ST.

MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES

PERCEPTION OF BANKERS TOWARDS

THE CHALLENGES AND OPPORTUNITIES
OF OUTSOURCING PRACTICES IN THE
BANKING SECTOR IN ETHIOPIA

BY
ROBEL SIYOUM
ID NO. SGS/0112/2004

SEPTEMBER 2013
ADDIS ABABA, ETHIOPIA

1
 PERCEPTION OF BANKERS TOWARDS
THE CHALLENGES AND OPPORTUNITIES
OF OUTSOURCING PRACTICES IN THE
BANKING SECTOR IN ETHIOPIA

BY

ROBEL SIYOUM
ID NO. SGS/0112/2004

A THESIS SUBMITTED TO ST.MARY’S UNIVERSITY, SCHOOL

OF GRADUATE STUDIES IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS
ADMINISTRATION

SEPTEMBER 2013
ADDIS ABABA, ETHIOPIA

2
 ST.MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES
FACULTY OF BUSINESS

PERCEPTION OF BANKERS TOWARDS

THE CHALLENGES AND OPPORTUNITIES
OF OUTSOURCING PRACTICES IN THE
BANKING SECTOR IN ETHIOPIA

BY

ROBEL SIYOUM
ID NO. SGS/0112/2004

APPROVED BY BOARD OF EXAMINERS

________________________ __________________
Dean, Graduate Studies Signature& Date

______________________________ _____________________
Advisor Signature & Date

______________________________ _____________________
External Examiner Signature & Date

______________________________ _____________________
Internal Examiner Signature & Date

3
 ACKNOWLEDGEMENTS

The assistance from many individuals has made this study possible. First of all, I would like to
acknowledge my thesis advisor Tilaye Kassahun (PhD) for his comments. I would also like to
thank the management and staff members of the Commercial Banks, who were actively involved
in this study and devoted necessary time to complete the questionnaire and to make the interview
that served as study material for this research. Finally, I want to express my deepest thanks for
my families and friends who encouraged me by providing moral and material support.

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 TABLE OF CONTENTS
page
ACKNOWLEDGEMENTS …………………………………………….………………………...i
TABLE OF CONTENTS …………………………………………….………………………...ii
LIST OF TABLES……………………………………………………………………………..….v
LIST OF FIGURES…………………………………………………………………………..…..vi
LIST OF ACRONYMS…………..………………………………………………………….....vii
ABSTRACT…………………………………………………………………………………….viii

CHAPTER ONE
INTRODUCTION…………………………………………………………………...................... 1

1.1 Background of the study ...........................................................................................................1

1.2 Statement of the problem ..........................................................................................................2
1.3 Objective of the study ...............................................................................................................3
1.4.Hypothesis ...........................................................................................................................3

1.5. Significance of the study ……………………………………………………………………..4

1.6. Delimitation of the study ……………………………………………………………………..4

1.7. Operational definitions………………………………………………………………………..5

1.8. Organization of the study……………………………………………………………………..6

CHAPTER TWO
LITERATURE REVIEW ………………………………………....…………………………..7

2.1 Practices of outsourcing.............................................................................................................7

2.1.1 The global trend..........................................................................................................7
2.1.2 Trends of outsourcing in Ethiopia...............................................................................8
2.2 Outsourcing practice in financial institutions............................................................................8
2.3 Types of outsourced services.....................................................................................................9
2.3.1 Information technology outsourcing...........................................................................9

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 2.3.2Human resource outsourcing....................................................................................10
2.3.3 Facility management outsourcing............................................................................10
2.4 Theoretical background and concept of outsourcing...............................................................11
2.4.1 Theories in outsourcing.............................................................................................11
2.4.2 Outsourcing decision framework..............................................................................12
2.5 Motivations of outsourcing......................................................................................................13
2.5.1 Cost Driven Outsourcing……..................................................................................14
2.5.2 Strategy driven outsourcing……...…………...……………………..……………..15
2.5.3 Politically driven outsourcing……………..…………………..………………...…15
2.6 Advantage and disadvantage of outsourcing.……..........………………..…………………..15
2.6.1 Advantages of outsourcing.......................................................................................17
2.6.2 Disadvantages of outsourcing...................................................................................18
2.7 Theoretical framework of the study.........................................................................................20

CHAPTER THREE
METHODOLOGY............................................................................................................23

3.1 Research design......... .............................................................................................................23

3.2 Source of data. ........................................................................................................................23
3.3 Population and sample................................................................................................... 23

3.4 Development of instrument..........................................................................................24

3.5 Data collection procedure............................... ........................................................................25

3.6 Methods of data analysis ............................................................................................ 25

CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION...........................................27
4.1 Results of data gathered from questionnaires..........................................................................27
4.1.1 Background information of respondents...................................................................27
4.1.2 Trend and practice of outsourcing........................................................................................30
4.1.2.1 Outsourcing concept awareness level in banking sector........................................30
4.1.2.2 Trends of outsourcing practice...............................................................................31

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 4.1.3 Perception’s of bank managers and senior officers to outsourcing benefits.............33
4.1.4.Perception’s of bank managers and senior officer for risk related to Outsourcing..34
4.1.5 Major Roadblocks of outsourcing.............................................................................36
4.1.6 Criticality of outsourcing as a business strategy.......................................................37
4.1.7 Chi square test...........................................................................................................38
4.1.7.1 Expected benefits of outsourcing Vs criticality of outsourcing ቀas business
strategy.......................................................................................................38
4.1.7.2 Perceived outsourcing risks Vs Criticality of outsourcing as a business
strategy.......................................................................................................39
4.1.7.3 Roadblocks of outsourcing Vs Criticality of outsourcing as a business
strategy.......................................................................................................40
4.2 Findings from interview and its discussions............................................................................42

CHAPTER FIVE
SUMMARY OF FINDING, CONCLUSIONS & RECOMMENDATIONS...............................53
5.1 Summary of findings................................................................................................................53
5.2 Conclusion...............................................................................................................................57
5.3 Recommendations....................................................................................................................59
BIBLIOGRAPHY..........................................................................................................................61
APPENDIXIES..............................................................................................................................64
QUESTIONNAIRE ..........................................................................................................65
INTERVIEW QUESTIONS ..............................................................................................69
DECLARATION...............................................................................................................72
ENDORSEMENT..............................................................................................................73

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 LIST OF TABLES
Page

Table 4.1: Respondents category by bank ownership and position…………….......……….…...28

Table 4.2: Respondents length of service on current job and their department……..........…...…28

Table 4.3: Educational Level and experience of respondents .......................................................29

Table 4.4: Respondents Age and Sex ...........................................................................................30

Table 4.5: perception’s of bank managers and senior officers to outsourcing benefits ...............33

Table 4.6: Perception’s of bank managers and senior officer for risk related to Outsourcing .....35

Table 4.7: Outsourcing obstacles Level of impact .......................................................................36

Table 4.8: Chi square test result of Perceived benefits of outsourcing Vs criticality of outsourcing
as business strategy........................................................................................................................39

Table 4.9: Chi square test result of perceived outsourcing risks Vs criticality of outsourcing as a
business strategy............................................................................................................................40

Table 4.10: Chi square test result of perceived roadblocks of outsourcing Vs criticality of
outsourcing as a business strategy.................................................................................................41

Table 4.11: summarized current status of outsourcing services ...................................................44

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 LIST OF FIGURES
Page

Figure 2.1: Outsourcing decision framework … ...........................................................................13

Figure 4.2: Awareness levels of bankers about outsourcing .........................................................31

Figure 4.3: Future growth of outsourcing ......................................................................................32

Figure 4.4: Criticality of outsourcing as a business strategy ........................................................38

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 LIST OF ACRONYMS

AB Abay Bank

AIB Awash International Bank

BFI Banking and Finance Industry

BPO Business Process Outsourcing

CBE Commercial Bank of Ethiopia

CN Commercial Nominees

DBE Development Bank of Ethiopia

FM Facility Management

HRM Human Resource Management

ISM Information System Management

IT Information Technology

ITO Information Technology Outsourcing

SD Standard Deviation

UB United Bank

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 ABSTRACT

This study was conducted to examine the outsourcing practices in banking sector of Ethiopia. A
descriptive case study was employed to achieve the goal of this research. Two government banks
and three private banks were selected as samples and 100 participants from three areas of
business process (Human Resource Management, Facility Management and Information
technology business process) were involved on the study. In order to get relevant data from the
target population questionnaire and interviews were used. The questionnaire was administered
to the experts, senior officers and managers and the interviews were conducted with the senior
managers of the five sampled banks. The collected data were analyzed using frequency, mean,
standard deviation, and percentage values. The findings generally indicate that outsourcing
practices in Ethiopian banks is at its infant stage dominated by outsourcing very few noncore
businesses which are security, cleaning, and maintenance services. The major motivations for
outsourcing are management convenience and focus on core business. Moreover, cost saving
was found to be important motivator but not major reason for outsourcing. Achieving focus on
core business, cost shifting and management convenience are given high expected benefits of
outsourcing. Data security and data confidentiality risks are highly expected risks of
outsourcing. The major challenge for Ethiopian banks to outsource is lack of qualified and
professional service provider from the market. Generally finding indicates that outsourcing
strategy has a potential to grow in the future. Based on findings of the study banks are
recommended to make a serious risk analysis of outsourcing and to incorporate efficiency
variables on the outsourcing contracts to monitor outsourcing strategy effectiveness. Service
providers also recommended to focus on growth of business value not cost reductions on their
offers because clients are tend to value quality than pure cost savings.

Key words: outsourcing, perception, Business process outsourcing, Banks

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 CHAPTER ONE

INTRODUCTION

1.1 Background of the study

One of the current business strategies to have emerged for many organizations has been the
growing importance of outsourcing (McIvor, 2000). Outsourcing is defined as having work that
was formerly done inside the organization performed by an external organization (Beaumont and
Sohal, 2004). The practice of outsourcing is not a new phenomenon; since firms have always
made decisions on buy or made. The advancement of information technology and globalization
make easy to outsource activities which are noncore and less competitive business functions. The
drive for greater efficiency and continuous cost reduction has forced many organizations to
outsource activities which traditionally were carried out in-house. For this reason, organizations
can focus on their core competencies, which contribute most to a sustainable competitive
advantage (Gewald, 2010).

The growth of outsourcing market is increasing in types that moves from activities that are
noncore to the organization such as cleaning, catering and security, to include core areas of
activity such as design, manufacture, marketing, distribution and information systems with
almost the entire value chain open to the use of outside supply (McIvor, 2000).

The global trend of outsourcing is growing fast in terms of complexity and market whereas the
growth of outsourcing in Ethiopia is at its infant stage. It is dominated by non-core functions like
Security and Janitorial service (Meresea, 2007). The banking environment in Ethiopia has, for
the past decades, undergone many regulatory and financial reforms. These reforms have brought
about many structural changes in the banking sector of the country and have also encouraged
private banks to enter and expand their operations in the industry. Despite these changes,
currently, the banking industry in Ethiopia is characterized by operational inefficiency, little and
insufficient competition and also can be distinguished by its market concentration towards the
big government owned commercial bank (Lelissa, 2007 cited in Abera, 2012).

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In the context of the above discussions, the purpose of this study is to assess challenges and
opportunities of outsourcing practices in Ethiopian banking industry.

