinations inthe world, there is little motivation for a firm operating in India to look for otheroutsourcing destinations.

Further, it is also interesting to observe that the decision makers in the Indianbanking sector do not really perceive knowledge management and improved businessintelligence, often the underlying reasons for high-end outsourcing globally, as possiblebenefits from outsourcing engagements, and hence these factors do not seem to exertgreater influence on their outsourcing decisions. While the trend for high-endoutsourcing is fast emerging fueled precisely by the expectations of such advancedbenefits from outsourcing engagements, the difference in perceptions of decision makersin India is rather surprising. Whether such a difference in perception can be attributed tothe difference in the “level of maturity” in outsourcing practices in the banking sector inIndia vis-a-vis other matured markets is a matter for further research investigation.

Overall, it can be concluded that the decision makers in the Indian banking sectorperceive, predominantly, operational and business-related benefits of outsourcing to bemore important than financial and cost-related benefits.

Further, it is important to note that the overall perception of benefits of outsourcingcontributes significantly in shaping the decision makers’ attitude towards outsourcingand influence their decisions to outsource.

6.2 Perceived risksAs far as the factors contributing to the overall perception of risks due to outsourcingare concerned, the study reveals that the decision makers seem to perceive data-relatedrisks to be more serious than other risks. These findings are very much in line with theconclusions drawn by several outsourcing studies conducted globally, especially in thearea of outsourcing in banking and financial services sector (Federal Bank ofNew York, 1999; Khalfan, 2004; Shankar, 2005). And rightly so because the banks dealwith a lot of sensitive (personal and financial) data of their clients and any compromisein security and confidentiality of such data will have a direct impact on the reputationof the bank and may also lead to serious legal problems and litigations due todata privacy and related issues. Moreover, these data-related risks become morepronounced in case of BPO engagements, as the outsourcing vendor(s) get access

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to the data in non-encrypted form thus increasing the possibility of compromises indata integrity and confidentiality.

The other contributing factor to risk perception is that of management andpolicy-related risks. It is observed that the risk of increased management complexities,risk of losing process control, risk of vendor lock-ins and/or over-reliance on the vendor(s)and the complexities in vendor relationship management contribute, in that order ofseriousness, significantly to the risk perception of the decision makers towardsoutsourcing.

Interestingly, contrary to the popular belief, the evidence shows that the decisionmakers do not perceive the risk pertaining to regulatory violations and legalobligations as an important factor contributing to their overall perception of risksassociated with outsourcing. Also, the data analysis indicates that the decision makersare relatively certain about being able to realize the level of expected benefits from theiroutsourcing engagements as they seem to consider the risk of otherwise as relativelyless. These conclusions are partially consistent with the fact that the service providersmarket for IT services in India is mature enough with globally reputed and provenservice providers delivering high quality services. However, the risk of not being ableto realize the desired results assumes more importance in the case of BPO engagementsas the vendor market for BPO (especially vertical services) in India does not seem to beas mature as it is for ITO.

While it is evident that all, but one, indicators of risk identified in this studycontribute to the overall risk perception of the decision makers as far as the risksassociated with outsourcing is concerned, it is interesting to note that the overall riskperception is found to be insignificant in terms of its influence in shaping the decisionmakers’ attitude towards outsourcing. In other words, the decision makers in theIndian banking sector seem to feel relatively more comfortable with the risksassociated with outsourcing. The reasons for this comfort level with the risks ofoutsourcing – especially in the Indian banking sector where outsourcing practices areyet to mature – merit further research.

6.3 Perceived roadblocksThe data analysis of the previous section support the following conclusions pertainingto the construct “perceived roadblocks”. The study reveals, perhaps unsurprisingly,that the regulatory and policy restrictions are a major roadblock for outsourcingdecision among banks in India. This is very well reflected in the fact that the BFSI,specifically banks, is one of the tightly regulated sectors in the country. In the contextof this study, regulatory and policy restrictions implies banking specific regulationsand other related laws and policies which are especially important for outsourcingengagements. In recent years, Reserve Bank of India (RBI), the apex regulatory bodyfor the banking sector in India, has undertaken some important and encouraginginitiatives to provide a stable and reliable framework for banks to adopt outsourcingpractices (RBI, 2005). However, the restrictions imposed by such regulations arestringent enough to call for concerted efforts to remain compliant on the part of boththe banks as well as the outsourcing service providers, thus posing a serious roadblockto engage in outsourcing activities.

Further, it can also be noted that the decision makers seem to be concerned aboutthe issues such as the infrastructural inadequacy, and the scale of operations – in that


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order of seriousness – while engaging in outsourcing. Infrastructural inadequacy canbe attributed, as primarily, to the prevalence of legacy systems and infrastructure builtover the decades of pre-liberalization era to support the traditional working methods ina majority of the banks (especially many of the public sector banks and even oldprivate sector banks) in India. These legacy systems made these banks rigid andinflexible in adopting new business practices which require a new IT-basedinfrastructure and digitization of necessary (if not all) processes. These are large-scalechanges which usually take longer time periods for implementation. Such inadequacyof infrastructure is proving to be a big roadblock for the banks to adopt outsourcing,despite a realization among top management at banks that outsourcing can really openup a lot of new possibilities for them.

