Information systems outsourcing

Business Process Management Journal Information systems outsourcing: Motivations and the implementation strategy in a Malaysian bank Mohd Adam Suhaimi Husnayati Hussin Muzzafar Mustaffa

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Article information: To cite this document: Mohd Adam Suhaimi Husnayati Hussin Muzzafar Mustaffa, (2007),"Information systems outsourcing", Business Process Management Journal, Vol. 13 Iss 5 pp. 644 - 661 Permanent link to this document: http://dx.doi.org/10.1108/14637150710823138 Downloaded on: 19 May 2015, At: 23:26 (PT) References: this document contains references to 32 other documents. To copy this document: [email protected] The fulltext of this document has been downloaded 4973 times since 2007*

Users who downloaded this article also downloaded: Umesh Gulla, M.P. Gupta, (2011),"Deciding the level of information systems outsourcing: Proposing a framework and validation with three Indian banks", Journal of Enterprise Information Management, Vol. 25 Iss 1 pp. 28-59 http://dx.doi.org/10.1108/17410391211192152 Ravi Kumar Jain, Ramachandran Natarajan, (2011),"Factors influencing the outsourcing decisions: a study of the banking sector in India", Strategic Outsourcing: An International Journal, Vol. 4 Iss 3 pp. 294-322 http://dx.doi.org/10.1108/17538291111185485 Mary C. Lacity, Leslie P. Willcocks, Joseph W. Rottman, (2008),"Global outsourcing of back office services: lessons, trends, and enduring challenges", Strategic Outsourcing: An International Journal, Vol. 1 Iss 1 pp. 13-34 http://dx.doi.org/10.1108/17538290810857457

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Information systems outsourcing Motivations and the implementation strategy in a Malaysian bank

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Mohd Adam Suhaimi, Husnayati Hussin and Muzzafar Mustaffa Faculty of Information and Communication Technology, International Islamic University Malaysia, Kuala Lumpur, Malaysia

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Abstract Purpose – This paper aims to aid in understanding the motivations for information system (IS) outsourcing decision and its initial implementation at one of the top commercial banks in Malaysia. The scope of the study includes the motivating factors, the implementation strategy and managing the change process. Design/methodology/approach – The study adopts a case study approach where 40 interviews were conducted among the staff, covering the management as well as non-management group. Findings – The findings of the study indicate that the motivating factors are the focus on core competencies, turning non-profit activities into profit-generating activities, and cost reduction. The implementation strategy involves the setting up of a two-tier relationship between the bank and the service provider. The challenges involved in the transition phase include managing the partnership and handling the staff transition and morale. Research limitations/implications – To some extent, there may be some subjectivity involved in interpreting the results of analysis, as with any other studies that adopt a case study approach. Practical implications – Amidst the complexity involved in any IS outsourcing endeavour, the management of a bank may learn some lessons from the experience reported in this study. At the initial stage, the bank should be concerned with the approach in establishing the partnerships and staff matters should not be undermined. Originality/value – The study provides a real life example of IS outsourcing implementation in the banking sector of a developing country. Keywords Outsourcing, Information systems, Banking, Malaysia, Communication technologies Paper type Research paper

Business Process Management Journal Vol. 13 No. 5, 2007 pp. 644-661 q Emerald Group Publishing Limited 1463-7154 DOI 10.1108/14637150710823138

Introduction Outsourcing of information systems (IS) services has exploded in recent years as many companies recognize its benefits ever since the landmark information technology (IT) outsourcing agreement signed between Eastman Kodak and service providers IBM, DEC and Businessland (Lacity and Hirschheim, 1995). Studies performed by Dataquest estimated global revenues for IS outsourcing have been growing at a rapid rate. A Dataquest report stated the outsourcing industry revenue to be $194 billion in 1999 and growing to $531 billion by 2002 (Young, 2000). Considering the market players, Lacity and Willcocks (2001) state that the most matured IS outsourcing partnerships are found in the USA. UK and Australia are said to be closely following the trend, followed by Western Europe and South America. The rest of the world, including Asia, is far behind. However, parts of the East Asia, including Japan, which initially resisted the trend, are now positively responding (Apte et al., 1997). This paper was selected from the International Conference on Innovations in Information Technology (IIT’05) held at Emirates Tower Hotel, Dubai, UAE in 2005, by Guest Editor Professor Nabeel Al-Qirim of the United Emirates University, UAE.