1.2 Statement of the problem

Firms in this dynamic global economy are expected to be highly competitive in every aspect. To
be competitive they need modern management practices that go with the current organizational
culture and global market. One of current modern management practices that are growing rapidly
across the globe is outsourcing. It is becoming more sophisticated and complex (Beaumont and
Sohal 2004). The trend of outsourcing started from 1980 with the basics information technology
outsourcing to non core business process and now reached to the more strategic core business
process of organizations (Schniederjans et al., 2007 cited in Kumar and Natarajan, 2011).
Several global research agencies have reported that worldwide, outsourcing engagements have
been growing and will continue to grow consistently both in terms of number of contracts and
their average contract value. The global outsourcing market in terms of total contract value has
grown to US$1.3 trillion in 2007 (Global Outsourcing 100 Index 2011 cited in Kumar and
Natarajan, 2011).

Various empirical as well as theoretical studies of outsourcing list benefits of outsourcing based
on various theoretical explanations. They indicate that outsourcing is an efficient tool for using
the technology and capital resources of firms for competition in fast changing market
environment. It also leads to costs savings and enhances the quality of services (Kim et.al, 2007).
External organizations can often provide greater economies of scale, flexibility, and levels of
expertise for overhead services that virtually any company can achieve internally. In the mean
time the outsourcer firm may lose its control over the outsourced service and it may bear risk of
becoming dependent on the service provider company (Maynard, 2006 cited in Meresea, 2007).

According to Kumar and Natarajan, 2011, several studies in financial services sector pertaining
to outsourcing show a gradually growing trend in outsourcing, both in terms of nature and scope
of activities outsourced, and also emphasize that outsourcing is an inevitable and critical aspect
of financial institutions to survive in a rapidly changing business environment. In fact, industry

13
research indicates that Banking and Financial Services Industry has been the largest sector user
of outsourcing services worldwide, next only to manufacturing (Ackermann, 2003 cited in
Kumar and Natarajan, 2011).

In Ethiopia, banks are more of driven by modern management practices. However, the practice
of outsourcing as a strategy is not well developed (Meresea, 2007). This variation attracts the
researcher to undertake a research with the objective of evaluating the current practice and future
potential of outsourcing in the country’s banking industry. Hence, the financial services sector
was a logical choice to focus on. Thus, the research will answer the following questions:

1. What is the trend of outsourcing in Ethiopian banking industry?

2. Which activities of the banks are outsourced?
3. What are the perceptions of bank management toward benefits and risks of outsourcing?
4. What is the significance of outsourcing as a business strategy?
5. What are the major obstacles to outsource?

1.3 Objective of the study

The general objective of the paper is to find out challenges and opportunities of outsourcing
practices in banking industry of Ethiopia. The specific objectives are:

To assess overall outsourced activities by the banks.

To find out the perception of managers on benefits and possible risks of outsourcing.
To find out barriers for outsourcing.
To evaluate the importance of outsourcing as a business strategy.

1.4 Hypothesis

The study has three sets of hypothesis which are related with association of different sets of
variables. These are:

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1. Ho: There is no relationship between the perceived benefits of outsourcing and criticality of
outsourcing as business strategy.

H1: There is a relationship between the perceived benefits of outsourcing and criticality of
outsourcing as business strategy.

2. Ho: There is no relationship between the perceived outsourcing risks and criticality of
outsourcing as a business strategy.

H1: There is a relationship between the perceived outsourcing risks and criticality of
outsourcing as a business strategy.

3. Ho: There is no relationship between the perceived roadblocks of outsourcing and criticality
of outsourcing as a business strategy.

H1: There is a relationship between the perceived roadblocks of outsourcing and criticality of
outsourcing as a business strategy.

1.5 Significance of the study

The practice of outsourcing in Ethiopia and awareness among the society is not well developed.
In the academic areas research related to outsourcing focusing on Ethiopia is few. Hence the
study aims to create awareness about outsourcing for different stakeholders of the financial
industry specifically for employees and managements of the banks and also for business persons
and scholars. Furthermore, this research can serve as stepping stone for other research in similar
area.

1.6 Delimitation of the study

The study is conducted in the banking sector of Ethiopia in the areas of outsourcing as a business
strategy. The research covers five banks as a sample from nineteen banks that are operating in
Ethiopia. The data were gathered from senior managements and experts of banks in the area of

15
information system, human resource and facility management. Due to time and budget constraint
outsourcing service supplier’s perspectives are not entertained in this study.

1.7 Operational definitions

Back sourcing: - work that was outsourced is taken back in-house (Beaumont and Sohal,
2004).

Business Process Outsourcing (BPO): - the delegation of one or more entire business process to
an external service provider (Gewald and Dibbern, 2005).

Facilities Management: - the integration of processes within an organization to maintain and

develop the services which support and improve the effectiveness of its primary activities
(Borisova, 2011).

Facilities Management Outsourcing: - An outsourcing solution in which the customer entrusts

to an external services provider, the responsibility for operations and maintenance of one or more
facilities (Borisova, 2011).

In-sourcing: - applying outsourcing’s discipline to internal suppliers, often having them

competes with external suppliers (Beaumont and Sohal, 2004).

Offshore Outsourcing: - the transfer of organizational activities carried out locally to product
and service providers in other countries (Bojan and Lewandowski, 2010).

Out-tasking: - indicate work being done outside the organization, but the organization retaining
full control over the operation over how it is to be done. The vendor has no discretion and
performs a programmable task (Beaumont and Sohal, 2004).

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1.8 Organization of the study

The research work is organized in five chapters. The first chapter is an introductory part. The
second chapter concentrates on literatures in relation to the subject matter of the paper. The third
chapter discussed about the methodology of the study. The fourth chapter is all about results and
discussion. The last chapter bring the study to an end through conclusions and recommendations.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Practices of outsourcing

Outsourcing traced back to the industrial revolution of England in 1700 (Beaumont and Sohal,
2004). But its significance and its fashionable way of solving some business problems are getting
more attention as a business strategy is increased in recent years. It is initially used primarily for
information technology (Ibid, 2004). Now a wide variety of business process is outsourced. The
use of outsourcing is becoming more sophisticated; more organizations are outsourcing their
business processes. Cleaning, IT, catering and security are well-known examples of activities
that are frequently outsourced (Ibid, 2004).

2.1.1 The global trend

With the global telecommunications, transportation and other infrastructure now well established
and consistently reliable, more outsourcing initiatives are under taken beyond in shore and near
shore service providers to include shifting work to international providers (Duening and click,
2005). Oshri et al. PP1, (2009) on title, Global Outsourcing Recent trends and issues, discuss the
global trends of outsourcing. They summarized the global trend as follows:

There will be a continuing rise in outsourcing revenues for global outsourcing, with BPO
overtaking ITO within five years. India will continue to dominate the outsourcing market
but its role will change. China gives out promise but will still struggle to achieve scale in
Western European and North American markets. Emerging country competition will
intensify. Near-shoring will be a strong trend. Outsourcing, by offering a potential
alternative, will help discipline in-house capabilities and service. Knowledge process
outsourcing will increase as emerging countries move up the value chain. Outsourcing
successes and disappointments will continue as both clients and suppliers struggle to
deal with a highly dynamic set of possibilities.

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2.1.2 Trends of outsourcing in Ethiopia

In order to gather the trends of outsourcing in Ethiopia there is lack of research works. However
according to one master’s thesis research that was done by Meresea, (2007) on outsourcing
practice in Ethiopia, the use of outsourcing in Ethiopia is very low and limited with the exception
of the use of some Non-core functions like Security service and Janitorial service. The most
outsourced business functions listed are maintenance service, janitorial service, security service
and information technology. Conversely, Accounting and Administration services are mentioned
less outsourced by Ethiopian organization. The main reasons for not outsourcing are
organizations fear of loss of confidential information and loss of control. In addition, the
organizations suspect that the external service providers are not loyal to them (Ibid, 2007).

2.2 Outsourcing practice in financial institutions

The outsourcing strategy has shifted from product and service focus to that of differentiation and
speed to market. Several studies pertaining to outsourcing in the financial services sector show a
gradually growing trend in outsourcing, both in terms of nature and scope of activities
outsourced, and also emphasize that outsourcing is a critical aspect of financial institutions to
survive in today’s business environment (Federal Reserve Bank of New York, 1999).

The justification for outsourcing activities, such as cash management, research and business
analytics, and other processes that otherwise are considered core to the banking business, lies in
the argument that these activities, though essential to the bank, do not provide a unique
competitive advantage. This implies that those activities, where a bank can do better than its
competitors, and which generates a competitive advantage, are retained in house and the rest are
outsourced (Chris, et.al. 2004 cited in Prasad et.al., 2011).

Financial institutions have outsourced activities such as information technology, accounting,

audit, electronic funds transfer, investment management, and human resources. According to
Federal Reserve Bank of New York (1999) citing published reports, thirty-nine percent of all

19
U.S. banks and thrifts outsourced at least some processing activities in 1998 and the most
frequently outsourced activity is some aspect of information technology. Next in importance is
BPO, such as treasury operations, internal audit and human resources. BPO is the emerging area
of growth since it facilitates financial institutions’ reengineering of core business processes
(Federal Reserve Bank of New York, 1999).

2.3 Types of outsourced services

The general trend in all sector shows that companies first outsource those business functions that
are noncore for the organizations with the aim of reducing costs and focusing on core functions.
Among non core activities call centers, janitorial services, maintenances and information
technology are commonly outsourced. Recently more and more business processes are being
outsourced from partially outsourcing a business process to completely outsourcing the total
work of business process. Various researches illustrate that Information technology; human
resource and facility management are among the most outsourced business process.

2.3.1 Information technology outsourcing

Outsourcing is a trend that is more common in information technology for services that have
usually been regarded as intrinsic to managing a business. In some cases, the entire information
management of a company is outsourced, including planning and business analysis as well as the
installation, management and servicing of the network and workstations (Nag, 2004).

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. Powerful information systems have made the
processing of large transaction volumes possible, at the same time enabling new E-Commerce
products and services like online banking. 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.

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The benefits of IT outsourcing in the BFI is well understood. However, the risk of outsourcing is
not well known. This raises questions about the impact of risk facets such as financial, strategic,
performance and social risks on outsourcing decisions in firms Gewald et. al (2006). Advances in
IT have provided banks with the opportunity to use outsourcing as a means to reduce costs and
focus on core competencies (Ibid, 2006).

2.3.2 Human resource outsourcing

The decision of HR outsourcing is contingent upon factors like flexibility, availability of

adequate resources, affordability, and acceptability (openness to information-sharing) etc.
According to analysts, companies usually cite cost reduction as the most crucial reason for HR
outsourcing. As companies were discussing how to cut costs in the face of an economic
downturn, many look at outsourcing for some of their HR processes. However, some analysts
argue that by outsourcing major HR activities, the number of HR jobs is decreasing, others feel
that on the contrary by outsourcing these kinds of repetitive and administrative jobs, higher-level
HR professionals get the time they need to tackle strategic workforce challenges (Seth and Sethi,
2011).

HR services are among the key elements in the enlarging outsourcing game. Recognizing the fact
that senior management needs to get out of mundane day to day processing work and focus
instead on strategic planning, core competencies, customer satisfaction and decision making, a
number of large companies, across globe have begun selecting for outsourcing of their HR
services. Some of the functions most commonly handed over to outside providers include
payroll, benefits administration, background checks, drug testing, recruiting and training. Even
small companies turn to outside services to help with such everyday jobs (Seth and Sethi, 2011).

2.3.3 Facility management outsourcing

Facility management is one of noncore business process activities commonly outsourced.

Facilities and properties maintenances and procurements are the main areas of facility
management services. Facility Management can be summarized as creating the optimal

21
environment for the organization’s primary functions, taking an integrated view of the business
infrastructure, and using this to deliver customer satisfaction and best value through support for
and enhancement of the core business (Borisova, 2011).

