The impact of outsourcing on HSBC, United Kingdom

| November 24, 2012

 

INTRODUCTION

 1.1 Research Title

The impact of outsourcing on HSBC, United Kingdom

1.2 Research Question

What is the impact of outsourcing on HSBC bank in the UK?

1.3 Research Objectives

The objectives behind reviewing previous literatures and doing this project are:

  1. To discuss the concept of outsourcing
  2. To identify and understand the outsourcing strategy of HSBC bank, UK
  3. To analyse how outsourcing has impacted on the HSBC bank in the UK

1.4 Background and Definition

HSBC Holdings is one of the largest banks across the globe.  Pal and Pantaleo (2005) suggest that HSBC Holdings has over 9500 offices scattered in 80 countries.

Outsourcing has been defined by many authors.  Laabs, C. (1997) as summarised by Embleton & Wright. (1998, p. 94) defines outsourcing as “… having an outside vendor provide a service that you usually perform in-house”.  (Gibson. 1996, p. 19) describes outsourcing as “The transfer of routine and repetitive tasks to an outside source”.  Outsourcing arrangements are normally classified into two categories which are IT outsourcing and Business Process Outsourcing (BPO).  Examples of IT outsourcing are system analysis, data processing and security management among others.  On the other hand, BPO are back office administration, call centres, document processing and management of other selected processes.

Offshore outsourcing is a subcategory of outsourcing where banks outsource services to a third party in another country other than the one in which the bank is based.  This relates to HSBC as it already has a number of processing centres in India and Malaysia according to Pal and Pantaleo (2005).  As discussed by Rohde (2003), it planned to move some business tasks such as data processing and call centre enquiries to India, Malaysia and China by 2006.

The next part of the paper draws on the critical literature review which explores the overall concept of outsourcing related to HSBC.  It explores different sub sections which are discussed in detailed.

 

 2. LITERATURE REVIEW

2.1  History and concept of outsourcing

This section provides some historical background of the concept of outsourcing.  According to Jacques (2006), outsourcing also known as offshore outsourcing, started in the 1950s.  At that time, manufactured products rather than services were mostly outsourced.  Jacques further suggests that Nike and Reebok were among the first to subcontract their production of shoes to Taiwanese and Korean suppliers.  However, Busi & Mclvor (2008) and Lonsdale & Cox (2000) argued that it is very difficult or rather impossible to determine the origin of outsourcing.

Jacques (2006), Lonsdale & Cox (2000), Jiang & Quresh (2005) and Foogooa (2008) all agreed that the concept of outsourcing for services emerged in the 1990s.  Services such as canteen management and security have however been outsourced since the early 1960s or even earlier. The size and array of activities has drastically increased in the last 15–20 years to add in logistics, IT, finance, accounting and personnel.  Many banks and financial institutions have since been moving their payroll, IT systems and customer services offshore.

The outsourcing industry is one of the largest industries in the UK.  The country is home to practically one fifth of all outsourcing agreements. Goodman & Fox (2008) suggested that outsourcing was originally used during the recession period by firms to cut costs and achieve productivity.  It is now more often considered as a key part of organisational change programme and also a strategic activity.

In the public sector, extensive outsourcing which is more generally known as contracting-out began in the 1980s. It first began in the local government and then continued to central government in the 1990s.  The next section will draw on the benefits and drawbacks of outsourcing.

 

2.2 The reasons behind HSBC outsourcing

This section will limit it discussion to the various reasons which forced the bank to outsource some work.  As stated by Kripalani (2006), “HSBC decided to outsource mainly because the need to constantly improve technology was becoming difficult for the bank, drawing attention away from its core financial-services business.”  However, Pal & Pantaleo (2005) argue that increasing pressure from Citigroup to remain competitive on cost triggered HSBC to outsource.

With a revolution in technology, banks should be able to provide fast and efficient technology.  While almost all banking transactions are now done online, HSBC had to move to a new technology platform to remain competitive and become more efficient.  Hence, the UK based bank had to outsource its IT support and software development in India and Malaysia.  Being in the financial services industry, HSBC could not cope with the increasing new technologies adopted by other banks.