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IS outsourcing is taking place in private and public organizations, and affecting various industries. The banking industry represents one of the largest outsourcing markets in Japan (Goolsby et al., 2002). While there has been numerous researches conducted on IS outsourcing, only a few focused on the banking industry (McLellan et al., 1995; Ang and Cummings, 1997; Marcolin and McLellan, 1998; Baldwin et al., 2001; Goolsby et al., 2002). Furthermore, these studies were conducted in developed countries. This paper presents a case study of the IT outsourcing experience of one of the top commercial banks in Malaysia. The bank has become the first bank in Malaysia to outsource its IT function and the deal represents the largest IT outsourcing deal in Malaysia. As with most developing countries, there is a limited studies conducted on the practices of IT outsourcing in Malaysia. Yet, many large companies are embarking on IT outsourcing projects, and the Malaysian Government too is outsourcing most of the important national projects such as the Smart School, human resource management IS, and e-procurement project. The purpose of this study is to understand what drives a Malaysian bank to outsource its IS services, and how it implements the outsourcing strategy. The main themes of the study centre on a few fundamental questions: “What motivates the bank to implement IS outsourcing?” “What approach is adopted by the bank in implementing IS outsourcing?” “How does the IS outsourcing strategy affect their IT staff?” and “How is the outsourcing partnership managed?” It is hoped that the study filled the gap in providing insights on how a bank in a developing country adopts IS outsourcing. To achieve anonymity of the organizations under study, the bank will be referred to as ALPHA, the service provider as GAMMA and the intermediary company as BETA. Past research on outsourcing In the last 15 years, academic research on IS outsourcing has evolved rapidly. Dibbern et al. (2004) had attempted to synthesize the academic literature on IS outsourcing and offers a roadmap which highlights how the past works fits together under one umbrella. They have identified five major sourcing issues namely, why to outsource, what to outsource, which decision process to take, how to implement the sourcing decision, and what is the outcome of the sourcing decision. Since, the term “IT outsourcing” has been defined differently by different researchers, it is necessary to look closer at the IT outsourcing concept. IT outsourcing concept Various definitions of IS outsourcing has been found in the literature. Sengupta and Zviran (1997) refer the concept of IS outsourcing as “subcontracting part or all a company’s IS function to one or more external vendors”. Loh and Venkatraman (1992) defined IS outsourcing as “the significant contribution by external vendors provide in the physical and/or human resources associated with the entire or specific components of the IT infrastructure in the user organization”. Hirschheim and Lacity (2000) stated that IS outsourcing involves transferring IS assets, leases, staff, and management responsibility for delivery of services from internal IS functions to third-party vendors. Dibbern et al. (2004) after reviewing various definitions came up with their own definition which is “the organizational arrangement instituted for obtaining IS services and the management of resources and activities required for producing these services”. In addition to various definitions of outsourcing, many researchers also describe various outsourcing arrangements. This is related to Dibbern et al. ’s (2004) “what” issue. For example, Currie (2000) distinguishes four types of IT outsourcing decisions:

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(1) Insourcing (in-house sourcing). Retaining IS responsibilities as in-house functions, it is a relationship with the internal IS department. (2) Multiple selective sourcing. A more comprehensive type, it describes a relationship with one or more IS services suppliers for only parts of the IS services. (3) Total outsourcing. The most comprehensive type, it describes a relationship for all IS services, with one or more IS services supplies. (4) Strategic alliance/joint venture. Today’s outsourcing agreements are in the spirit of long-term (5-10 years) partnerships and alliance. Dibbern et al. (2004), after reviewing various options for IS outsourcing arrangements based on past literature, identify four parameters that determine the kind of outsourcing arrangement that a firm may enter into: (1) degree (total, selective, and none); (2) mode (single vendor/client or multiple vendors/clients; (3) ownership (totally owned by the company, partially owned, externally owned); and (4) time frame (short-term or long-term). The combination of degree and ownership results is various types of outsourcing arrangements: “spin-off” “joint ventures” “total outsourcing” and “selective outsourcing”. IS could be spun off into a separate services unit or company where the ownership is still internal but the function is either totally or selectively outsourced. An alternative arrangement is called “joint ventures” where the “spin-off” is jointly owned between the client and the vendor organization. In the case where ownership is given to the outsourcing vendor, if the outsourcing is of the “total” variety, it is referred to as “traditional outsourcing” and if it is selective, it is termed as “selective outsourcing”. On the other hand, the firm might wish to have total ownership of the IS function as termed as “insourcing”. The number of clients and the number of providers involved results in four types of vendor-client sourcing arrangements: (1) simple dyadic; (2) multi-vendor; (3) multi-client; and (4) complex relationship. Simple dyadic relationship is the simplest where a single vendor is involved with the client. Multi vendor arrangement is where the firm forms relationships with multiple vendors in order to mitigate the risks. On the other hand, several client companies in the same or related industry might form an alliance when obtaining services from a single vendor and this is termed as multi-client outsourcing mode. Additionally, several client companies may form an outsourcing relationship with more than one vendor, hence, the arrangement is called complex relationship. Motivations for outsourcing decision Reasons for IT outsourcing decisions have been studied by many past researchers. Until 1990, the driver for IS/IT outsourcing is the perceived potential of cost savings for