In many organizations Facility Management function is new function that provides a connection
between the core activities and the facility activities. Facility Management function can be
fulfilled by a facility manager internally or by a facility manager of an external service providers
(Borisova, 2011). Today the trend is that many services related to Facility Management,
transferred to the outsourcing. In the international market there are companies that specialize in
transportation logistics, cleaning, archiving, preservation, security, etc.

The reason why Facility Management services are given to the outsourcing is enormous costs
that are hold by the owner, if performed internally. Facility Management companies can
professionally optimize and significantly reduce these costs (Tswetkow 2011 cited in Borisova,
2011).

2.4 Theoretical background and concept of outsourcing

2.4.1 Theories in outsourcing

Various theories are used by scholars for explanations of why outsourcing occurs. Many of
outsourcing arguments have a basis in economic theories. Transaction cost theory which
typically frames outsourcing as a decision about drawing firm boundaries or as vertical
integration, offers economic perspective of outsourcing (Ang and Straub 1998). McIvor (2008)
on the study of general reviews of outsourcing related research identified the ‘‘top-10’’ list of ten
theories which have come across most frequently on outsourcing related research, these are:

(1) Transaction cost theory (Coase, 1937;Williamson, 1975, 1985).

(2) Resource-based view (Penrose, 1959; Richardson, 1972).
(3) Principal agent theory (Ross, 1973; Jensen and Meckling, 1976).
(4) Vertical integration theory (Bain, 1968; Grossman and Hart, 1986).

22
 (5) Strategic management (Quinn and Hillmer, 1994).
(6) Evolutionary economics (Nelson andWinter, 1982; Mahnke, 2001).
(7) Relationship market/view (Berry, 1983; Sommer, 2003).
(8) Industrial economics (Porter, 1980).
(9) Strategic alignment theory (Henderson and Venkatraman, 1990).
(10) Core competence theory (Prahalad and Hamel, 1990)

2.4.2 Outsourcing decision framework

Outsourcing is often combined with competitive tendering for the contract under which the
goods and services are to be provided. Businesses of all types, both large and small, have been
outsourcing activities for many years and have benefited from it; they know the value that
outsourcing brings to their organization, as a tool to enhance and enlarge the business.
Organizations that have repeatedly used outsourcing over a substantial period know that to
sustain the positive benefits that it brings to the organization, it is also important to have a well
managed plan of action for the outsourcing process. This includes deciding which activities or
tasks to outsource, which companies should be hired to perform these tasks, how to manage the
outsourced business process, how to agree on payment terms, and how to ensure that the desired
results are achieved (Beaumont and Sohal, 2004).

Outsourcing is a hierarchical sequence of decisions. The fundamental decision is whether or not

to outsource a business process or function. Outsourcing decisions can be complex because
modern organization’s applications tend to be integrated with each other, sensitive; it may be
difficult to separate and outsource a single application. The criteria used to evaluate outsourcing
decisions may be multidimensional and intangible; besides difficult to estimate cost savings, the
firm must consider intangible effects such as freeing up managerial time and possible
dependence on the vendor (Beaumont and Sohal, 2004).

Kremic et. al (2006) mention that 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

23
significant impact on managers' attitudes towards BPO and that these attitudes strongly influence
the outsourcing decision.

Figure 1: Outsourcing decision framework. Adapted from Kremic et. al (2006)

2.5 Motivations of outsourcing

Companies that are Successful in practicing outsourcing leverage their capabilities and
investments by exploiting three areas of functional activities performed in house by outsourcing.
These activities are complementary, integrative, or duplicative activities scattered throughout the
company; in which outsiders have greater expertises or capabilities for innovation. Therefore, by
outsourcing noncore activities for vender organizations, clients can focus on their core activities
that give them competitive advantage and improve overall performance (Kim and Won, 2007
cited in Kremic et. al., 2006).

24
There are motivations for outsourcing in companies. They can be categorized in to three: cost,
strategy, and politics. Whereas there may be three categories, outsourcing activities are mostly to
be initiated by elements from all three categories. Cost and strategy motivations commonly drive
outsourcing by private organizations. Political agendas often drive outsourcing by public
organizations (Kakabadse and Kakabadse, 2000a, cited in Kremic et. al., 2006).

2.5.1 Cost Driven Outsourcing

Saving cost is the major reasons for outsourcing practice for many organizations. Cost saving
can occur when suppliers’ costs are low enough that even with added overhead, profit, and
transaction costs suppliers can still deliver a service for a lower price. Service provider can able
to deliver the service with low cost than the client with the mechanisms of Specialization and
economies of scale Kremic et.al. (2006). A desire to save indirect costs may also drive
outsourcing. Outsourcing allows having fewer employees that requires less infrastructure and
support systems which may result in a more efficient organization. Some organizations outsource
to achieve better cost control while others try to shift fixed costs into variable costs (Kremic et.
al., 2006).

Even though organizations may outsource for cost related reasons, increasing evidence on
literatures shows that cost savings have been overestimated and costs are sometimes higher after
outsourcing. In addition to not realizing the costs that originally drove the outsourcing initiative,
there are also some additional indirect costs like contract monitoring and oversight, contract
generation and procurement, intangibles, and transition costs and social costs like low morale,
high absenteeism, lower productivity etc. that may be incurred. The literature shows that
significant savings can result. However, savings are not a given. Apparently the effects of
outsourcing on an organization’s cost are not yet fully understood and perhaps the variables and
their relationships are more complex than expected Kremic et.al. (2006).

25
2.5.2 Strategy driven outsourcing

Another mostly cited driver for outsourcing is strategic issues such as core competence and
flexibility. Because of intense competition, organizations are forced to redirect scarce resources
where they make the greatest positive impact, namely the organization’s core functions.
Outsourcing is to allow the organization to better focus on its core competencies. Other strategy
issues which encourage the consideration of outsourcing are restructuring, rapid organizational
growth, changing technology and the need for greater flexibility to manage demand swings
(McIvor, 2000). Organizations need to react quicker to customer requirements and outsourcing is
seen as a means to accomplish it (Kremic et. al., 2006).

2.5.3 Politically driven outsourcing

Political motive for outsourcing shown in public organization since most of their issues may be
more social than economic. Other factors that may be drive outsourcing by public organizations
include public organizations are sometimes perceived as inefficient and bureaucratic, political
candidates may promote outsourcing ideas, particularly at election time, to demonstrate their
willingness to make positive changes, for better accountability in public organizations, the
agendas of elected officials, public opinion, and current national or international trends (Avery
2000, cited in Kremic et.al., 2006). Manager’s preference to divest of troublesome functions is
another major reason to outsource. In summary, there is enough evidence in the literature to
suggest that outsourcing by public organizations may be initiated for reasons quite different from
private industry (Kremic et.al., 2006).

2.6 Advantage and disadvantage of outsourcing

Outsourcing is used because it gives advantages to the organization. However it brings also a risk
for the organization. Ang and Straub (1998) cited different studies and forwarded that a cost
advantage by hiring outsiders to perform certain services and produce certain products is one of
the most commonly cited reasons for outsourcing by managers.

26
If the organization has accumulated specific assets and skills peculiar to the process then in
house processing should be considered (this is especially so if the in-house operation, through
experience or economies of scale, is cheaper and/or provides higher quality than potential
vendors). If the internal operation is inefficient or distracts management, an outsourcing
partnership should be considered. The partner and client will cooperate by using their skills,
experience, and assets to optimize the process and adapt it to changing business conditions
(Beaumont and Sohal, 2004).

According to Beaumont and Sohal (2004) a business process is strategic if it gives a unique
competitive advantage. If the business process is strategic, the organization will probably not
want to become dependent on or share sensitive knowledge with vendors who might supply the
client’s competitors; the normal option is in sourcing. However, a strategic business process may
have several aspects some of which can be outsourced. For example, although customer
relationship management (CRM) may be critical and strategic, it may be appropriate to outsource
call center operations while retaining in house authorship of operators’ scripts and responsibility
for databases.

Pressures to outsourcing in the goal of companies that aggressively outsource most functions are
to enhance competitiveness by achieving a higher return on assets through less capital
commitment and increasing the ability to adjust quickly to a changing environment through less
commitment to in-house resources.' Their motto is: do more with less. Outsourcing is motivated
by growing pressures on management to remain competitive by accomplishing more with fewer
resources at a faster pace. Competitive pressure is a constant driver to increase efficiency.
Organizations have been, or are being, restructured, downsized, and reengineered in a relentless
attempt to achieve a state of efficiency, effectiveness, and agility expected to deliver increased
productivity. In order to do more with less, a company must focus its limited resources on those
activities that are essential to its survival and must leverage activities that are peripheral. The
result is a greater use of partnerships, collaborations, and simple buying to substitute for in-house
capabilities.

27
2.6.1 Advantages of outsourcing

Given that outsourcing will be a natural outgrowth of globalization and fast changing technology
for many companies in the world, those who anticipate and manage these changes strategically,
the gains can be enormous (Zhu et.al, 2001). Researches shows that there are various reasons to
outsource that include reduced costs, enhanced performance, an ability to access superior
expertise and industry best practices, and a desire to devote scarce human resources to core
businesses (Federal Reserve Bank of New York, 1999). The following elaborate the major once

Reduce and control operating costs: - A vendor may provide better performance at a lower cost
than in houses because of economies of scale, specialization and tactical focus. Cost savings may
be secured by converting fixed costs to a variable cost structure to accommodate fluctuations in
labor and equipment needs and by purchasing services at a fixed cost per transaction, a client can
avoid financial uncertainty. Additionally, outsourcing can provide immediate access to expertise
and best business practices that may be too expensive to build internally or hire particularly in
areas such as technology (Federal Reserve Bank of New York, 1999). Outsourcing reputedly
reduces IT costs. Vendors convince firms by claiming to cut costs by 10-50 percent and
Economies of scale can lower costs (Lacity and Hirschheim, 1993 cited in Beaumont and Sohal,
2004).

Concentration on core activities and competencies: - Managers should apply their experience and
knowledge to core competencies and outsource activities in which they are less competent; can
benefit from vendors’ expertise. The choice of which activities to outsource is often determined
by the strategic value of the activity and its level of operational performance. Generally less
strategic activities that show low internal performance are more likely to be outsourced
(Beaumont and Sohal, 2004).

Variable and fractional demand: - A small firm’s limited internal resources make coping with
sudden changes in demand difficult. Responses to increased demand usually lag demand as new
capacity is acquired or new staff are recruited and trained. Diminished demand may necessitate
dismissing loyal staff in whom training and experience has been invested. A vendor may have

28
ample resources. A small organization will not hire half a lawyer, but outsource its legal
requirements.

2.6.2 Disadvantages of outsourcing

Since outsourcing is recent tool of managers the complete costs are not yet known, which
possess a risk in itself. One of the causes of outsourcing failure is lack of guiding methodology
for managers and skills to manage and monitor outsourced functions (Kremic et.al, 2006). While
outsourcing may seem attractive at the strategic management level, serious pitfalls are often
encountered as the strategy is pushed downward into operations. At the operational level, the
strategic intent tends to be lost in a hectic day to day, problem to problem business environment.
Outsourcing decisions made at the operational level can easily lead to dependencies that create
unforeseen strategic vulnerabilities (Ibid, 2006).

