The Influence of Perceived Risks on Banking Managers' Intention to Outsource Business Processes: A Study of the German Banking and Finance Industry

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ABSTRACT

Information Technology (IT) is a key productive factor in the banking and finance industry (BFI) as almost the entire production and delivery of services can in principle be digitized. Driven by cost pressure and new competitors, outsourcing IT together with the relevant business processes is a promising way to focus on core competencies and to restructure the corporate value chain. While there is a rich literature on the risks and benefits of IT outsourcing, little is known about the next step of business process outsourcing (BPO) and especially the associated risks. Our main hypothesis is that the perceived risks associated with BPO strongly influence managers' intention to outsource business processes. Based on an empirical survey of BFI managers covering 90% of the cumulated German BFI balance sheet, it is shown that perceived risk does indeed have a significant impact on managers' attitudes towards BPO and that these attitudes strongly influence the outsourcing decision. Financial risks turn out to be a major risk facet, exerting pressure on banks which decide solely in terms of potential cost savings. In addition, the high importance of performance risk requires banks to invest in sophisticated vendor management.

Keywords: banking and finance industry, perceived risk, business process outsourcing

1 Introduction

The benefits of IT outsourcing in the banking and finance industry (BFI) seem to be quite well understood from both an academic and a practitioner's perspective [Ang and Straub 1998; Baldwin, Irani and Love 2001; Lancellotti, Schein, Spang and Stadler 2003; Adeleye, Annasingh and Nunes 2004]. However, we still lack a thorough and empirically validated understanding of the risks of outsourcing, especially concerning business processes. This raises questions about the impact of risk facets such as financial, strategic, performance and social risks on outsourcing decisions in firms and ultimately challenges the field to propose sound outsourcing decision support that considers benefits and risks in one model.

As financial processes are almost fully digitizable, the banking and finance industry heavily relies on information technology. Accordingly, IT has been a strong driver of developments in the BFI with ATMs being a renowned example [Benaroch and Kauffmann 2000]. Powerful information systems have made the processing of large transaction volumes possible (e.g., payments and securities processing), at the same time enabling new E-Commerce products and services like online banking. But despite its long history and the success of many firms, the overall industry structure is still surprisingly unchanged and modern network-like structures like supply chains are widely unknown. A major reason is that outsourcing as the major pillar of restructuring value chains has long been much more complicated or even impossible due to regulatory constraints in the BFI. Recently, a change in regulation tendencies together with further advances in IT has provided banks with the opportunity to use outsourcing as a means to reduce costs and focus on core competencies. This is expected to enable the industry to move towards value network structures as has been successfully done in other industries [Homann, Rill and Wimmer 2004].

While banks have gained some experience in IT outsourcing (ITO) over the past decade, business process out-sourcing (BPO), i.e., procuring a business process together with the relevant IT from the market, is quite a new challenge. BPO is widely seen as an opportunity - enabled by advancements in IT - to make business architectures sufficiently flexible and efficient. Accordingly, BPO is considered to be of substantial importance in the banking and finance industry [Kumar and Hillegersberg 2004; Lammers, Löhndorf and Weitzel 2004]. In fact, a survey of Germany's top 500 banks reveals that 9 out of 10 banks plan to focus on core business functions and that the current wave of BPO in the BFI is just the beginning of a major trend [Wahrenburg, König, Beimborn, Franke, Gellrich, Hackethal, Holzhäuser, Schwarze and Weitzel 2005]. …