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the outsourcer and shifting the burden or risk to the service provider or vendor in order to gain access to the cutting-edge technology (Aubert et al., 1999). The potential for cost savings has led many senior managers to enter into various types of contracts with IS outsourcing vendors (Bryson and Ngwenyama, 2000). Contrary to this, findings from a study conducted by Cullen et al. (2002) suggested amongst others, that savings were not significantly associated with satisfaction with outsourcing for either larger or smaller firms. The main reason for outsourcing was to access better or acquire more skills. Another driving force for outsourcing is management’s perception that by surrendering control of company’s IS functions to external service providers, management can better focus on its core business (Grover et al., 1993). Outsourcing can quickly bridge the gap of IS inadequacies since the perennial slogan of computing is faster, better and cheaper. Outsourcing also frees up resources for other more vital business objectives. Defining what are core competencies for any firm is rather ambiguous. Firms that identify IS as a non-strategic function or if the company is a low-technology organization, considering the possibilities of outsourcing is the solution since staying to current technologies requires tremendous effort and time (Klepper and Jones, 1998). IT outsourcing implementation Implementing an outsourcing arrangement comprises three main activities: (1) selecting one or more vendors; (2) building and structuring the outsourcing relationship; and (3) managing the resulting relationship (Dibbern et al., 2004). The vendor selection includes choosing among at least two different vendors and issues considered include which type of vendor (one or multiple), which criteria to consider, and how the selection process might be structured. The building and structuring the relationship is constructed around two main elements: (1) the formal contract that specifies the task requirements and obligations of each party in written form; and (2) the psychological contract that is based on the parties’ mutual beliefs and attitudes. The management of the relationship includes all conscious activities of the parties to impact the relationship during its life in their desired way. Cullen et al. (2005a) presented a four-phase outsourcing life cycle model which organizations may follow and if they conduct the phases well, it will increase the likelihood of success. The four phases are: architect, engage, operate and regenerate. The architect phase is where the foundation of the outsourcing is laid, consists of four building blocks – investigate, target, strategize and design. The engage phase is where one or more suppliers are selected and the deal is negotiated. This phase consists of two building blocks namely, select and negotiate. The operate phase is where the deal is put in place, operationalized, and managed through its terms. It consists of transition and manage building blocks. Finally, the regenerate phase is where next generation options are assessed and it consists only of refresh building block. Following this phase, the life cycle begins anew, where the organization prepares for its next generation deals.

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IT outsourcing success Based on past literature, the success of IT outsourcing has been mixed (Cullen et al., 2005b). Hirschheim and Lacity (2000) found that a large number of contracts were being renegotiated or terminated. Cullen et al. (2005b) mentioned that one of the possibilities for the mixed findings is due to researchers treating all IT outsourcing arrangements as homogeneous. Based on seven cases, they argued that this is not so, and highlighted 31 different options in IT outsourcing. They introduced the concept of “configuration” which is defined as a high-level description of the set of choices the organization makes in crafting its IT outsourcing portfolio. The authors identified seven attributes namely scope grouping, supplier grouping, financial scale, duration, pricing, resource ownership, and commercial ownership, as key descriptors of an organization’s IT outsourcing configuration. In conclusion, IS outsourcing have been well researched in the context of developed countries. However, only a few studies were found which reported on practices of IS outsourcing in developing countries or in the Asian context (Khalfan, 2003; Kim and Park, 2003). This study attempt to fill the gap by providing a detail account of IS outsourcing implementation in a Malaysian commercial bank. IT outsourcing in Malaysia The prevalent trend of outsourcing information and communications technology (ICT) operations in local scene is fast becoming an alternative business solution in Malaysia especially so among large organizations. Manecksha (2003) reported that Meta Group Asia-Pacific states that the current trend is to go into outsourcing by forming joint ventures. Malaysia views outsourcing as a value-added service to generate revenues and also a means of improving IS performance. Since, 1995, Asia-Pacific is the leading outsourcing market; Malaysia and Singapore are the leading countries where interest level is high. As reported by Kasim (2003), Sirim Berhad clarifies that an organization would typically have three ICT functions, namely management, development of new systems and maintenance. In preserving the organization’s competitive edge such critical systems components should not be jeopardized. Maintenance of hardware systems could be outsourced unlike business specific applications. In addition, gateway to the organization’s network is considered crucial to safeguard the organization’s security; as such it is not advisable to be outsourced. The need to understand and develop a fit between IT outsourcing and business strategy has long been emphasized by researchers and practitioners. It was also reported that KPMG Consulting Asia believes third-party outsourcing works, but provided it has a track record Sakran (2001). Even as outsourcing becomes an integral part of the banking sector one needs to consider the issue of security. In the world heading towards borderless transactions and information communication technology, security is crucial to the reputation of the organization. In the public sector, among the early Malaysian Government’s large-scale systems integration projects were for Malaysian Postal Office and Amanah Saham Nasional Berhad for Permodalan Nasional Berhad. All these massive computerization projects are outsourced to HeiTech Padu Berhad, which is Malaysian’s leading total ICT solution and service provider. Electronic data services (EDS) Release on 12 October 1999, reported that the Malaysian Government awarded the Smart Schools project