Kremic et.al (2006) listed potential risks in relation to outsourcing that are gathered from
outsourcing literatures. The following are the potential risks

• Unrealized savings or hidden costs

• Less flexibility
• Poor contract or poor selection of partner
• Loss of knowledge/skills and/or corporate memory and the difficulty in
reacquiring a function
• Loss of control/core competence
• Power shift to supplier
• Supplier problems (poor performance or bad relations, opportunistic behavior, not
giving access to best talent or technology)
• Losing customers, opportunities, or reputation
• Uncertainty/changing environment
• Poor morale/employee issues
• Loss of synergy
• Create competitor

29
 • Conflict of interest
• Security issues
• False sense of irresponsibility
• Legal obstacles
• Skill erosion Lafferty and Power shift to supplier

Basel committee on banking supervision paper of Outsourcing of financial services on 2005

identified and explained some of common outsourcing risks of financial services encountered.
The key risks that may arise due to outsourcing are:

• Strategic Risks - The service provider may conduct business on its behalf, which is
inconsistent with the overall strategic goals of the bank.
• Reputation Risk - Poor service from the service provider, its customer interaction
may not be consistent with the overall standards of the bank.
• Compliance Risk - Privacy, consumer and prudential laws may not be adequately
complied with by the service provider.
• Operational Risk - Arising due to technology failure, fraud, error, inadequate
financial capacity of service provider to fulfill obligations and/or provide remedies.
• Legal Risk – includes, exposure to fines, penalties or punitive damages resulting from
supervisory actions, as well as private settlements due to omissions and commissions
of the service provider.
• Exit Strategy Risk - This could arise from over-reliance on one firm, the loss of
relevant skills in the bank itself preventing it from bringing the activity back in-house
and contracts entered into wherein speedy exits would be prohibitively expensive.
• Country Risk - Due to political, social or legal climate of country where the service
provider is located.
• Contractual Risk - This risk arises from inability or degree of ability of the bank to
enforce the contract with the service provider.
• Concentration and Systemic Risk - Due to lack of control of the bank over a service
provider, more so when overall banking industry has considerable exposure to one
service provider. The failure of the service provider in providing the desired services
30
 covered by the terms of agreement or any non compliance of any legal / regulatory
requirements by the service provider can lead to reputational or financial loss for the
bank which can trigger a systematic risk in the banking system (Basel Committee,
2005).

2.7 Theoretical framework of the study

Perceptions of decision makers towards outsourcing is discussed by Kumar and Natarajan, pp 8,

(2011) as “positive perceptions are often equated with the advantages of outsourcing and the
criticality of outsourcing for the organization; negative perceptions are equated with the risks of
outsourcing and the roadblocks for implementing outsourcing decisions.”

The risk and benefits of outsourcing have influence on the attitude of decision maker towards
outsourcing (Gewald and Dibbern 2009). “Attitude towards outsourcing is positively influenced
by the perceived benefits and perceived criticality of outsourcing; and negatively influenced by
the perceived risks and perceived roadblocks for implementing outsourcing” (Kumar and
Natarajan, pp 8, 2011).

A way to evaluate outsourcing risks despite the non availability of quantitative data is to use the
expert judgment of Bank managers. Supported by a number of studies showing that the actual
outsourcing decision is strongly influenced by the particular manager in charge of the process
and is thereby an individual rather than a group decision (Kakabadse and Kakabadse 2002, cited
in Kremic et.al., 2006). It becomes obvious that a manager's individual perception of outsourcing
risks and benefits plays a major role as an antecedent to corporate outsourcing. Therefore, if
managers are involved in the decision process towards BPO it is of utmost importance how they
perceive the risks as no reliable objective measure is currently available.

The perceived risks and benefits associated with BPO strongly influence managers' intention to
outsource business processes. Hence detecting the perceptions of decision makers in outsourcing
is important to identify the reasons of currently outsourced activities as well as future trends of
outsourcing practices.

31
Prasad et.al (2011) has seen various dimensions of outsourcing that have been identified from
both in practice and literature as:

1) Shoring model (vendor location/service creation),

2) Sourcing model (vendor type),
3) Engagement model (number of vendors engaged), and
4) Duration of the engagement (contract periods).

The ownership of the outsourcing facility and the transfer of assets is also an important
dimension of outsourcing. Dibbern and Heinzl (2001) cited in Prasad et.al (2011), for example,
distinguish between the procurement of a service from a legally independent entity (third party
vendor) and from profit centers with capital ties to the enterprise (e.g. subsidiary or joint
venture). Another important dimension of outsourcing is the number of vendors engaged by a
client (Lacity and Willcocks, 2001, cited in Prasad et.al, 2011).

An organization may choose to engage a single vendor (single outsourcing) for all its
outsourcing needs or may engage multiple vendors for the same (multiple outsourcing)
depending upon several factors, like nature of the activities, vendor’s capabilities, client’s ability
to manage vendors, availability of vendors, and maturity of outsourcing market, and so on
(Prasad et. al, 2011).

Gallivan and Oh (1999) cited in Prasad et.al (2011) analyzed various IT outsourcing
relationships as business alliances and described client vendor relationship (single client/single
vendor, multiple clients/single vendor and so on) and highlighted that these simple relationships
may prove to be risky for the client due to the dependency on single vendor. Engaging with
single vendor poses a serious risk of vendor dependency, especially in an immature outsourcing
market, and hence, it is prudent for the organizations to consider engaging multiple vendors for
outsourcing.

32
The scope or the extent of outsourcing is also a very important dimension of an outsourcing
decision. There are terms Total or complete outsourcing and selective or partial outsourcing
describing the coverage or scope of the outsourced services. In a total (complete) outsourcing
arrangement, a client outsources a complete activity or a business process or an entire function,
while in selective (partial) outsourcing, the client procures services from the vendors only
partially (Ibid, 2011).

As the outsourcing practice was getting widely adopted across several industries and
geographies, coupled with the maturing of the vendor market and the outsourcing services being
offered in a variety of packages, several new sourcing models have emerged during the late
1990s (Prasad et. al, 2011). Therefore this research is anchored based on the above theoretical
frameworks.

33
 CHAPTER THREE

METHODOLOGY

The study investigates challenges and opportunities of outsourcing practice in Ethiopia with
particular focus on the banking industry. In order to gather relevant data and draw useful and
realistic conclusion, the researcher has used the following methodology for the research.

3.1 Research design

A descriptive type of research design is used for the study. The reason behind using descriptive
study design is because the researcher is interested in describing the existing situation under
study. The study shows the current practices of outsourcing within the banking industry. In
addition, the bank managements and senior officers’ perceptions toward outsourcing in terms of
strategic business tool are described by gathering the relevant information and analysis. The
study is cross-sectional in the sense that relevant data were collected at one point in time.

3.2 Source of data

Both primary and secondary data were used for the study. Primary data were gathered using
questionnaire and semi-structured interviews, whereas secondary data were collected from
reports, websites, and various unpublished and published materials through documentary
analysis.

3.3 Population and sample

The population of the study is Ethiopian banks that are operating within the country. There are
sixteen private and three government owned banks in Ethiopia. Among them the study gathered
relevant information from five banks as a sample. In order to represent the population the sample
contains two government banks and three private banks. Stratified random sampling technique
was used to select the sample banks based on lottery method. Accordingly, Commercial Bank of

34
Ethiopia (CBE) and Development Bank of Ethiopia (DBE) from government owned banks and
Awash International Bank (AIB), Abay Bank (AB), and United Bank (UB) from private banks
have been selected as a sample. The study concentrates on three areas of business process. These
are Human Resource Management (HRM), Information System Management (ISM), and Facility
Management (FM). Various studies confirm that a worldwide trend shows these three areas of
business activities widely outsourced. Data were collected from the above five banks managers
experts, and senior officers. They were contacted from the three business process.

Purposive sampling technique was applied to distribute the questionnaire for respondents in each
bank and in each business process. Respondents from each bank of the three business areas
which are from HRM, FM and from IT business activities were contacted. Hence, the size of the
sample reaches 100 respondents. The determination of the sample size based previous works in
similar studies. The main purpose applying purposive sampling technique in this study is to
gather information from senior management and officers who have relatively high role in
decision making process in relation to outsourcing. Their perception influences their support for
outsourcing decisions.

Semi structured interview is another tool used to gather data on practical activities of the banks
in relation to outsourcing. Interview were made for the selected five banks outsourcing
department managers or in related areas to cover more practical aspect of outsourcing and this
was done based on purposive sampling methods.

Besides, secondary sources were used for supplementary purpose. Secondary sources include
bank’s annual report, unpublished internal reports and prior research reports.

3.4 Development of instrument

The survey questionnaire has six sections. The first section was designed to collect personal
information about the participants relevant to verify key informants. The second section contains
measurement questions that assess the current practice of outsourcing in the bank. The third and
fourth sections are designed to collect information regarding the perceptions of senior officers

35
and managers to outsourcing in terms of benefits and risks. The fifth section contains a rating
scale measurement questions designed to collect the roadblocks of outsourcing and the last
section, deals with question relating to criticality of outsourcing as a business strategy.

The questionnaire design used two scales to collect the data. The nominal scale and five point
Likert scale ranging from five (very high) to one (very low) is used to measure the responses.
Most of these designs have been adapted from previous survey done by Kumar and Natarajan
(2011) with some modification by the researcher to fit for the Ethiopian context and this research
purposes.

With regard to interview, semi structured question were prepared to address actual practices of
outsourcing of banks. The question was used as initiators for discussion but during the interview.
Based on the discussion necessary questions were raise in standing of interviewee response.

3.5 Data collection procedure

The researcher adopted three steps in collecting the data for the study. First, relevant literature
was reviewed to get adequate information on the topic. Second, objectives and research
questions were formulated to show the direction of the study. Third, data gathering tools were
developed. After the questionnaire was distributed and collected, interview with the senior
managers and officers of the bank were conducted.

3.6 Method of data analysis

Statistical Package for Social Science (SPSS) software for version 20.0 was used to compute and
analyze the data. The statistical tools are used in the analysis of data include percentage, mean,
standard deviation, chi square and rank. Graphs and tables are used for presentation of data.

Chi square test is applied in order to test significances of relationships among different sets of
variables. Pearson Chi square test is used using SPSS (IBM Version 20). The reason for using
Pearson Chi square test is because of its appropriateness to measure association among two

36
variables. The variables considered under this study are ordinal variables, which are perceived
degree of expected benefits of outsourcing, perceived degree of expected risk related to
outsourcing and the level of perceived roadblocks on outsourcing practices. Each of the three
ordinal variables is checked if they have a relation with the perceived criticality of outsourcing as
a business strategy, taking α= 0.05 at different degrees of freedom.

37
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

This chapter presents analyzed results and interpreted discussions of the data obtained from the
primary sources as well as secondary sources. The primary data was obtained from the
questionnaire and semi structured interview questions which are designed to collect the
necessary data to answer the research questions. The questionnaire was administered for one
hundred respondents, from the five sampled banks, situated in Addis Ababa, Ethiopia whereas
interviews were made with five senior higher management officers. This chapter is organized
based on data gathering tools. Hence, first all the data from questionnaire are presented and
secondly data from interview and documents are analyzed.

4.1 Results of data gathered from questionnaires

This part has seven sections in relation to data of questionnaire. The first section deals with the
demographic data of respondents. The second section deals with general practice of outsourcing
in banks. The perceptions of senior officers and bank managers toward the benefits and risk of
outsourcing are presented in third and fourth sections respectively. Fifth section deals with the
obstacles to outsource business process. The last section reveals the criticality of outsourcing as a
business strategy.

4.1.1 Background information of respondents

One hundred questionnaires were distributed to the respondents and out of the 100
questionnaires 78 of them were collected with a response rate of 78%. However, only 74
responses were valid with complete answers. The demographic characteristics include:
designation, gender, age, level of education, and length of service. This aspect of the analysis
deals with the personal data on the respondents of the questionnaires. Table 1 to table 4 below
shows the details of background information of the respondents.

