OUTSOURCING AS A STRATEGY FOR REDUCING OVERHEAD COSTS

Outsourcing As A Strategy For Reducing Overhead Costs

ABSTRACT

Thesis on outsourcing as a strategy for reducing overhead cost in selected banks in Lagos

This investigated the extent to which banks are applying outsourcing arrangement as a financial strategy
to cut cost, asses its inherent benefits and demonstrate how it puts banks in favourable liquidity positions.
It also examined the maintenance of quality of service delivery irrespective of overhead reduction.

Primary data were collected from 10 heads of department, with 5 selected from each bank. Secondary
data were collected through official records.

The findings of the study showed that ‘all things being equal’ in the long run banks overhead costs fall
relatively due to impact of outsourcing strategy; the pictorial representation clearly revealed this. Also, in
banks that other strategies of overhead control have not been deployed, we saw that the rate at which
expense grow was higher than that of the revenue, it was when outsourcing value were taken cognizance
of that the expense growth kept under revenue.

It can be concluded from these findings that the concepts of outsourcing has not been fully embraced in
Nigeria banks because of the sensitivity of the industry vis-a-vis the need to protect the integrity of their
records and customers’ information. The banks were able to manage their operating cost through the use
of outsourcing because they escaped issues like salary increase, inflation of consumables like cleaning
materials, security gadgets with other leakages in the banks’ overheads by fixing management fees or
other chargeable fees.

And the impact of outsourcing was seen to force the growth rate of real operating cost down below the
growth rate of the revenue or income of banks that diligently deployed the use of outsourcing strategy in
its operations.

CHAPTER ONE
INTRODUCTION

1.1       BACKGROUND TO THE STUDY

The banking industry in Nigeria has become a jungle of sorts where the rules of the game are not so clear
cut any longer. Some call it a battle arena where gladiators are expected to fight according to laid down
rules created and implemented by the bias arbitrator. Others call it a battlefield where it is only the strong
and highly competitive banks can survive. However, a state of anarchy ensues in the search by all to be
the best and be appreciated by all stake holders. (Osekita, 2002).

Profit is a function of revenue minus cost; however, most business conscious people believe that for you
to make profit you should make more sales. This principle is not far fetching from banking business, as
pressure on deposit mobilization targets are emphasis.

The most interesting thing in the banking industry is that all banks market the same customers; chase the
same money in circulation and use the same personnel. Another interesting thing to note is that all banks
are branding the same products using different style, logo and slogan.

The issue is that how do we survive this war, since we know according to Charles Darwin [1801] that “it
is not the strongest species that survive nor the most intelligent but the ones that are most responsive
to change”. The concept of change cannot be thrown aside in this heat intense banking industry.
Therefore, in search of what change that can assist to compete in the banking environment is the concept
of synergy which states 1+1=3. That is the total been more than the sum of parts.

The concept of synergy is then introduce into “cost reduction” strategy where it is expected that 1+0 =
2  that is, at same equilibrium level of revenue and a reduction in cost produces increase in profitability
and still maintain same quality of service delivery thus giving the organization unbeatable “competitive
niche”.

One of the ways of reducing overhead cost in the bank is to introduceoutsourcing. Cost reduction is not
the only target of outsourcing. Outsourcing is instrumental in increasing the business productivity. It also
allows organization to have access to best-of-breed talent and technology. This means outsourcing
creates values.
The answer to why outsourcing should be more than cutting costs include creating value – value for the
company through re-engineered processes, value for customers through better service and value for
shareholders because the markets reward companies that focus on their core business. Although valuecan
mean different things to different people for instance, in outsourcing, value can mean long-term cost-
effectiveness. It can mean increased revenues, profits and rewards for shareholders. It can also mean
greater competitive advantage, the result of more responsive processes and improved levels of service. At
its best, value should mean all of these and more. In fact, there aredegrees of value that an outsourced
process will have on the larger organization. For example, a company that out sources its finance and
accounting (F & A) function could expect to obtain immediate demand for value.