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to the Telekom Malaysia Consortium. EDS Malaysia had earlier been selected, as part of the Sapura Consortium, by the Malaysian Government to develop and implement the pilot phase of the Prime Minister’s Office – Generic Office Environment (GOE) Project. Then again, Malaysia can expect to attract at least US$ 3 billion of the global outsourcing business that is projected to be worth US$ 0.504 trillion by 2008 (Cheong, 2003). According to Multimedia Development Corporation, this would lead to the creation of some 60,000 high-end jobs in the country. The growth of Malaysia as an outsourcing centre would drive the outsourcing implementation, may it be in manufacturing, telecommunications, finance, government or other services. Methodology Since, the main objective of the study is to understand the outsourcing decision and approach by the bank, it is thought that case study method is the most appropriate. According to Leidner and Jarvenpaa (1993), case study research is appropriate in situations where the research question involves a “how” “why” or exploratory “what” question, the investigator has no control over actual behavioural events, and the focus is on contemporary as opposed to historical events. This case study covers only on the understanding the IS outsourcing decision-making process and the implementation of the decision in ALPHA. It is not intended however to study whether the decision will bring the desired results because at the time of writing, the decision has not been fully implemented. This exploratory study seeks to understand the IS outsourcing undertaken by ALPHA and strive to identify potential challenges faced by the organisation. This study is predominantly based on interviews and review of reports, bulletins and other printed resources. The approach to the study is more qualitative than quantitative. Interviews were conducted which covers five top and middle managers, 15 technical staff and 20 internal customers. Internal customers are users who receive the services provided. A total of 40 interviews were conducted in the middle of the year 2002. A list of open-ended questions was prepared to guide the interview process. The length of each interview varies, depending on the interviewee’s designation in the company. All interviews were properly recorded to allow analysis done on the textual information. It is observed that top and middle management are more passionate when it comes to the discussion on IT outsourcing, thus interviews lasted slightly longer than the other two groups, i.e. technical staff and other internal customers. Nonetheless, all interviews conducted have indeed provided useful insights on the IT outsourcing in the selected bank. Case background As an effort to strengthen the Malaysian banking industry following the 1997 financial crisis, the Malaysian Central Bank had directed local banks to merge and to form only ten anchor banks. ALPHA was one of the mergers completed in this process, which represents a merged entity between two previously independent commercial banks. It is presently one of the largest banks with a strong presence of more than 300 branches and retail service outlets throughout the country. In addition to strong presence locally, the bank also has branches in Singapore, Hong Kong, Tokyo and London.

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In the company’s 2001 Annual Report, it is stated that the company’s vision is to be a Malaysian icon – a dominant financial service provider in the country with a significant presence in the region. The mission statement of the bank is expressed as follows: We are building a financial institution with competencies and capabilities to deliver the highest standards of service and innovative financial products initially satisfying the needs of customers in all sectors of Malaysian society. We will achieve this through the introduction of best business practices, high standards of management, investments in enabling technology and strategic alliances with world-class players.

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In achieving the vision, the company is guided by the following core values: .

.

.

Performance-driven – be result-oriented while mitigating risks through the adoption of prudent policies and processes. Quality shall be the trademark of all the company’s endeavour. Trustworthiness – exhibiting the highest standards of professionalism, integrity and business and work ethics. Innovation – encouraging innovation, adopting best practices and leveraging technology to raise internal efficiencies and continuously create superior value propositions for our customers.

Despite being one of the largest banks in the country, ALPHA envisages that the banking industry will be very competitive in the coming years, especially with the completion of all bank mergers in the country and the liberalisation of Malaysian financial industry. Having identified the threats, the bank has embarked on several steps to prepare itself for the challenges in order to safeguard and improve its position. One of the steps taken by ALPHA is to re-organize its credit department. The department was selected as it is closest to the customers in terms of banker-customer relationship. With customer base that spans Malaysian life in all its richness and diversity, from small households to huge conglomerate, it is important for ALPHA to be able to meet those unique needs. With those objectives in view, ALPHA has re-organised its credit departments into three sub-divisions or “internal banks” as follows: (1) Retail banking: serving the banking needs of individuals and SMEs. (2) Business banking: for the growing businesses. (3) Corporate and institutional banking: for large and complex organisations. To support these divisions or “internal banks” there are Policy and Control and IS division cutting across the divisions. Figure 1 shows the organisational structure of ALPHA after the merger and prior to the outsourcing decision. Case description IS outsourcing decision In the Financial Master Plan revealed in 2001, Bank Negara Malaysia (BNM), the Malaysian Government Central Bank, encourages banks to outsource their non-core back-office and IS processes to enhance their internal efficiency and enable them to focus on selling and marketing financial services products. This move is consistent with trends in most developed nations. In response to this, and partly to gear itself for

Retail Banking

Business Banking

Corporate and Institutional Banking

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IT Services and Support

the inevitable competitive environment of the banking industry, the management of ALPHA has decided that each of the “internal bank” has to concentrate on the sales function. It is observed that in order to achieve a strong sales function and high-service level, the divisions should not be bogged down with back-office processing as well other supporting functions. Aspiring to be leaner and more efficient, the bank adopted a new business model to reposition itself by taking a bold step of outsourcing back-office processing and its IS management to focus on its core competencies. The chief executive officer (CEO) of the bank outlined the following four major benefits expected of the outsourcing decision in its internal bulletin (2002): (1) The clearer demarcation of the functions of sales and services on one hand and processing on the other, allows the bank to focus on the design, packaging and marketing of products which more closely meet the needs of customers of the bank. (2) Back-office processing will no longer be an under-appreciated task. Instead, it will be recognised for what it really is – a necessary and value-adding activity for the operations of the bank. (3) It will facilitate the integration of a broad range of financial services, both banking and non-banking, as offerings to the consumer. (4) It raises opportunities to develop new income streams from non-core activities. The birth of BETA Having identified the possibility for the outsourcing trend to continue and copied by other financial institutions, the bank has decided to take advantage on the opportunity of being the first to embark on outsourcing of back-office activities together with its IS management. As the new back-office operations segment of the financial services industry develops, economic pressures may compel most banks to outsource their back-office and IS management. The management of the bank believes that, given the size of Malaysian financial services market, approximately 10.0 million customers, there will be only room for two or three back-office processing companies in the industry. The management has decided that the outsourcing decision is a double-pronged strategy where it provides better cost-management for the bank and at the same time it is also a profit-centre that should generate additional income stream to the organisation. The bank is aiming for the outsourcing business to complement its banking business.