However, a big shift in this situation is likely to happen soon as aggressive,technology-savvy new age private sector banks and a few public sector banks in Indiahave been rapidly upgrading their infrastructure and thereby setting new rules ofcompetition. Further, a central government body, the Institute for Developing andResearch in Banking Technologies, is engaged, since its establishment in 1996, indeveloping robust platforms for banking and financial services using latest IT,telecommunication and internet technologies.

As far as market-related roadblocks are concerned, the lack of a matured vendormarket – especially for BPO – is a major roadblock. India is, arguably, the IT serviceprovider for the world, with a best-of-the-breed of vendors delivering high quality ofservices globally. But, when it comes to BPO services, it is ironic that there are notenough vendors who can promise and deliver quality services for a required range ofbanking (vertical) services. Thus, it poses a big roadblock for adopting outsourcing,especially in the case of advanced services.

6.4 Perceived criticalityThe perception of critically can be associated not with the incremental effect ofoutsourcing but with its transformational impacts – for better (if adopted) or for worse(if not adopted) – on the overall organization and its present and futurecompetitiveness. This study recognizes perceived criticality as a distinct factor thatcan potentially influence a decision maker’s attitude towards outsourcing and hencetheir decisions to outsource. It can be inferred from the data analysis that a decisionmaker’s perception of the criticality of outsourcing, with respect to its ability toenhance the overall value of the organization or potential adverse consequences to theorganization in its absence, has a positive and significant influence on the decisionmakers and their outsourcing decisions, at least in the context of the Indian bankingsector.

However, with all that it revealed and concluded, this study has focused onoutsourcing in a service industry, i.e. banking services in India, with specific referenceto scheduled commercial banks operating in public and private sectors. Therefore, itsconclusions may not be generalized to the practice of outsourcing in other industriesand other countries.

6.5 Significance of the studyRelevance for the practitioners. This study brings out interesting insights that areuseful for the practitioner, especially for the outsourcing vendors. The analysis

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of the perceived benefits showed – contrary to other recent empirical studies(Lancellotti et al., 2003; Fisher et al., 2008) – that clients are becoming increasinglycautious regarding cost advantages. The clients, at least in the banking sector in India,tend to value factors such as improved operational efficiency, customer serviceimprovement, and access to new skills, capabilities and resources higher than pure costsavings and convenience. A similar trend was reported in a recent study on theGerman banking sector (Gewald and Dibbern, 2009; Gewald, 2010). Therefore, it isimportant that the outsourcing vendors in the service sectors such as banking startemphasizing on delivering business value or value creation and not just the costreductions while marketing their service offerings.

The results of the study also provide a basis for rethinking on the structure ofoutsourcing offers with respect to the risks related to outsourcing. Those outsourcingvendors who are able to offer additional business value in the form of risk mitigation orrisk sharing approaches to their clients are more likely to succeed in the future. Inparticular, practices aimed at lowering the client’s data-related risk, i.e. the possibilityto ensure absolute data security and data confidentiality, coupled with creativeapproaches for smooth management of vendor relationship and outsourcing contracts,become the key in gaining market share, at least among the outsourcing clientele in theIndian banking sector.

Implications for research. A majority of the previous research in the area ofoutsourcing (both ITO and BPO) – where the subjects of study have been clientelebased in developed countries such as the USA, the UK, and Germany – has indicatedthat cost-related advantages was (Lacity et al., 1994) and still remains a major reason(Fisher et al., 2008) for organizations to choose to outsource their IS, IT, and/or businessactivities. However, this study indicates a shift in the mindset of the decision makers,at least in the context of outsourcing by clientele from the Indian banking sector. Asdiscussed earlier, generating business value – by way of improved operationalefficiency, improved quality of services, and access to new skills, capabilities andresources – seems to be the predominant reasons for outsourcing. This study points tonew areas of research, especially from the perspective of countries such as India, whichis not sufficiently addressed in the outsourcing literature. Further, it indicates thatresearch efforts are required in the direction of understanding aspects such as valueadded by the outsourcing vendors of services, innovative pricing mechanisms andcreative contract designs that address risk-mitigation and risk-sharing aspects.

Moreover, outsourcing literature is dominated by theoretical studies; while thisstudy is based on empirical data. Additionally, almost the entire outsourcing literaturefocuses on outsourcing from the perspective of clientele based in developed countriesbut this study focuses on outsourcing by clientele within a developing country such asIndia. Therefore, some confounding variables such as communication withoutsourcing partners, regional and cultural differences among vendors andoutsourcing firms, and differences in regulatory regimes are not issues in this study.

Notes

1. The reference to “developing economy” here is to qualify India as a developing country andis not intended to generalize the conclusions of this paper to all developing countries.

