OUTSOURCING AS A STRATEGY FOR REDUCING OVERHEAD COSTS
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OUTSOURCING AS A STRATEGY FOR REDUCING OVERHEAD COSTS
ABSTRACT
Thesis on outsourcing as a technique for decreasing overhead costs in selected Lagos banks.
This study studied the extent to which banks use outsourcing arrangements as a financial strategy to minimise costs, assessed the underlying benefits, and demonstrated how it puts banks in better liquidity positions. It also looked at how to maintain service quality even when overheads were reduced.
Primary data were acquired from ten heads of department, five from each bank. Secondary data were acquired from official records.
The study’s findings revealed that, ‘all things being equal’, in the long term, banks’ overhead expenses reduce relatively due to the impact of outsourcing strategy; the visual representation clearly demonstrated this.
Also, in institutions where other overhead control measures had not been used, we observed that the rate at which expenses grew was faster than the rate at which revenues grew; it was only when outsourcing value was considered that expenditure growth remained below revenue.
These data suggest that Nigerian banks have not completely embraced outsourcing due to the industry’s sensitivity to protecting records and consumer information.
The banks were able to manage their operational costs through the use of outsourcing since they avoided concerns such as pay increases, inflation of consumables such as cleaning materials and security devices, as well as other leakages in the banks’ overheads by establishing management fees or other chargeable fees.
And the influence of outsourcing was observed to drive the growth rate of real operating costs below the growth rate of revenue or profits for banks that meticulously implemented an outsourcing strategy in their operations.
Chapter one
INTRODUCTION
1.1 Background of the Study
The Nigerian banking industry has become a jungle in which the rules of the game are no longer apparent. Some refer to it as a war arena, where gladiators are supposed to fight according to predetermined rules devised and implemented by the biassed arbitrator.
Others describe it as a battleground in which only the strongest and most competitive banks can survive. However, anarchy develops as everyone strives to be the best and be respected by all stakeholders. (Ozekita, 2002).
Profit is defined as revenue minus cost; yet, most business people feel that in order to generate a profit, you must increase your sales. This idea is not far removed from the banking industry, where pressure on deposit mobilisation targets is emphasised.
The most intriguing aspect of the banking industry is that all banks market the same consumers, chase the same money in circulation, and employ the same personnel. Another noteworthy point to note is that all banks brand the same products with distinct styles, logos, and slogans.
The question is how we will survive this conflict, given that Charles Darwin [1801] stated that “it is not the strongest species that survive nor the most intelligent, but the ones that are most responsive to change”.
In today’s hotly competitive banking market, the concept of change cannot be ignored. As a result, the concept of synergy, which argues that 1+1=3, is used to determine what changes can help banks compete in the banking industry. That is, the total exceeded the sum of the parts.
The concept of synergy is then introduced into the “cost reduction” strategy, where it is expected that 1+0 = 2, that is, at the same equilibrium level of revenue, a cost reduction results in an increase in profitability while maintaining the same quality of service delivery, giving the organisation an unbeatable “competitive niche”.
Outsourcing is one of the ways that banks can reduce overhead costs. Outsourcing is aimed at more than just cost reduction. Outsourcing helps businesses increase their productivity. It also provides organisations with access to top-tier people and technology. This signifies that outsourcing generates values.
The answer to why outsourcing should be more than just cost-cutting is to create value – value for the company through reengineered processes, value for customers through improved service, and value for shareholders since markets reward organisations that focus on their core competencies.
Although value might imply different things to different people, it can also refer to long-term cost-effectiveness when outsourcing. It can result in greater sales, earnings, and dividends for shareholders.
It can also indicate a larger competitive advantage as a result of more responsive processes and higher levels of service. At its best, value should encompass all of the above and more.
In truth, an outsourced process will add varying degrees of value to the bigger organisation. For example, a corporation that outsources its finance and accounting (F & A) department may experience immediate demand for value.
The dynamic and volatile global economy that fueled the ideas of “globalisation” has forced several banks to seek ways to establish effective and efficient match-making strategies to find or facilitate connections with their competences, opportunities, and risks as a result of environmental change.
One of the tactics used by a few Nigerian banks was to change profit formulas because the ingredients of their service delivery were the same or recycled personnel, products, branding, clients, and ideas.
This formula focuses on cost reduction strategies while maintaining the same level of service delivery. Two banks were investigated: Zenith Bank and GtBank. Annual reports and other protected information from these banks demonstrate management’s unwavering desire to generate a profit and stay on top, particularly through the employment of cost-cutting strategies, the majority of which involve outsourcing.
1.2 Statement of the Problem
Despite their strong income output, many banks avoid significant salary bills due to liquidity concerns. Furthermore, many of the bank’s revenues are paper income, which cannot be converted into monetary profits.
Many bankrupt banks today, such as Commerce Bank, Eagle Bank, Metropolitan Bank, and others, experience this type of difficulty in which they spend real cash in excess of their actual profits. (Osekita 2002).
Previous studies hypothesise generic theories of outsourcing that are only applicable in Europe, societies where increasing profitability requires a reduction in costs rather than an increase in sales, as sales are maximised using a single objective paradigm.
However, a more practical strategy, tailored to the unique environment in which Nigerian banks operate, would be advocated here. As there is opportunity for more sales, as according to the CBN circular, 45% of the funds are outside the banks.
As a result, the purpose of this study is to address the unique nature of the Nigerian environment while also ensuring that cost reductions combined with increased sales equal an improvement in profitability.
1.3 RESEARCH QUESTIONS.
The study on “Outsourcing as a strategy for reducing overhead costs in the selected banks, Zenith Bank and GTBank in Lagos” is guided by the following questions.
Questions include:
1. What is the definition of outsourcing?
2. What are the steps in outsourcing?
3. What are the current conditions influencing outsourcing arrangements?
4. What are the advantages and disadvantages of outsourcing?
5. How may outsourcing be used as a successful financial strategy in the banking industry?
6. Does outsourcing have a direct impact on overhead cost reduction?
7. How does outsourcing affect the quality of service delivery in banks?
1.4 Objectives of the Study
The study’s major goal is to look into “outsourcing as a strategy in reducing overhead costs in some selected banks in Lagos”.
The particular objectives of the study can be appropriately stated as follows:
To explore whether banks use outsourcing arrangements as a cost-cutting tactic, and to what extent. To evaluate the advantages and downsides of outsourcing as a financial strategy.
To show how outsourcing improves banks’ liquidity position. To investigate the maintenance of quality in service delivery regardless of overhead reduction. To investigate how outsourcing as a financial strategy might be used to lower bank overhead costs.
1.5 Significance of the Study
The study is noteworthy and extremely relevant in the following ways:
1. The study will show banks and other financial institutions how outsourcing may be utilised to improve the quality of service delivery to consumers, allowing banks to remain competitive and successful in the face of fierce competition in the financial market.
2. It will demonstrate practical methods in which banks and other financial institutions can deploy and incorporate outsourcing into their operations.
3. Overhead expenditures undoubtedly account for a significant amount of bank expenses. The study will thus illustrate how outsourcing might be used to cut such costs [overheads].
4. The study is also expected to add to the existing body of knowledge about outsourcing as a financial strategy and arrangement.
1.6 SCOPE OF THE STUDY
The research focuses on strategies for reducing overhead costs in the banking business while also providing great service delivery.
Data for the study are limited to Zenith Bank and GTBank in Nigeria.
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