Figure 1. ALPHA’s organisation structure after the merger

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Working hand-in-hand with one of the Consulting Group Company, OpCo was set up. OpCo is to manage the bank’s back-office processing initially, but in the long run, it is to manage other financial institutions’ back-office processing as well. Later, in February 2001, it was decided that OpCo will also manage the IS management of the bank in addition to the back-office processing. A lot of time and effort was spent to understand the existing business processes and reengineer them with great clarity and detail. Various steps were taken by the bank to ensure the success of the new business model such as news updates for better communication at all levels using memos, emails and intranet and the formation of change management committee. In August 2001, a workshop was held for key personnel in OpCo to derive the mission statement, identify the set of core values and define the set of core competencies. At the end of the workshop, a new name, BETA, was chosen for OpCo, as it provides a strong brand affinity and brand usage. The core values of BETA are Excellence, Professionalism, Innovation, Caring and Integrity. The bank formally introduced BETA Sdn Bhd beginning 2002. The CEO of the bank, in his welcome remarks, was “excited and proud to be the first domestic bank to implement outsourcing in line with the country’s financial master plan” (Staff Updates, 2002). According to the CEO of BETA, who was formerly the CIO of the bank, although BETA is a wholly owned subsidiary of the bank, it is not just confining itself within the ALPHA Group. The company also targets business outside the group that includes providing IS services for government departments, private sectors and other financial institutions. Involvement of GAMMA Having decided to outsource its IS management, services and processes, BETA issued RFPs to ten candidates, all of which are reputable multinational IT outsourcers. The following criteria are used by BETA in the service provider selection process: . Global presence; . Management processes and strengths; . Proven track records in technical capability and vast experience in IS outsourcing; . Attention to the human resource issues arose as a result of the outsourcing decision; . Savings to BETA and ultimately savings to the bank/ALPHA; and . Congruence of objectives. At the end of the process, BETA decided to select GAMMA as the service provider. According to the CEO of BETA, “our tie-up with GAMMA, that has vast international networks and years of experience, will enable us to obtain the most current and practical IS solutions”. GAMMA is not a new name in the IS outsourcing business. The company has successfully undertaken many IS outsourcing agreements for various huge multinational conglomerates. This augurs well for GAMMA, and with proven track records, the bank expects to ride on the invaluable experience GAMMA has both in tackling organisational as well as technical issues. As outsourcing is new to the bank, GAMMA has been engaged to provide management participation in BETA.

The USD$250 million, ten-year multifaceted partnership with GAMMA includes an IS agreement, and management services and business development agreement. The CEO of BETA emphasized that: . . . the partnership with GAMMA enables us to leverage their experience in business consulting, IS and back-office processing which will help us reduce our start-up expenses and operate efficiently as we begin operations as a separate entity.

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GAMMA, on the other hand, promised that: The solutions GAMMA will provide for BETA will primarily focus on cost saving of at least 20%, which will be achieved with economies of scale, new technologies, reengineered processes and improved staff productivity.

In line with BETA’s objectives to become a significant player in financial services’ back-office processing company, GAMMA is committed to introduce new business opportunities to BETA. This is to ensure BETA is able to: . . . acquire the business volume and scale to be even more cost efficient, and therefore able to embark on market expansion in its target market within 18 months. By 2004, GAMMA envisions having significant third party processing business in BETA.

The outsourcing agreement between BETA and GAMMA was signed in December 2001. It took more or less a period of nine months to complete the IT outsourcing process from selection to signing of outsourcing agreement. With the completion of assets transfer between ALPHA, BETA and GAMMA, BETA will have an asset base of USD$32.6 million and expected revenues of USD$71.05 million per year. The implementation of IT outsourcing As indicated above, the outsourcing of back-office and IS in ALPHA Bank is unique in the sense that it involves a “middle-man” BETA. The bank has appointed BETA as the outsourcing company providing the back-office and IS management. BETA in turn has appointed GAMMA as the service provider of IS management to BETA immediately and to ALPHA ultimately. The implementation of the IT outsourcing was done in three phases: (1) Phase 1 commenced in January 2002 and completed in March 2002. Phase 1 included the outsourcing of payment processing, cheque processing, call centre and IS infrastructure. (2) Phase 2 started in March 2002 and its target date of completion is in June 2002. Functions that have been outsourced in Phase 2 include Automated Teller Machine (ATM) management, cash management, branch accounting and IS application management. (3) Phase 3, which at the time of writing has not started, covers the function of trade processing, corporate services, administration services and consumer finance. The phases of implementation are shown in Figure 2. Under the outsourcing agreement signed between the bank and BETA, and between BETA and GAMMA, the bank will sell all its assets in outsourcing of back-office processing to BETA while assets in outsourcing of IS management will be

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654 Figure 2. Phase of back-office and IS services of BETA