38
Table 1: Respondents category by bank ownership and position

Bank Total
Position
Private Government Frequency Percent
Managers 16 12 28 38
Experts /Senior Officers 18 28 46 62
Frequency 34 40 74 100
Total
Percent 46 54 100

The above table shows that 54 % of the respondents were from the state owned banks and 46%
of them were from private banks. In terms of organizational hierarchical positions all participants
were senior officers and managers who have relatively higher information and as well as
experience within the banks. Among respondents 38% were managers whereas the rest of them
(68%) were experts and senior officers.

Table 2: Respondents length of service on current job and their department

Length of service on current job Total

Respondents
Below Six 6 month 3–5 Above 6
department/Business Frequency Percent
Month old to 2 years years Years
process
Information Technology 2 2 4 4 12 16
Human Resource 1 8 21 7 37 50
Facility(property)
2 12 10 1 25 34
Management
Frequency 5 22 35 12 74 100
Total
Percent 6 30 47 16 100

39
Table 2 demonstrates respondent’s current job and their experience on their current job. Majority
of the respondents are from HR department which cover 50% of the respondents. 34% and 16%
of the respondents were from Facility or property management department and information
technology department respectively.

Experience of respondent on their current job is shown that 63% of the respondents have more
than three years of work experience on their current job. Thus, the survey response can be relied
upon data gathered from these groups to reflect the current practice and understanding of
outsourcing with in the banking sector.

Table 3: Educational level and experience of respondents

Educational Level Total

Experience College First Second Degree &
Frequency Percent
Diploma Degree above
Below 1 year 2 2 4 5
1 – 5 years 1 7 11 19 26
6 – 10 years 22 2 24 32
Above 10 years 24 3 27 36
Frequency 3 55 16 74 100
Total
Percent 4 74 22 100

The above table presents information relating to personal attributes of the respondents in relation
to education and job experience. With regard to experiences 68% of the respondents have more
than five years of experience. The respondents are well educated in which 96% holding at least a
first degree and all the respondents occupying senior officer and management positions. This
suggests that all the respondents were well versed with the policies and operations of the bank,
and have good understanding in outsourcing decisions within their organizations.

40
Table 4: Respondents age and sex

Respondents Age Total

Respondents Sex Below 25 26 – 35 36 – 55 Above 55

Frequency Percent
years old years old years old Years old
Male 2 32 8 1 43 58
Female 21 10 31 42
Frequency 2 53 18 1 74 100
Total
Percent 3 72 24 1 100

From the above table about 58% respondents are male the least amount 42% are females. The
age majority of the employees are between 25 than 35 years old which comprise 72% of the
respondent and 24% of them aged within 36 to 55 years. This shows respondents of the study
have a good mix of sex as well as age groups.

Generally from the details of background information of the respondents it is possible to

conclude that respondents of the study have good experience and educational background and
have a good mix of sex as well as age groups that help to have better complete perspectives of
outsourcing that would be reflected on their perceptions.

4.1.2 Trend and practice of outsourcing

4.1.2.1 Outsourcing concept awareness level in banking sector

To assess the awareness level of bank staffs about the concept of outsourcing, respondents are
asked to reflect their observations of subordinate and supervisors level of awareness in ranging
from very high to very low. Result of respondents summarized in figure 2.

41
Figure 2: Awareness levels of bankers about outsourcing

60

50 48

40

30 28
25 Higher position Staffs
Low position staffs
20 18
13
10 8
5
3
0 0
0
Very High High Medium Low Very Low

According to figure 2, majority of the respondents believe that their subordinates as well as their
supervisor have more than medium level of awareness about the concept of outsourcing. Thus,
the result shows bank staffs have reasonable level of awareness about the concept of outsourcing.

Awareness among organizations staffs to a strategy is important for the strategy successful
implementation. Hence the above medium level of awareness on the bank staffs will have its
own positive impact on success of outsourcing strategy.

4.1.2.2 Trends of outsourcing practice

Globally, according to Federal Bank of New York (1999) the financial services sector show a
gradually growing trend in outsourcing, both in terms of nature and scope of activities
outsourced. To assess the future trend of outsourcing practice in Ethiopian banking sector
respondents are asked their perception of future potentials of outsourcing.

42
Figure 3: Future
uture growth of outsourcing

Future trend of outsourcing

Increasing
4% 12%

Stay constant

16%
Decreasing

68%
Do not know

Figure 3 show that 50 respondent which is 68% of the respondents believe that outsourcing
practice is increasing. The other 16% of the respondents believe that outsourcing services
serv will
not be change within the bank in the future or it will stay constant.

4.1.3 Perception of bank managers and senior officers to outsourcing benefits

The perceived benefits associated with outsourcing strongly influence managers' intention to
outsource
utsource business processes. Hence revealing the perceptions of decision makers and their
subordinates in outsourcing is important to identify the reasons of currently outsourced activities
as well as future trends of outsourcing practices. The perceptions of respondents on the degree of
expectation of benefits from outsourcing were asked and measured using five
five-point likert scale
(Scale: Very high to Very Low). Table 5 shows the result.

43
Table 5: Perception of bank managers and senior officers to outsourcing benefits

Std.
N Mean Mode Rank
Deviation

Achieve better focus on core

74 3.68 4 1.366 1
competencies (core business)

Cost shifting (from ‘fixed’ to

74 3.62 3 1.003 2
‘variable’)

Management convenience
74 3.54 4 1.088 3
(spreading risk)

cost cutting 74 3.51 4 1.208 4

Improved operational efficiency 74 3.49 4 1.010 5

Improved customer service 74 3.41 3 1.134 6

Access to new and updated

74 3.41 4 1.158 6
technologies on continuous basis

Access to new capabilities and

74 3.41 4 1.271 6
skill sets.

Process improvement
(restructuring and process 74 3.38 3 1.030 9
standardization)

Improved business intelligence 74 3.30 4 1.362 10

Introduce new products/services

74 3.19 3 1.401 11
(with quick time-to-market)

Overall outsourcing benefits 74 3.49 4 .798

The results of the questionnaire responses on perceived benefits of outsourcing are shown in
Table 5. The respondents are generally in agreement that outsourcing process brings benefits to a

44
bank. The mean value of 3.49, mode 4, and 0.798 SD, on five point likert scale for overall
benefit for the organization indicates that respondents expected high level of outsourcing
benefits.

The analysis further shows that the main motivation for outsourcing comes from the perception
to achieve better focus on core competencies (core business), with mean value 3.64 ans mode
value 4 represent high degree of expectations on outsourcing benefit. Cost shifting (from ‘fixed’
to ‘variable’) mean (3.62), mode (3) and SD 1.003, and Management convenience (spreading
risk) mean (3.54), mode (4) and SD 1.088 are ranked second and third next to focus on core
business. Introduce new products/services and improved business intelligences are the least
expected benefits of outsourcing.

Finding of Seth and Sethi, (2011) also supports this finding where managers want to engage their
internal staff in strategic functions and entrust the routine and non-core functions to third party
service providers. Recognizing the fact that senior management needs to get out of mundane day
to day processing work and focus instead on strategic planning, core competencies, customer
satisfaction and decision making, a number of large companies, across globe have begun
selecting for outsourcing of their HR services.

According to Gewald and Dibbern (2005), cost advantages are the prevailing reason why
corporations choose to outsource parts of their business. But their study in German banking
sector shows that business value seems to be replacing cost reduction as the main motive for
outsourcing.

4.1.4 Perception of bank managers and senior officer for risk related to Outsourcing

The degree of perceived risk due to outsourcing was asked to respondents on the likert scale
(Scale: Very high to Very Low). The insight gained in this study is the ranking of the different
risks from Ethiopian context instead of merely naming them.

45
Table 6: Perception of bank managers and senior officers for risk related to outsourcing

Std.
N Mean Mode Rank
Deviation

Data security 74 3.46 4 1.184 1

Data confidentiality 74 3.41 4 1.158 2

Loosing process control 74 3.32 3 .995 3

Regulatory violations and

74 3.27 4 1.138 4
legal obligations
Complexity in vendor
74 3.27 3 .983 4
relationship management
Unable to realize expected
74 3.24 3 1.057 6
deliverables/benefits
Increased management
74 3.22 4 1.174 7
complexities

Over reliance on vendors 73 3.16 3 1.093 8

Overall outsourcing risks 74 3.35 4 .818

Analysis of the section on the level of outsourcing risk indicates that the highest expected risk
from outsourcing are data security and data confidentiality in the banking sector in Ethiopia with
mean value of 3.46 and 3.41 respectively and mode value 4 which is above normal degree of
outsourcing risk expectations. The perception of high degree of outsourcing risk of data-related
risks (Data security, Data confidentiality) may be explained by the seriousness the banks attach
to the principle of confidentiality and the sensitivity of banks customer data.

46
Over reliance on vendors and increased management complexities are the least degree of risk
attached to them. Possible reason for the least degree of risk attached to Management and policy-
related risks (Losing process control, Regulatory violations and legal obligations, Complexity in
vendor relationship management, Over reliance on vendors, Increased management complexities,
Unable to realize expected deliverables/benefits) may be believes of banks internal capacity to
manage and to substitute outsourced services easily.

4.1.5 Major Roadblocks of outsourcing

To implement outsourcing as a strategy there are challenges from various points. These
challenges impact vary from country to country from sector to sector. Degree of impact of major
Roadblocks for Bank to outsource were asked and measured using likert Scale (Very high – 1,
High – 2, Neutral – 3, Low – 4, Very Low – 5).

Table 7: Outsourcing obstacles Level of impact

Std.
N Mean Mode Rank
Deviation
Absence of matured vendor
74 2.24 1 1.373 1
market
Size and scale of the
74 2.35 1 1.349 2
operations/organization

Infrastructure inadequacy 74 2.38 2 1.392 3

Regulatory and policy

74 2.54 2 1.295 4
restrictions
Resistance from Employee
74 2.73 3 1.436 5
union
Overall roadblocks of
74 2.46 2 1.113
outsourcing

47
Table 7 shows that ‘Absence of matured vendor market’ is the highest roadblock to outsource
with 2.24 mean values that nearly equal to high degree of impact it has on outsourcing. Size and
scale of the operations/organization the second most challenger for outsourcing with the mean
value of 2.27. In the same way Resistance from Employee union is the least barrier for
outsourcing with the mean value 2.70 and Regulatory and policy restrictions is also less barrier
with the mean value of 2.51.

This finding strengthens the finding of (Kumar and Natarajan, 2011 cited in Adeleye et al., 2004)
outsourcing among Nigerian banks that the non-availability of a matured vendor market can be a
big roadblock which not only impedes the outsourcing activities but also contributes to the
vendor-related risks of outsourcing.

According to Kumar and Natarajan, (2011) Reserve Bank of India developed initiatives to
provide a stable and reliable framework for banks to adopt outsourcing practices. But the
restrictions imposed by these regulations were stringent enough to call for concerted efforts to
remain compliant on the part of both the banks as well as the outsourcing service providers; thus
posing a serious roadblock to engage in outsourcing activities. In highly unionized employee
resistance from employee unions can also be a serious impediment to outsourcing (Kumar and
Natarajan, 2011).

Based on the above discussion it is possible to infer that lack of matured vendor market is major
obstacle for outsourcing in Ethiopia.

4.1.6 Criticality of outsourcing as a business strategy

The perceptions of experts, senior officers and managers regarding the criticality of outsourcing
as a business strategy presented in figure 4. The figure shows that 38% of the respondents
believe that outsourcing is a critical business strategy for their banks. In the same way 38% of
respondents expressed outsourcing as basic strategy for banks and still 19% of them consider
outsourcing as it is not so critical. Outsourcing is a critical aspect of financial institutions to
survive in today’s business environment (Federal Bank of New York 1999).