The dynamic and volatile global economy which fueled the ideas of “globalization” have forced several
banks to seek ways of establishing an effective and efficient match-using strategies to find or facilitate
connection with their competences, opportunities and risks resulting from environmental change.

One of the strategies employed by few Nigerian banks since the ingredients of their services delivery had
been the same or recycled personnel, products, branding, customers and even ideas, it thus become
necessary to change profit formulae.

This formula concentrates on cost reduction strategy and still maintains same quality of service delivery.
Two banks were studied, Zenith bank and Gtbank. Annual reports and other privileged information of
these banks indicate the unreserved interest of management to make profit and be on top especially
through the use of cost minimization strategy which outsourcing is predominately used.

1.2     STATEMENT OF THE PROBLEM

Liquidity is one of the major reasons why many banks avoid high wage bills despite acclaimed level of
income generation. Besides, many of the banks revenue are paper income that cannot, on the real
generate money profit. Many banks that failed today like commerce bank, eagle bank, metropolitan bank,
etc face this type of problem where they spend real cash above the real income generated. (Osekita 2002).

Past studies postulate general theories to outsourcing applicable only in the Europe, societies where to
increase profitability, a reduction in cost must suffice and not an increase in sales as sales is maximized
having in mind a single objective paradigm.
However, a more pratical approach and applicable to the peculiar environment in which Nigerian banks
operates would be recommended here. As there exist room for more sales, since according to CBN
circular, 45% of the monies are outside the banks

Therefore this study is meant to address this peculiarity of nature of the Nigerian environment and
entrenched in the knowledge that reduction in cost plus increase in sales would equal increase in
profitability.

1.3     RESEARCH QUESTIONS

The following questions guide the study on “outsourcing as a strategy in reducing overhead cost in the
selected banks, Zenith bank and GTBank in Lagos”.

The questions include:

1.       What is the meaning of outsourcing?

2.       What are the steps involved in outsourcing?

3.       What are the subsisting conditions guiding outsourcing arrangements?

4.       What are the merits and demerits of outsourcing?

5.       How can outsourcing, as a financial strategy be successfully applied in the banking industry with
resounding success?

6.       Does outsourcing have direct relationship to overhead cost reduction?

7.       How does outsourcing affect the standard of service delivery in banks?

1.4     OBJECTIVES OF STUDY

The main objective of the study is to investigate “outsourcing as a strategy in reducing overhead cost in
some selected banks in Lagos”.

The specific objectives of the study can be aptly put as follows;

To investigate if banks are applying outsourcing arrangement as a financial strategy to cut cost, and the
extent of its application. To assess the benefits inherent in the use of outsourcing arrangement as a
financial strategy and its attendant demerits/disadvantages To demonstrate how outsourcing puts banks in
favourable liquidity position To examine the maintenance of quality of service delivery irrespective of
overhead reduction To examine how outsourcing as a financial strategy can be used to reduce overhead
cost in banks.

1.5     SIGNIFICANCE OF THE STUDY

The study is significant and highly relevant in the following ways;

1.       The study will show banks and similar financial institutions how outsourcing can be used to
improve the quality of service delivery to customers, which will help banks to remain competitive and
successful in the face of stiff competition existing in the financial industry.

2.       It will show the practical ways banks and other financial institutions can implement and
incorporate outsourcing in their operations.

3.       Overhead costs unarguably account for a large proportion of bank expenses. The study will
therefore reveal how outsourcing can be used to reduce such costs [overheads].

4.       The study is also expected to contribute to the existing body of knowledge on outsourcing as a
financial strategy and arrangement.

1.6SCOPE OF THE STUDY

The research work concentrates majorly on strategy to reduce overhead cost in banking industry and at
the same time achieve excellent service delivery.

Data for the study are limited to Zenith bank and GTbank in Nigeria.