Phase 2

Phase 3

• Payment processing

• ATM management

• Trade processing

• Cheque processing

• Cash management

• Corporate services

• Call centre

• Branch accounting

• Admin services

• IT infrastructure services

• IT application management

• Consumer finance

sold directly to GAMMA. Under the agreement between BETA and GAMMA, GAMMA is to manage the following areas of IS management: . desktop management; . computer operations; . network management and solutions; . IS security; and . IS support. It is noted that, in almost all areas of IT functions of the bank including IS management have been outsourced. However, the development of new system applications has not been outsourced yet at the time of writing, although the CEO of BETA has not ruled out the possibility that it will be done in the near future. It is worth noting that licences for the use of proprietary application or software in the bank are not part of the outsourcing agreement. Licences are still to be paid by the bank to the application or software owner. Managing the IT outsourcing Though BETA is a wholly owned subsidiary of the bank, it will maintain an arm’s length relationship with the latter through a new unit within the bank formed to manage the relationship with BETA. The unit, known as Service Management Group (SMG) is the focal contact point between the various business units of the bank and BETA. SMG is therefore the key player in the negotiation and development of the terms and conditions of service of BETA for the ALPHA Bank (Annual Report, 2001). In addition to the existence of SMG, the IT outsourcing to GAMMA is also overseen by the directors of BETA together with three senior representatives of GAMMA. To enhance the working relationship between BETA and GAMMA, the possibility of the latter to have equity stake in the former has been explored. However, at the time of writing the structure of the partnership has not been determined yet. The equity sharing will depend largely on what GAMMA brings to the table, that is, the potential value of external business or new technologies. Despite the potential benefits of the “marriage” between customer and service provider, things may change especially for a ten-year contract in rapidly changing industry. According to the CEO of BETA, notwithstanding the fact that the outsourcing

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agreement should not emphasise on how to resolve problems as a result of the partnership dissolution, the agreement should have the spirit, like any other contract, the provisions to handle the situation if at all the “marriage” does not work. In the case of BETA and GAMMA, there are termination clauses as a result of many factors such as performance below expectation and breach of regulatory conditions (i.e. breach of duty of secrecy). In the unlikely event of termination of the service contract between BETA and GAMMA, it will be resolved by arbitration. However, there is one striking clause in the outsourcing agreement with BETA and GAMMA, known as “termination of convenience”. Under “termination for convenience” BETA may terminate the outsourcing agreement without a specific reason. However, it can only be invoked after five years. If it is invoked by BETA before five years, GAMMA is entitled for compensation. Staff transition The bank, BETA as well as GAMMA appreciate the fact that one of the key issues in IT outsourcing is the issue of migration or transition of staff. The process covers mostly the transition of staff from ALPHA to BETA and GAMMA, and familiarisation of changed processes and rules for the staff of other units. The selection of staff for BETA and GAMMA from the bank is determined by the manpower demand of the BETA and GAMMA, and will be based on skills and competencies required for the job. Those staff identified will be offered employment in either BETA or GAMMA. It is noted that the staff have the liberty to make their own decision whether to accept or decline the offer of employment made. There is no coercion by the bank in this process. In addition to selecting staff from the bank, BETA and GAMMA may also conduct external recruitment concurrently. Even those staff from other units may apply for an employment with BETA or GAMMA. However, in such situation, BETA and GAMMA have the prerogative whether to accept or decline the application. Those staff not offered employment by BETA and GAMMA will remain with the bank and will be redeployed to appropriate positions. Where necessary, training will be provided to these staff to enable them to perform the jobs in their new roles. The treatment is similar to those who decline the offer of employment by either BETA or GAMMA. However, to facilitate replacement, handover and continuity of the functions, the staff concerned may be requested to carry on their current duties for a period of not more than three months. The terms and conditions of service of BETA will be reflective of the terms and conditions of information processing industry. Similarly, the terms and conditions of service of GAMMA will be reflective of IS outsourcing industry. Because BETA and GAMMA are in industries different from the bank, their terms and conditions of employment are different from the bank, although there may be slight similarities. Nonetheless, for those from the bank, BETA and GAMMA will take into consideration the current terms and conditions of employment with the ALPHA bank. Knowing the fact that staff transition is a delicate issue, communication is vital. Therefore, a lot of effort has been made by the bank to communicate the effect of the outsourcing decision on manpower requirement. Frequently asked questions on staff transition are posted on ALPHA’s intranet web page to allow staff to understand the situation and to avoid them reaching wrong conclusion or developing wrong perception.

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Case study findings In the paragraphs that follow, the findings of the study are summarized. Key issues are highlighted and presented following the partial framework of Dibbern et al. (2004). Since, the focus of the study is to explore on the “why” and “how” of IS outsourcing, the discussion mainly centres on these two aspects of IS outsourcing.

