The effect of business process outsourcing on the financial performance of commercial banks in Kenya

Abstract

Outsourcing is a widely used business practice for organizations that are in an effort to improve firm performance and add value to their firms. Empirical studies show that outsourcing has very limited positive impact on firm performance. However, there is to date no research that has exclusively focused on the impact that outsourcing of business processes has had on firm performance ,especially in the banking industry, which is one of the most technology-intensive industries. This paper attempts to fill this gap by comparing the firm performance of 43Kenyan banks that have outsourced some of their functions. The comparison is made based on before and after results of performance of the banks, using accounting performance measures. The research results show that there is a difference in the performance measures between the period the banks began outsourcing their business processes compared to the prior period. The research results suggest that the inherent costs and risks brought by business process outsourcing do not exceed the positive effects such that business process outsourcing might enhance banks’ performance. However, as a suggestion to future research, a more sophisticated performance measurement system that includes soft measures other than only solid accounting ratios may be an optional method to measure the firm performance.