48
Figure 4: Criticality of outsourcing as a business strategy

40.% 38%

35.%

30.%
24%
25.%
19%
20.%
14%
15.%

10.%

5.%

0.%
very critical critical neutral Not so critical Not at all critical

4.1.7 Chi square test

The relationship among expected benefits of outsourcing, perceived risk of outsourcing and
perceived roadblocks with criticality of outsourcing as business strategy of variables is tested.

4.1.7.1 Expected benefits of outsourcing Vss criticality of outsourcing as business strategy

The result for the test for independence between perceived benefits of outsourcing and the
perceived criticality of outsourcing as a business strategy obtained from the SPSS
SP
experimentation is shown below.

49
Table 8: Chi square test result of Perceived benefits of outsourcing Vs criticality of outsourcing
as business strategy

Criticality of outsourcing as a business strategy Total

Not so Neutral critical Very
critical critical
Low 6 2 0 0 8
Neutral 0 10 16 2 28
Outsourcing benefits
High 4 8 10 10 32
Very high 0 2 2 2 6
Total 10 22 28 14 74

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 40.645 9 .000
Likelihood Ratio 37.868 9 .000
Linear-by-Linear Association 11.224 1 .001
N of Valid Cases 74

As the calculated Chi square result, 40.645 is greater than the critical value (tabulated Chi square
value at α= 0.05 with 9 degrees of freedom (16.919), we reject the null hypothesis. Therefore, it
is possible to conclude that there is a relationship between benefits of outsourcing and criticality
of outsourcing as business strategy.

4.1.7.2 Perceived outsourcing risks Vs Criticality of outsourcing as a business strategy

The result for the test for independence between the level of expected risks from outsourcing and
the perceived criticality of outsourcing as a business strategy obtained from the SPSS
experimentation is shown on table 9.

50
Table 9: Chi square test result of perceived outsourcing risks Vs criticality of outsourcing as a
business strategy

Criticality of outsourcing as a business strategy Total

Not so critical Neutral critical Very
critical
Very low 0 2 0 0 2
Low 2 2 2 2 8
Outsourcing risks Neutral 4 10 12 2 28
High 2 8 14 10 34
Very high 2 0 0 0 2
Total 10 22 28 14 74

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 25.446 12 .013
Likelihood Ratio 21.412 12 .045
Linear-by-Linear Association 1.403 1 .236
N of Valid Cases 74

As the calculated Chi square result, 25.446 is greater than the critical value (tabulated Chi square
value at α= 0.05 with 12 degrees of freedom (21.026), we reject the null hypothesis. Therefore,
we conclude that there is a relationship between the level of perceived outsourcing risk and
criticality of outsourcing as a business strategy.

4.1.7.3 Roadblocks of outsourcing Vs Criticality of outsourcing as a business strategy

The result for the test for independence between perceived roadblocks of outsourcing and the
perceived Criticality of outsourcing as a business strategy obtained from the SPSS
experimentation is shown below.

51
Table 10: Chi square test result of perceived roadblocks of outsourcing Vs criticality of
outsourcing as a business strategy

Criticality of outsourcing as a business Total

strategy
Not so Neutral critical Very
critical critical
Not
0 0 2 2 4
applicable
Very low 2 2 0 2 6
Roadblocks of
Low 2 14 10 4 30
outsourcing
Neutral 4 4 12 4 24
High 0 2 4 0 6
Very high 2 0 0 2 4
Total 10 22 28 14 74

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 27.752 15 .023
Likelihood Ratio 32.634 15 .005
Linear-by-Linear Association .326 1 .568
N of Valid Cases 74

The calculated Chi square result, 27.752 is greater than the critical value (tabulated Chi square
value at α= 0.05 with 15 degrees of freedom (24.996), resulting to reject the null hypothesis.
Therefore, we conclude that there is a relationship between the level of the management support
(while works identify problems and give solution) and the perceived organizational success.

52
4.2 Findings from interview and its discussions

Interviews were made with four bank senior managers from each sampled banks, in order to
gather practical activities of outsourcing. From government banks property management
business process manager and corporate human resource development directorate director were
interviewed. From private banks human resource manager, procurement and facility management
directorate director and general service manager were interviewed. Semi structured interview
questions were prepared to gather more information from the respondent’s feedback. For the
purpose of presentation related questions and their responses are presented together in the
following manner.

1. When did you start outsourcing? What are outsourced services of the bank? What
activities are planned to be outsourced in the near future?

The experiences of outsourcing vary from bank to bank. According to interviewees response
outsourcing started within the range of seven to three years ago on their banks. CBE was started
outsourcing before seven years ago and DBE also started outsourcing five years back. But AB
and UB stared outsourcing three and two years ago respectively. Far from the others AIB did not
outsource any of commonly outsourced service for external service providers with the exception
of vehicle maintenance. Generally government owned banks are relatively started outsourcing
early than private banks. This variation may be due to their establishment period; government
banks are older than the private banks. Therefore outsourcing practice in banking sector in
Ethiopia is almost new as it is compared to global financial sector trends.

The four sampled banks with the exception of AIB started outsourcing with non clerical services;
specifically with security services.AIB outsource vehicle maintenance. The other service areas
mostly outsourced by banks currently are cleaning services, supply of labor for messenger
services and other temporary support works. Information technology services are not considered
by the respondents as a real outsourcing deal rather they consider it as one time purchase. But
one respondent mention that implementation of core banking software was outsourced partially
for Indian firm for three years of contractual agreements to provide technical assistance, however

53
internal staffs were administering the whole process of implementations. Outsourcing of non
core business is varying among banks.

Respondents mention that Transportation service, Maintenance and servicing of car service,
Procurement activities, performance management, medical service, ATM, Card banking, external
recruitment, mail service, and drivers are planned to be outsourced.

In contrary to the above discussion one of the respondents said that currently there is no plan to
outsource other activities of the bank, rather due to management difficulty of vender
relationships they are considering turning back what they outsourced which is security services.
As the interviewee disclosed cleaning and messengers are outsourced in other banks but the bank
believes that outsourcing these services are too risky, since the documents exchanged between
offices are confidential as well as almost they are money.

Documents on bidding found at CBE reveal that, invitation for expression of interest on potential
outsourcing services show fifteen services that were selected for outsourcing. This includes
Cleaning Service, Audio Visual Service, External Recruitment & Selection Service, Building
Administration and Maintenance Service, Promotional Service etc. See appendix.

In relation to the service provider location, all venders are local companies that supplies non
clerical services like security, maintenance and cleaning services with exception of information
technology services provided by foreign company. In relation to number of vendors engaged by
banks; currently banks hire one vender for one service type and they engaged in contracts with
various venders for different services. This shows that at least more than two venders are being
managed by each bank. Duration of the engagement is varying from contact to contract and
from bank to bank experience, but generally contract periods set between one to two years.

Another important dimension of outsourcing is the ownership of service providers engaged in

contracts. This is whether or not service provider has financial and other stakes with the
outsourcing company. Based on this dimensions CBE works with its own subsidiary company.
Private Banks are engaged in the procurement of a service from a legally independent entity

54
(third party vendor). Interviewee responses regarding outsourced service are summarized in to
tables 11.

Table 11: Summarized current status of outsourcing services

Already Under Not considered Reintegrate

Function
Outsourced consideration For outsourcing Functions
Human Resource Functions 1 3 1
Promotion and Marketing
1 1 3
functions
Information Technology
1 1 3
functions
Maintenance services 2 3
Security services 4 1
Cleaning /Janitorial services 3 1
Transportation services 4 1
Procurement and logistics
3 2
services

Table 11 shows the level of currently outsourcing for each function. The level of outsourcing
was captured using for constructs, dependent upon whether the bank; already outsource the
function, is under consideration, has decided against or reintegrate a particular function with
others.

Analysis of the section on the level of outsourcing indicates that security function and janitorial
functions are the most outsourced in the banking sector in Ethiopia all interviewees indicating

55
that their banks have already outsourced the functions. The high rate of outsourcing of these
functions may be explained by the emergence of private companies offering the services.

According to Barako and Gatere (2008) ATM services and card processing are the most
outsourced function in Kenyans banking sector. Literature on outsourcing states a significant
portion of activities that are outsourced globally by different organizations across different
industries in different countries, are horizontal business activities, e.g., customer care, payroll,
recruitment, training and development, etc. (Prasad et. al, 2011).

Whereas according to Kumar and Natarajan (2011) the outsourcing practices of Indian banks
shows that they have serious reservations in outsourcing their horizontal business activities. They
preferred not to outsource their customer care and technical help desk activities, Sales and
marketing activities, activities that involve direct dealing/interaction with the customer (e.g.,
sales, marketing, customer care etc.).

From the above discussion it is possible to infer that the level of outsourcing in Ethiopian banks
is at its infant stage in terms of type of outsourced services which limited to non clerical services
(security services, cleaning service, information technology services, and supply of temporary
labor services). However future growth seems to be expanding towards basically supporting
activities that are common across industries independent of the nature of the business of an
organization.

Banks do not consider software purchasing and implementation as outsourcing, information

technology services are outsourced partially for foreign and local companies for its
implementation and technical supports. Outsourcing is more common in information technology
for services that have usually been regarded as intrinsic to managing a business. In some cases,
the entire information management of a company is outsourced, including planning and business
analysis as well as the installation, management and servicing of the network and workstations
(Gewald et. al, 2006).

2. What was the motive to outsource?

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In relation to driving force to outsource interviewed participants mentioned management
convenience, focusing on core business, and cost saving as a motivational factor for outsourcing.

Management convenience; the main motive for outsourcing those non clerical services are
administrative issue. Management of non core functions and administering non clerical staffs are
highly difficult. There was high absenteeism with the reason of sick leaves, they don’t arrive on
time on their jobs, managing their benefits’ was very routine in relation to their uniforms,
insurance, medical and the like. Management of non clerical benefits, government regulations,
programs and follow up of their performance are routine and takes more time of managers. As
one interviewee said on average seven security guards are hired for a single branch. The process
of hiring and administering is quite difficult as compared to clerical staffs considering their level
of contribution for bank competency and lack of qualified professionals. Other issue raised is
that in our country there is lack of proper certification and professionalism in non clerical
services like cleaning, security guards and massagers. Handling and managing these personnel
are difficult for bank managers. Outsourcing is a good ways of handling these services by
external expertise.

Focusing on core function is the other main driving force for outsourcing in banking sector of
Ethiopia. The other major motive of the bank to outsource is to focus on core business.
Interviewee from CBE said that the bank has a vision to be a world class commercial bank by
year 2025. In order to realize its vision the management as well as its staffs should focus on
strategically important core areas of the bank. Outsourcing noncore activities to external service
providers who has a competency and economic scale advantage is a critical strategy of the bank.
The other respondent discussed that the bank is new and it wants to be internationally competent
bank. To be nationally and internationally competent bank, global thinking is important and one
of the currently applied strategies of management is outsourcing. The respondent’s views are
supported by Kim and Won (2007) conclusions that by outsourcing noncore activities for vender
organizations, clients can focus on their core activities that give them competitive advantage and
improve overall performance.

57
Based on interviewees response cutting cost was not the main driver for outsourcing. However
cost saving is considered for decision to outsource a business activity. Some of mentioned costs
saved from outsourcing are Insurance, medical, training and development, uniform, and the like
cost for non clerical staffs. Interviewee from AB discussed that internally there was a high
demand for outsourcing since the bank is new it has no own facilities. Most of the offices are
rented and there is a problem of facility in general. Hence cost cutting is one of the major drivers
for outsourcing.