The other reason behind the decision to outsource was indeed cost saving.  Griffiths (2003) cited that HSBC justified its decision to slash jobs from the UK to Asia in an attempt to cut costs.  HSBC goes on to say that labour costs in India for example is much cheaper than in UK.  The cost to maintain IT and back office work in the UK is quite high.  Labour cost is relatively much higher in the UK than in Asian countries and economies of scale make the cost cheaper in those countries.  Kripalani (2006) contended that the bank wanted to get the job done as fast as possible even if it means putting more workers on the job.  As a result the job is done much quicker as a lower cost.   The HSBC bank also looked to India as the country’s reputation for quality software work was becoming increasingly known.

Moreover, access to the huge and potential Asian market is made easier by outsourcing in those countries as the bank gets more familiar to the local laws and regulations.

 

2.3 The outsourcing strategy of HSBC

Lee, Miranda and Kim (2004) divide IT outsourcing strategies into three categories which are degree of integration, allocation of control and performance period.  According to Kripalani (2006), HSBC learned from its outsourcing experience to develop strategies.  The first strategy is to start small.  HSBC started out a centre with only 30 people and many mistakes were made in the beginning.  The bank therefore learned from those mistakes. Furthermore, by starting from scratch, it helped to build a relationship from the start with various departments.

The second strategy is customer involvement.  While trying to upgrade its international financial processing system, HSBC found out that it is crucial that experts get involve rather than making a request on paper only.   Thirdly, the use of a hybrid offshoring model is another strategy.  Moreover HSBC bank built a sense of community within the organisation to work towards quality work. Finally HSBC made sure that quality is maintained as it is a key factor to successful business.  HSBC in-house short-term jobs and outsource long-term work.  It can be argued that all those strategies above might not be enough for a successful outsourcing.  How about supervision and control?

Another strategy pointed out by Farrell (2009) is that HSBC in the UK split its service into two, with ordinary account holders served by Indian call centres and premier account holder by UK call centres.


2.4 The impact of outsourcing on HSBC

HSBC has a wholly owned BPO subsidiary in Kolkata which employs 2000 employees working on back-office operations.  It also has a software development centre in Pune. According to Mann (2005), HSBC “revealed a 37% rise in pre-tax profit to £9.2bn ($17.6bn) for 2004 – largely on the back of the company’s performance outside the UK.”  Again quoting Mann (2005) “expansion for HSBC has not been without its share of problems.”

Due to outsourcing to cut down costs, HSBC had to face trade unions who were not happy with the increasing cutting down of jobs in the UK.  Farrell (2009) stated that “HSBC ran into a row over its latest round of job cuts yesterday when the main trade union representing its staff claimed the bank’s announcement of 1,200 redundancies was fewer than half the real number.”  Mann (2005) makes the point that concerns were raised in the UK about outsourcing banking services such as call centres in India due to quality standard.  Moreover during the Asian crisis HSBC lost quite a lot of money due to outsourcing activities there.  As said by King (2010), IT and outsourcing costs increased in 2009 due to progress in the bank’s standardisation plan.

Research by Embleton & Wright (1998) suggests that outsourcing brings benefits as well as drawbacks.  They claim that the main advantage is cost saving.  By outsourcing, small companies benefit from economies of scale whereas large companies benefit from the transfer of departments which are not performing well.  They go on to suggest that other benefits are time saving to set up the department, hidden costs which are discovered, activities which are outside the company’s core business are taken care by experts, cash injection by selling assets when an activity is outsourced, greater flexibility in allocating human resources, accountability by the suppliers to provide agreed level of service which may not be controlled if activities are in-house, more free staffs in-house to do other important tasks, access to specialist tools, skills and technology, geographical problems may be reduced and finally outsourcing can improve quality due to the expertise of the provider.

 

On the other hand, they also point out that the drawbacks include unsuccessful attempt to reduce costs, the surrender of control, difficulty and cost involve in bringing back a process in-house, morale of existing staffs may be affected due to cut in staffs, costly contracts and lost in quality.

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