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The “why”: motivation for the IT outsourcing decision Ang and Cummings (1997) conducted a study to explain IS outsourcing behaviour in the banking industry. One of the findings of the study indicate that banks respond to institutional pressures, but that respond varies depending on the source of the pressure. It was found that when the source of pressure was federal regulators, reactions were more in line with the regulators’ desired actions. The finding from the case of ALPHA Bank seems to support Ang and Cummings’s (1997) contention. It is apparent that one of the main reason for the IT outsourcing decision in ALPHA Bank is due the external pressure from the Malaysian Central Bank’s new policy. The Central Bank has encouraged banks to outsource their non-core back office and IT processes. Coming from the Central Bank, it is not surprising that ALPHA Bank, and perhaps eventually other banks, reacted in line with the new policy. Another motivation for ALPHA Bank’s decision to outsource is to allow the bank to focus on its core banking business. This reason is similar to the one reported in the past literature (Grover et al., 1993). The bank has adopted a new business model to allow it to focus on its core banking business and also the creation of superior processing capability. The implementation of the new business model has resulted in a significant change and the reengineering of the operating and administrative structure of the bank. By outsourcing the bank’s back-office processing and IS management, sales staff can dedicate their energy and effort to increase banking business as all the supporting activities have been relieved from them. It is worth highlighting that another important determinant for IS outsourcing decision at ALPHA Bank is to turn non-profit activities such as back-office processing and IS management into profit generating activities. This motivation is again well supported in the past literature. DiRomualdo and Gurbaxani (1998), for example, argued that one of the strategic intent that firms outsource is for “commercial exploitation”. It aims to improve the return on IS investment by generating new revenue and profit or by offsetting cost. As ALPHA is the first bank in the country to embark on IS outsourcing, the bank is expected to benefit from back office processing of other banks as well. Reducing cost is another motivating factor of the IS outsourcing decision at ALPHA bank. This goal is clearly expressed in the contract between BETA and GAMMA, where the solution provided by GAMMA should lead to cost savings of at least 20 per cent. Cost reduction has been the main motivation for IS outsourcing in many companies as reported in most studies in the 1990s (Dibbern et al., 2004). In conclusion, the motivations for outsourcing at ALPHA can be categorized as strategic and organizational as well as economic. This finding partially support the findings of Baldwin et al. ’s (2001) study on a UK bank where the motives include strategic and organizational, political, technical and economic. The political and technical motives are not apparent in the case of ALPHA probably due to respondents being less open, which is part of the Asian cultural traits.

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The “what”: outsourcing alternatives/approach Dibbern et al. (2004) identified four parameters to IS outsourcing arrangement, namely, degree, mode, ownership and timeframe. The arrangement adopted by the ALPHA Bank is two-tier: (1) the first tier is between ALPHA and BETA; and (2) the second tier is between BETA and GAMMA. For the first tier, it is a spin-off, as BETA is a wholly-owned subsidiary to ALPHA Bank. The ownership is still internal but the function is selectively outsourced. In this case, BETA would handle back office processing for ALPHA. The second tier is a selective outsourcing where IS ownership for IS management of Alpha is handed over to GAMMA. The decision of ALPHA Bank to outsource its IS management is contrary to the practice of most other firms, as Dibbern et al. (2004) found from their review of past literature that IS planning and management most often remained in-house. However, the authors highlighted that the decision on what to outsource is dependent on the specific situation within the individual organization and the perception and preferences of the decision makers. Related to the outsourcing mode or client-vendor arrangement, the relationship between ALPHA, BETA and GAMMA appear to be closest to what Cullen et al. (2005b) described as prime contractor, where BETA is the lead supplier that is accountable for the entirety of the contract but who uses GAMMA as the subcontractor to deliver part of the scope. The advantage of this arrangement is that it allows single point accountability (in this case BETA will handle the contract with GAMMA) and it also allows best of breed subcontracting. However, in this case, GAMMA is the sole provider to BETA and ALPHA, a relationship which Dibbern et al. (2004) termed as a simple dyadic. Dibbern et al. (2004) cautioned that simple dyadic arrangement could become risky due to vendor opportunism. Another parameter is the contractual length of the outsourcing arrangements. At both tiers, the length of the outsourcing arrangement is ten years which is considered as single-term contracts. Cullen et al. (2005b) mentioned that besides single-term, other options include roll-over contract or evergreen contract. Rollover contract is a norm today where a fixed initial term is specified followed by an extension options. Evergreen contracts have no expiry, rather the contract continues until either party invokes its termination rights. By adopting single-term contract, ALPHA bank does not have the flexibility while the provider enjoys a measure of security. Some of the top and middle level managers expressed concern on managing a long-term contract in the fast-changing world of ICT, as one expressed: . . . 10-year contract is rather too long. I’m not too sure how changes in the environment will affect the agreement.

However, it is noted that such practice is common in the banking industry, for instance, the Japanese banks (Goolsby et al., 2002). The “how”: implementing and managing the IT outsourcing strategy One key aspects of IT outsourcing implementation is building and structuring the outsourcing relationship which is constructed around two main elements:

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(1) the formal contract; and (2) the psychological contract (Dibbern et al., 2004). These elements lead to anticipation and expectations that in turn impact how the parties interact with each other. The term “partnering” is generally used to describe a trust-based relationship that parties attempt to engender, but does not describe the specific relationship structure. According to Cullen et al. (2005b), there are four types of commercial relationship that summarize the high-level nature of relationship structure: arms-length, value-add, co-sourced and equity. In the case of the relationship between, ALPHA and BETA, it is best described as co-sourced as both parties provide a mix of service labour and assets, and have integrated accountability. While the relationship with GAMMA appears to be arms-length in the beginning but may develop into value-add as GAMMA indicated that it “. . . envisions having significant third party processing business in BETA . . . ” Another key activity in implementing IT outsourcing is managing the resulting relationship. The management of ALPHA has taken reasonable steps to ensure that every aspect of the organisation affected by the decision is thoroughly understood. Although it appears that IT outsourcing decision was done in a top-down manner, the management of ALPHA did take into account the opinions and views of the staff, particularly from the middle management directly affected by the outsourcing decision. Having identified the magnitude of change in the organisation as a result of IS outsourcing decision, ALPHA did make a right step in managing the change. The management formed a change management committee to handle the issues arising from the change in business processes. Another issue pertinent to the implementation of IS outsourcing is the issue of human resource management. The feedback received from staff in regards to staff transition is mixed. Though there was no pressure for staff whether or not to accept employment with BETA or GAMMA, some ALPHA’s technical staff perceived that there was some pressure for them to accept employment with GAMMA. Though they have the options to stay with ALPHA and learn new skills, as a result of their IT background or qualification, they may not able to learn the new skills. Another issue related to the implementation of IS outsourcing is the impact of service level although some allowances have to be made because the outsourcing decision is only six months into its implementation stage. Mixed feedbacks have also been received. If users have any IS-related problems, they will inform the help desk. However, there were unfortunate occasions where to the frustration of the users, it took a while for GAMMA to attend to and resolve some problems. The “outcome”/challenges It is definitely a challenge to the ALPHA to ensure successful implementation of the IS outsourcing. The main challenge is whether the strategy brings the desired results. These include better sales and marketing functions, better service, superior processing capability, deriving income stream from non-bank activities and the desired 20 per cent reduction in IS cost. One of the reasons why IS outsourcing is different from outsourcing of other functional areas of a business is the long-term agreement signed between a customer and a service provider in a world of fast changing technology of IS. As the agreement