From the above discussion it is possible to infer that management convenience, and focus on
core activities are major reasons for outsourcing. However cost cutting is also reason for
outsourcing, yet it is not the major motive for outsourcing. There is no difference between
government banks and private banks in terms of outsourcing drivers. This varies from the
conclusion of (Kakabadse and Kakabadse, 2000a, cited in Kremic et. al., 2006) that Cost and
strategy motivations commonly drive outsourcing by private organizations and political agendas
often drive outsourcing by public organizations.

Generally from both results of questionnaire and interview, unlike other studies, this research
found that cost reductions are not the key driver for outsourcing, but the ability to focus on core
competencies and management convenience are the main factor for outsourcing. Increased cost
transparency which is cost shifting from fixed to variable also turns out to be more important
than pure cost reduction. Overall, this finding is similar with findings of Gewald and Dibbern
2005; study on German Banking Industry, over the Influential Role of Perceived Risks versus
Perceived Benefits in the Acceptance of Business Process Outsourcing. German banks can be
seen to favor business value over cost reductions in business process outsourcing engagements.

3. What was the process of outsourcing?

The response of interviewees on their bank experience regarding the process of outsourcing is
more or less similar. In terms of handling outsourcing contracts CBE is relatively more
organized and a separate outsourcing management offices are established. Other banks facility
and property management business unit or general service unit handles the administration and

58
follow-up of the outsourcing contracts for currently outsourced services which are security and
cleaning services. Decision to outsource an activity is done by Top management of banks.

The first step for outsourcing is identification of potential business activities for outsourcing.
According to interviewee the basic evaluation criteria used were whether the service is core
business of the bank or not and the competency level of the bank. Mandate of the bank and
strategic importance of the business are the basic factors for weight the business as Core business
of the bank. Level of competency of the bank over each service are also based on various factors
such as the internally available and required material and human resource, Cost Savings,
Improve service level, Reduce risk, Control of budget, Lower ongoing investment, requirement
in internal infrastructure, Increase flexibility to meet changing business conditions, Acquire
innovative ideas. Generally less strategic activities that show low internal performance are more
likely to be outsourced (Beaumont and Sohal, 2004).

Based on the assessment potential outsourcing services selected then using bidding process
service provider was selected. Secondary analysis of documents show that CBE was invited for
expression of interest bid for those potential outsourcing services identified as potential
outsourcing business activities. Bidding document on outsourcing services of CBE shows fifteen
services that were selected for outsourcing see appendix.

Biding selection criteria (evaluation measurement) were as follows 30% financial aspects; price
for the service and 70% technical aspects which includes; management experience; past
performance of reference; organizational structure; human resource organization; proportional
salary payment for outsourced staffs.

From the above discussion of interviewee’s responses and documents analysis we can deduce
that outsourcing decisions were made by top managements. Assessment of potential activities
based on the competency and core activities are seen from banks. Outsourcing like any other
purchasing process bidding procedure is applied to select the right service provider.

59
To sustain the positive benefits that it brings to the organization, it is important to have a well
managed plan of action for the outsourcing process. This includes deciding which activities or
tasks to outsource, which companies should be hired to perform these tasks, how to manage the
outsourced business process, how to agree on payment terms, and how to ensure that the desired
results are achieved (Beaumont and Sohal, 2004).

For question raised, what was any firing of staffs due to outsourcing, Interviewees disclosed that
no single individual is fired. Due to natural process, the number of staffs in those areas of
service to be outsourced decreased. Some of them were retired, others who upgrade themselves
promoted and others are dead and the size of non clerical staffs decreased. In the mean time
contractual bid was made and a service provider was selected to fill the gap. Partial outsourcing
was applied and through time as internal staffs decrease the service provider supplies the
required amount of labour and fills the gap.

4. Is there any challenge to outsource from the market?

Currently banks outsourced some of non clerical services that have relatively good supply and
ability from the market. These activities are Janitor service and security guard service. These
services are currently provided by the market with some level of competency. There are
challenges from the market. In most of the services, there is lack of well qualified service
provider. Example mentioned by interviewee that transportation service was planned to be
outsourced but from the market assessment there are some venders that render the service but
their services are not guaranteed in terms of quality. So the bank decided to postpone outsourcing
of transportation. In relation to cleaning, messenger, security service there are considerable
number of venders with different capacity and experiences.

Based on what the banks outsource specifically to security and cleaning service there are a
number of challenges. During bidding time there were a number of service providers and they
presented their capacity and win the contract. But after contractual agreement is signed their
focus will be money only. They are not professionals, they are not organized and they don’t have
proper controlling system. Their HR is not strong, and even there is nepotism within the

60
organizations. In order to maximize the profit, service providers have contracted with many
companies beyond their capacity as a result they offer service which does not meet their
customers’ expectation.

Lack of ownership and belongingness is the major challenge faced by banks from the outsourced
staffs. Service providers focus on money making. Hence, they pay less salary for their staffs and
due to this and other management problems there is high turnover. In addition, in order to fill
their financial needs outsourced staffs work more time in various organizations beyond
acceptable working hours and they get tiered to give the required service efficiently.

One interviewee mentions that currently one service providers are giving security services in
branch of the bank at Addis Ababa and Mekele only. On the other regions of the country the staff
performs the activity. The main reasons are first they are very expensive to give service out of
Addis Ababa. Secondly they are required to have license from the region to give this service on
those specific areas.

Interviewee from CBE said that out of fifteen potentially outsourcing activities that CBE invited
for bidding none of the services have qualified and competent service provider were presented as
to the level of competency the bank expected. The market is very weak to provide quality
service with required capabilities. Due to this CBE currently engaged in contract with its own
subsidiary company CN so that it can support the company to get the required level of services.

Accordingly interviewee from AIB disclosed that the main reasons not to outsource what
commonly outsourced services by other banks like cleaning and security services are lack of
qualified service providers from the market. Study was conducted by General services
department together with system reengineering division on the experience of other banks and the
market. Based on the assessment it is concluded that currently challenge and risk of outsourcing
outweighs the benefit hence in sourcing is the better approached. If there is professional service
provider with strong capacity in terms of financial technical and human resources, the bank will
outsource some of non clerical services. This idea was also expressed by other interviewees.

61
5. What benefits bank gets from outsourcing? Are you satisfied with performances of
service provider?

According to the interviewee’s response managers and internal staff free time for more strategic
activities, cost saving, and external expertise management are the major benefits gained from
outsourcing.

Banks achieved the expected benefits of outsourcing in two aspects. The first one is the
administration burden of managing non clerical staffs are decreasing as compared to the previous
times. Now, in outsourcing, bank is required to give payments for the service provide as per the
contract and service delivery. Hence management time are free for more critical jobs than before
even though managing outsourcing contract by itself has some challenges.

The second benefit the bank realized is cost reduction. Hiring, training, insurance, bonus,
medical, overtime, uniform, education fees and annual leaves are costs that are reduced due to
outsourcing.

In terms of service quality they are more of professionals and the company substitute inefficient,
absent employees easily.

Satisfaction level of respondents of outsourcing service varies. Some of them are satisfied by
comparing the challenge of internal staff management and service quality. Others are not
satisfied; mentioning that vendors are not delivering what is expected by their banks. Therefore
the variation in the satisfaction level of respondents regarding the outsourced services may be
due to either the variation of service level provided by different service providers or the variation
of expectation level of the banks.

6. What actions does the bank take to overcome risk and challenges of outsourcing?

To build the trust and belongingness of service provider’s staffs and management the banks
invites them in ceremonial events like annual bank day and special events. The banks also

62
provide training on the bank vision missions and also customer handling to vendor staffs. Even
some of the equipments are provided by the banks to support the capacity of contracted
companies and smoothing of the services.

Specific to security services issues; there is continuous meeting of banks with bank association.
Through these meetings it is proposed that security service provider will be graded based on their
capacity and performance from government and the banks are suggested to hire grade one
security service providers.

Interviewee from private bank indicates that even if the bank does not organize separate section
of outsourcing like CBE, facility management business process is responsible for the follow-up
and control of outsourced service performance. Policy and procedures are being developed;
proper specialized staffs are being hired to follow specific outsourced service for example chief
security officer for security services.

Respondent from the CBE states that the first outsourcing periods there were private service
providing companies that provides on security and cleaning services. In order to minimize risks
and related challenges from the market, the bank is now working with commercial nominees,
which is a subsidiary company of the bank. CN is now providing security, cleaning, messenger
and temporary non clerical man power services. The bank also established and organized on
section office “outsourcing management office” that administer outsourcing contracts and
manages related activities. In order to follow up the quality of service provided, the bank
assigned its own security manager that control the overall security level of the bank that makes
sudden check-up the attendance of the outsourced staffs.

63
 CHAPTER FIVE

SUMMARY OF FINDING, CONCLUSIONS & RECOMMENDATIONS

This chapter is divided in to three sections. The first section presents the summary of findings,
second section is conclusion of the research and the last section suggests important points for
future researches.

5.1 Summary of findings

The general objective of the study is to find out challenges and opportunities of outsourcing
practices in banking industry of Ethiopia. The study tries to shows the current practices of
outsourcing within the banking industry by assessing the trends; identification of which activities
of the banks are outsourced; the perceptions of bank management toward benefits and risks of
outsourcing, the significance of outsourcing as a business strategy; and the major obstacles to
outsource. In order to address these issues a descriptive type of research methodology is used.
Both questionnaire and interview were applied to gather primary data. Documentary analysis
also made from secondary data. Using SPSS software descriptive statistics such as percentage,
mean, standard deviation and rank are applied on the analysis.

According to the discussion and analysis of the data presented in chapter four, the findings of
research shows:

1. Majority of the respondents believe that their subordinates as well as their supervisors
have more than medium level of awareness about the concept of outsourcing.

2. Majority of respondents 68% believe that there is an increasing practice of outsourcing.

However considerable amount of study participants do not see the future potential of
outsourcing practice.

3. The mean value of 3.49 on five point likert scale represent high degree of outsourcing
benefit expectation in 0.798 SD for overall benefit for the organization indicates that

64
 respondents do consider the benefits from outsourcing as significant. Achieve better
focus on core competencies (core business), Cost shifting (from ‘fixed’ to ‘variable’) and
Management convenience (spreading risk) are expected benefits of outsourcing ranked
first , second, and third with the mean value of 3.68, 3.62, 3.54 and standard deviation
1.366, 1.003 and 1.088 respectively. Introduce new products/services and improved
business intelligences are the least expected benefits of outsourcing.

4. Management convenience, and focus on core business are the main motives of
outsourcing. Cost saving also considered for outsourcing decisions but it is not the major
driver for outsourcing. There is no difference between government banks and private
banks in terms of outsourcing motivation.

5. The highest expected risks from outsourcing are data security and data confidentiality in
the banking sector in Ethiopia ranked first and second respectively. In contrary over
reliance on vendors and increased management complexities are the least degree of
expected risk due to outsourcing.

6. Absence of matured vendor market is the highest roadblock to outsource nearly equal to
high degree of impact it has on outsourcing. Size and scale of the operations/organization
the second most challenger for outsourcing. In the same way Resistance from Employee
union is the least barrier for outsourcing and regulatory and policy restrictions are also
fewer barriers to outsource.

7. The perception of experts, senior officer and managers regarding the criticality of
outsourcing as a business strategy shows that 38% of the respondents believe that
outsourcing is a critical business strategy for their banks however considerable number of
respondents does not see outsourcing as a critical strategy.

65
8. Null hypothesis proposed on the study are rejected hence, Perceived outsourcing benefit,
perceived outsourcing risk and perceived roadblocks of outsourcing have a relationship
with perceived criticality of outsourcing as a business strategy.

9. Outsourcing practice in banking sector in Ethiopia is almost new as compared to global

financial sector outsourcing trends. Outsourcing practice started with in seven to three
years that vary from bank to bank but state banks started earlier than private banks. Level
of outsourcing practice varies among banks.

