The relationship between outsourcing and firm financial performance in the banking industry in Kenya

Abstract

Industrial organizations are constantly in search of new solutions and strategies to develop and increase their competitive advantage. Outsourcing is one of these strategies that can lead to greater competitiveness. No study is available on commercial banks on what effect, if any, outsourcing of some of their activities has had on their performance. For this reason, the present study sought to fill in the gap by establishing the effect of outsourcing of various activities on the performance of commercial banks in Kenya.

This was an explanatory research design. The target population was all the 43 licensed commercial banks in Kenya operating within Nairobi. Primary data were collected using questionnaires. The questionnaires were constructed in order to establish the extent of outsourcing among commercial banks in Kenya as well as the services outsourced in each of the commercial banks. These instruments were checked for validity and reliability. The secondary data was collected in order to help in the financial performance aspect of the study. As such, data was collected from the company financial statements available on their websites, the Nairobi Stock Exchange market, the Capital Markets Authority and also from the Banking Survey 2010 booklet. Both descriptive analysis and regression analysis were carried out on the collected data.

The study found that the most important reasons for outsourcing was concentration on core activities, improvement of company focus, efficiency improvement and to increase productivity. From the Pearson correlation coefficient, there was a high correlation between outsourcing and financial performance. The R2 revealed that outsourcing influenced up to 96.7% of the variance in financial performance. The adjusted R2 suggested that the least influence of outsourcing on performance was 95.6%. The study concludes that there are many non-core services that banks are outsourcing especially the IT related services. This study recommends urgent measures to institute a regulatory framework in place in the form of an outsourcing guideline to the banking sector.