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between BETA and GAMMA is only six months old in a ten-year contract, it is yet to be seen how both organisations resolve the issue of technological advancement. The management of ALPHA should also consider the long-term effect of the outsourcing decision on its own staff development, especially in regards to IS management. There is the issue of moral hazard where the staff of ALPHA may over-rely on GAMMA even for small problems which can be solved rather easily. This may lead to “spoon fed” situation when it comes to IS management. Over-reliance on outside assistance may also kill the creativity of end-users, especially in systems development. Another challenging point is related to the staff transition. It is imperative for ALPHA to monitor the employee competency and motivation. No matter how best a system is, if employees are not motivated the management is unlikely to optimise its organisational effectiveness. Conclusions Despite numerous research conducted on IT outsourcing worldwide, studies which focus on IT outsourcing in developing countries generally and Malaysia specifically, has been scarce. This paper presents a case study on IT outsourcing implementation in a Malaysian bank, which represents one of the largest outsourcing market in the country. The findings reveal that the motivations for IT outsourcing in the banking industry are both internally and externally driven. Furthermore, there is not a single factor that influence the decision but a multiply of various motivations including generating income from the outsourcing arrangement. The experience of the case bank also highlights the approach taken by an early adopter of IT outsourcing in the country. The bank has adopted a two-tier arrangement which involved a spin off and a reputable provider to minimize risks of failure. Additionally, the bank has been very cautious and far sighted in managing the outsourcing relationship by setting up the Change Management Committee as well careful handling of staff transition and staff morale. The study reveals that the outsourcing decision has affected almost every organisational aspect of the bank, most notably in the organisation’s operations and administrative structure, human resource management and also on the issue of service level. The Bank, like any other profit-oriented organisation, will continue to closely monitor the management of the outsourcing contract to ensure the goals are achieved. Despite too early to assess the outcome of the outsourcing implementation at the point of writing, the study has contributed towards understanding the experience in implementing IT outsourcing in the banking industry in a developing country. References Ang, S. and Cummings, L.L. (1997), “Strategic response to institutional influences on information systems outsourcing”, Organization Science, Vol. 8 No. 3, pp. 235-56. Annual Report (2001), Annual Report, ALPHA Bank, Kuala Lumpur. Apte, U.M., Sobol, M.G., Hanaoka, S., Shimada, T., Saarinen, T., Salmela, T. and Vepsalainen, A.P.J. (1997), “IS outsourcing practices in the USA, Japan and Finland: a comparative study”, Journal of Information Technology, Vol. 12, pp. 289-304. Aubert, B.A., Dussault, S., Patry, M. and Rivard, S. (1999), “Managing the risk of IT outsourcing”, Proceedings of the 32nd Hawaii International Conference on System Sciences, 5-8 January, Hawaii.

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McLellan, K.L., Marcolin, B.L. and Beamish, P.W. (1995), “Financial and strategic motivations behind IS outsourcing”, Journal of Information Technology, Vol. 10, pp. 299-321. Manecksha, F. (2003), “Outsourcing sector to keep growing”, Computimes, New Straits Times, 6October. Marcolin, B.L. and McLellan, K.L. (1998), “Effective IT outsourcing arrangements”, Proceedings of the 31st Annual Hawaii International Conference on Systems Sciences, Vol. 31, pp. 654-65. Sakran, S. (2001), “Outsourcing: a double-edged sword?”, Malaysian Business, New straits Times Press (Malaysia), Berhad, 1 October. Sengupta, K. and Zviran, M. (1997), “Measuring user satisfaction in an outsourcing environment”, Engineering Management, IEEE, Vol. 4 No. 4, pp. 81-103. Staff Updates (2002), Staff Updates, ALPHA Bank, Kuala Lumpur. Young, A. (2000), “The future of outsourcing: thriving or surviving?”, DataQuest Service Trends 2000, Gartner Group Report. Further reading EDS Release (1999), EDS wins bid in Malaysian Smart School Project, available at: www.eds.com/ news/news_release-template.shtml?rowid ¼ 166 (accessed 5 October 2003). Corresponding author Mohd Adam Suhaimi can be contacted at: [email protected]

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