2. Scheduled commercial banks constitute those banks which have been included in the secondschedule of RBI Act, 1934. The schedule includes only those banks that satisfy the criteria


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laid down by RBI vide section 42 (6) (a) of the act. Being a part of the second schedule conferssome benefits to a bank in terms of access to RBI’s support, especially during the times ofliquidity constraints. This status also subjects a bank to abide by certain conditions andobligations towards the reserve regulations of RBI.

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Appendix. Questionnaire

Section 1: Identification Particulars:1.1 Name: 1.2 Name of the Bank:

1.3 Designation: 1.4 Length of Service:

1.5 Educational Qualification: 1.6 Age:

1.7 Sex:

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Section 5: Please indicate the ‘degree of expectation’ vis-à-vis the ‘degree of realization’of benefits from outsourcing by your bank on a five-point scale.(Please put [*] in the appropriate cell against each question)Scale: Very high – 1, High – 2, Neutral – 3, Low – 4, Very Low – 5.

Degree ofExpectation

Degree ofRealization

N.A.S. No. Benefits

1 2 3 4 5 1 2 3 4 55.1 Cost cutting / labor arbitrage5.2 Improved operational efficiency 5.3 Improved customer service

5.4Achieve better focus on core competencies(core business)

5.5 Cost shifting (from ‘fixed’ to ‘variable’)

5.6Access to new and updated technologies oncontinuous basis

5.7 Access to new capabilities and skill sets.

5.8Process improvement (restructuring andprocess standardization)

5.9Introduce new products/services (with quicktime-to-market)

5.10 Management convenience (spreading risk)5.11 Improved business intelligence 5.12 Any other, please specify

N. A. – Not Applicable

Section 6: Please indicate the ‘degree of perceived risk’ and the ‘degree of actual/ experienced risk’ of the following risk elements by your Bank due to outsourcing on a five-point scale.(Please put [*] in the appropriate cell against each question)Scale: Very high – 1, High – 2, Neutral – 3, Low – 4, Very Low – 5.

Degree of Perceived Risk

Degree of Actual/ Experienced RiskS. No. Elements of Risk

1 2 3 4 5 1 2 3 4 5N.A.

6.1 Data security6.2 Data confidentiality6.3 Loosing process control6.4 Regulatory violations and legal obligations

6.5Complexity in vendor relationship management

6.6 Over reliance on vendors6.7 Increased management complexities

6.8Unable to realize expected deliverables/ benefits

6.9 Any other please specifyN. A. – Not Applicable


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Section 7: Please indicate the Major Roadblocks for your Bank to outsource, and the ‘degree of impact’ they have on the management decision to outsource on a five-point scale. (Please put [*] in the appropriate cell against each question)Scale: Very high – 1, High – 2, Neutral – 3, Low – 4, Very Low – 5.

Degree of ImpactS. No. Roadblocks Yes No

1 2 3 4 5N.A.

7.1 Infrastructure inadequacy

7.2 Regulatory and policy restrictions

7.3 Resistance from Employee union7.4 Size and scale of the operations/organization7.5 Absence of matured vendor market7.6 Any other please specify

N. A. – Not Applicable

Section 8: Please indicate the ‘degree of criticality’ for adopting outsourcing as a business practice for your organization.(Please put [*] in the appropriate cell against each question)Very Critical Critical Neutral Not so critical Not at all critical

About the authorsRavi Kumar Jain, PhD, MBA (Finance), PGDITM (E-commerce) is an Assistant Professor(Finance area) at the ICFAI Business School in Hyderabad, India. Previously he was theAssociate Dean (Research) at Symbiosis International University, Pune, India. His research andteaching interests are in the area of outsourcing, information systems management, andinvestments. He has more than 70 publications in leading national and internationalpublications, such as International Journal of Education, Economics and Development and ICFAIJournal of Systems Management. He is serving on the Editorial Board of a few internationaljournals – Journal of Accounting, Ethics & Public Policy, Journal of Business Management andEconomics, and Progress – AMultidisciplinary International Journal. He has authored/edited thebooks – Open Source Software: A Revolution in the Making (authored), Localisation ofInformation Technology: An Introduction (edited) and IT Governance: An Introduction (edited) –published by ICFAI University Press.

Ramachandran (Nat) Natarajan, PhD, CPIM, CIRM is currently the W.E. Mayberry Professorof Management, College of Business, Tennessee Technological University, Cookeville, USA. Hisresearch and teaching interests are in the areas of operations and supply chain management. Hehas published in journals such as International Journal of Operations Management, InternationalJournal of Production Economics, and Decision Sciences. He is the co-author of book onmanufacturing processes published by APICS and co-editor of a book on technology anddevelopment. In a study published in 1993 in Journal of Operations Management, he wasrecognized as one of the “Top 100 Researchers,” in operations management during a five-yearperiod. He has served as a Senior Examiner for the Baldrige National Quality Award of the USA.Ramachandran Natarajan is the corresponding author and can be contacted at: [email protected]

To purchase reprints of this article please e-mail: [email protected] visit our web site for further details: www.emeraldinsight.com/reprints

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