10. Currently outsourced service are limited to non clerical services which are security
service, cleaning services, supply of temporary labours for messengers and vehicle
maintenances.

11. Other horizontal activities like transportation service, maintenance and servicing of car
service, procurement activities, performance management, medical service, ATM, Card
banking, external recruitment, mail service, and the like are planned to be outsourced in
the future.

12. Generally banks are considering outsourcing as one of a strategic issue that decision are
being made at the top management positions. Assessment of potential activities based on
the competency and core activities are seen from banks. Outsourcing like any other
purchasing process bidding procedure is applied to select the right service provider.

13. Managers and staffs free time for more strategic activities, cost saving, and external
expertise management are the major benefits gained from currently outsourced services.

14. There are challenges from the market. In most of the services, there is lack of well
qualified service provider. In relation to cleaning, messenger, security services there are
considerable number of venders with different capacity and experiences. But after
contractual agreement is done their focus is profit making only. Respondent disclosed
that they are not professionals, they are not organized and they don’t have proper

66
controlling system. And the other major challenge is lack of ownership and
belongingness from the outsourced staffs. Service providers focus on money making
hence they pay less salary for their staffs and due to this and other management problems
there is high turnover on vendor’s staffs.

67
5.2 Conclusion

The main purpose of the study is to find out challenges and opportunities of outsourcing
practices in banking industry of Ethiopia.

Outsourcing is a modern management technique, despite the reasonable level of awareness of

bank staffs about the concept of outsourcing, level of outsourcing is at its infant stage in terms of
type of outsourced services which is limited to non clerical services (security services, cleaning
service, information technology services, and supply of temporary labor services). The findings
also confirm that banks are willing to outsource non-core business functions, other than currently
outsourced business activities. But lack qualified service provider from the market is a big
barrier to outsource. Generally banks are considering outsourcing as one of a strategic issue that
decision are being made at the top management positions.

The main motivational factors for outsourcing are management convenience, and focus on core
business. Cost saving which is the major motive of outsourcing globally is not a major motivator
for Ethiopian banks. Expected benefits of outsourcing are significant among experts, senior
officer and managers of bank. Achieve better focus on core competencies (core business), Cost
shifting (from ‘fixed’ to ‘variable’) and Management convenience are highly expected among
other benefits. In relation to expected outsourcing risks; data security and data confidentiality are
highly expected that show lack of confidence on the professionalism of service providers. There
is variation in believe that outsourcing is a critical business strategy for their banks. Most of
respondents expressed outsourcing as critical strategy for banks and others consider outsourcing
as it is not so critical.

Finally, there are challenges from the market. In most of the services, there is lack of well
qualified service provider. In relation to cleaning, messenger, security services there are
considerable number of venders with different capacity and experiences. But Satisfaction level of
respondents regarding outsourcing services varies. Some of them are satisfied by comparing the
challenge of internal staff management and service quality. Others are not satisfied; mentioning

68
that vendors are not delivering what is expected by their banks. And the other major challenge is
lack of ownership and belongingness from the outsourced staffs.

69
5.3 Recommendations

Based on the analysis of results received from the questionnaire and also based on the interview
with the managers of sampled banks, the researcher would like to recommend the following
points

For banks and managers responsible for the implementation and management of outsourcing:

1. Focusing on the analysis and management of risks connected with outsourcing is vital for the
success of outsourcing strategy. An insufficient risk analysis can lead to the choice of a bad
partner, to outsourcing of the inadequate activity and to exposing the company to some
unnecessary threats. Risk scenarios allow the company to prepare for the uncertain future.

2. Some of banks do not deal properly with the management of the outsourced activity. The
outsourced activity should be monitored and managed. The company should have a complex
overview about the outsourced activity and the control over it. Implementation of
outsourcing is better realized with supervision and monitoring of outsourcing contracts.
Hence to it is better to organize a separate offices rather than attaching responsibility to
existing structure.

3. Indicators for assessment of the outsourcing efficiency are not being used very often.
Researcher recommends the implementation of indicators directly into the outsourcing
contract. Both the provider and customer should be involved in the efficiency monitoring.
Monitoring of the outsourcing efficiency is crucial for a successful outsourcing project.
Without such data, the bank is not able to assess the costs increase/decrease after
outsourcing.

For service providers how engage in outsourcing contracts

4. Clients are becoming increasingly cautious regarding cost advantages. Therefore,

outsourcing offers should emphasize growth of business value not cost reductions. Clients

70
 tend to value quality factors like professionalism and meeting expected deliverables higher
than pure cost savings.

5. Taking the perceived risks finding into account, the major expected risk of outsourcing is
data security and data confidentiality; this implies lack of trust and positive attitude to the
service provider. Hence it is important that service providers should focus on this area to win
trust of their client. This could seem to be the key to gaining market share. This offers service
providers new ideas for the development of outsourcing proposals.

For financial supervisory bodies

6. For the financial supervisory bodies; they should aware of the potential of growth of
outsourcing in banking sector in Ethiopia and prepare legal directives regarding outsourcing
like other countries do ahead of time.

71
 BIBLIOGRAPHY

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13/04/2013 03:50
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• Delmotte J. and Sels L. (2008). “HR outsourcing: threat or opportunity?” Faculty of
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(Essentials series) Bulletin on Asia-Pacific Perspectives Includes index. ISBN 0-
471-70987-5 (pbk.)
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Business Process Outsourcing on Firm Performance and the Influence of
Governance A Long Term Study in the German Banking Industry”
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study of the German banking industry”. Strategic Outsourcing: An International
Journal Vol. 3 No. 2 pp. 89-105
• Gewald, H. and Dibbern, J. (2005), “The influential role of perceived risks versus
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evidence from the German Banking Industry”, Working Paper No. 2005-9, E-
Finance Lab, Frankfurt.
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on banking managers' intention to outsource business processes a study of the
German banking and finance industry”. Journal of Electronic Commerce
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Adopting Business Process Outsourcing: An Empirical Study”. International
Journal of Computer Science and Network Security VOL.7 No.10
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survey of benefits, risks, and decision factors”. Supply Chain Management: An
International Journal. Vol. 11 No. 6 pp 467–482
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• Maelah, R., Aman, A., Hamzah, N., Amiruddin R. and Auzair S. M. (2010). “Accounting
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APPENDIXES

75
 St. Mary University College
School of Graduates studies

Dear participants,
This questionnaire is prepared to collect data used for thesis entitled “challenges and
opportunities of outsourcing practice in the banking sector of Ethiopia” in partial fulfillment of
requirement for Masters of Arts Degree in Business Administration.

The information you provide is highly valuable to identify general practices, benefits, risks and
challenges related to outsourcing. I would like to assure you that the information you provide
will be used for research purpose only and all responses will be treated in strict confidentiality.

The researcher wants to forward his deepest gratitude for your keen cooperation.
• You are kindly requested to put “X” mark in the box that represents your opinion and the
right information.
Definition: - Outsourcing can be defined as ‘using an outside organization to carry out
activities previously carried out within the company’.

Section I: Personal Data

1.1 Ownership of your bank: Government Private
1.2 Designation: _____________________________
1.3 Your department :____________________________
1.4 Length of Service: On current Job ________________ total___________________
1.5 Highest Educational Qualification:__________________________
1.6 Age: ______________________________________
1.7 Sex: Male Female

Section II: General information on Outsourcing

2.1 What is the level of awareness about the concept of outsourcing on your subordinates?
Very high High Medium Low Very low
2.2 What is the level of awareness about the concept of outsourcing on your supervisor?

76
 Very high High Medium Low Very low

2.3 In the future do you believe the number of activities you outsource will?
Increase Stay Constant Decrease Don’t Know

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

S. No. Benefits of outsourcing Degree of Expectation

5 4 3 2 1 N.A
1 Cost cutting
2 Improved operational efficiency
3 Improved customer service
4 Achieve better focus on core competencies (core business)
5 Cost shifting (from ‘fixed’ to ‘variable’)
6 Access to new and updated technologies on continuous basis
7 Access to new capabilities and skill sets.
8 Process improvement (restructuring and process standardization)
9 Introduce new products/services (with quick time-to-market)
10 Management convenience (spreading risk)
11 Improved business intelligence
12 Any other, please specify

N. A. – Not Applicable

Section IV: Please indicate the ‘degree of perceived risk’ of the following risk elements due to
outsourcing. Scale: Very high – 5, High – 4, Neutral – 3, Low – 2, Very Low – 1.
77
 S. Degree of Expectation
Elements of Risk
No. and /or experienced risk
5 4 3 2 1 N.A.
1 Data security
2 Data confidentiality
3 Loosing process control
4 Regulatory violations and legal obligations
5 Complexity in vendor relationship management
6 Over reliance on vendors
7 Increased management complexities
8 Unable to realize expected deliverables/benefits
9 Any other, please specify

N. A. – Not Applicable
Section V: Please indicate the Major Roadblocks for your Bank to outsource, and the ‘degree of
impact’ they have on the management decision to outsource. Scale: Very high – 1, High – 2, Neutral
– 3, Low – 4, Very Low – 5.
S. 1 2 3 4 5 N.A.
Degree of Roadblocks Impact to outsource Yes No
No.
1 Infrastructure inadequacy
2 Regulatory and policy restrictions
3 Resistance from Employee union
4 Size and scale of the operations/organization
5 Absence of matured vendor market
6 Any other please specify

N. A. – Not Applicable
Section VI: Please indicate the ‘degree of criticality’ for adopting outsourcing as a business
practice for your organization. (Please put [X] in the appropriate cell against each question)

78
Very Critical Critical Neutral Not so critical Not at all critical

Any other comments/suggestions

______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________________

Thank you,

79
 Semi structured Interview questions

St. Mary University College School of Graduates studies

This semi structured interview question is prepared to collect data used for thesis entitled
“challenges and opportunities of outsourcing practice in the banking sector of Ethiopia” in
partial fulfillment of requirement for Masters of Arts Degree in Business Administration. The
information you provide is highly valuable to identify general practices, benefits, risks and
challenges related to outsourcing.

1. What are outsourcing contracts your organization has awarded in the last 5years? Please specify the
activity outsourced, and how many year of contract agreement is signed?
2. When did you start outsourcing? What is the bank motivation for outsourcing? How is the process of
outsourcing?
3. How is one business activity proposed for outsourcing? Who made the decisions? How much
participation of concerned staffs considered? What is the labour union reaction?
4. What difficulty faced to outsource externally as well as internally?
5. In what bases service provider are selected? Are the service providers foreign or local company?
6. What benefits your organization realizes due to outsourcing? What risk faced/potential risks?
7. How is the relationship of the service provider in terms of contractual agreements? Are service
providers performing to the require standards? Who follow their performance?
8. How is the level of interaction and integration between the service provider staffs and the bank
staffs? Are you satisfied with currently outsourced services performance?
9. Is there any return back decision made on outsourced business process (interrupted, renegotiated, or
prematurely terminated)? Why?
10. Is there a risk management framework for outsourcing by the bank? Does government has regulatory
guideline on outsourcing?

80
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82
 DECLARATION

I, the undersigned, declare that this thesis is my original work, prepared under the guidance of
Tilaye Kassahun (Phd). All sources of materials used for the thesis have been duly
acknowledged. I further confirm that the thesis has not been submitted either in part or in full to
any other higher learning institution for the purpose of earning any degree.

_________________________ ______________________
Name Signature& Date

83
 ENDORSEMENT

This thesis has been submitted to St. Mary’s University College, School of Graduate Studies for
examination with my approval as a university advisor.

_________________________ ______________________
Advisor Signature& Date

84