Outsourcing in the Hotel Industry

1.1 Introduction

Outsourcing is one of the growth industries of our time (Winterton 2000).  Today, the outsourcing of selected organisational activities is an integral part of corporate strategy (Lankford and Parsa 1999).  Outsourcing has become a significant facet of modern hotel management (Sieburg 1992).  Unfortunately there is shortage of prior research in the hospitality management literature concerning outsourcing or maintaining internally business processes in hotel sector.

This paper seeks to present critical analysis of factors, varieties, aims and results of outsourcing within hotel industry.

The first chapter will begin with stating the problem which is vital in hospitality industry.  It will then continue with the presentation of background literature and the purpose of study.  Thirdly, rationale will be explained. Subsequently research questions will be raised.  Furthermore a definition of terms will identify the key words within the study and how the writer defines them within it.  A number of limitations will indicate specific areas in which the research will not be definitive.  Finally a summary of the chapter will be provided indicating the main points discussed.

1.2 Statement of the Problem

Historically as the kind of contractual relations and commercial activity outsourcing has appeared in 1962 when the successful businessman Ross Perro, whose firm EDS carried out calculations for banks, renting night time on mainframes, has brought «General Motors» annual economy in 44 % – more than 4 billion dollars (Nureev 2002).  Over the last few years, the idea of outsourcing noncore business functions has gained huge popularity (Winterton 2000).  Nowadays different types and forms of outsourcing are putting into practice and developing in various businesses.

Tourism in its turn is a rapidly growing phenomenon and has become one of the largest industries in the world.  But also hospitality industry is very unique, and very sensitive to every internal and external changes.  And such innovation as outsourcing should have affect the industry in general and the development of hotel sector in particular.

As it has been mentioned above, outsourcing within hotel industry has been the subject of minimal literature research.  And a question: whether outsourcing will work in hotels and make notable profit still opened for reasoning and conclusions.  And if yes or no, how it will be affected by financial crisis which came less than year ago.  Just that very case of crisis can cardinally change the relation of business to outsourcing.  After all in a crisis situation it is more important not tactical, but the strategic part of the business.

In general, up to now the quantity of questions more than answers.  And it is very important to understand, why hotels outsource.  And what form for them is most attractive and far-sighted.

1.3 Background Literature

According to Lankford and Parsa (1999), outsourcing is defined as the procurement of products or services from sources that are external to the organisation.  This leads to allowing outsiders to take responsibilities for some aspects of financial management (Winterton 2000).  After definition and explanation of previous authors, it is possible to say that outsourcing is something similar to service and support services though it is differs essentially from them.  It is not short-term service, on once, given by one company to another.  Outsourcing gives longer support, not single.  Outsourcing is transfer of certain processes or functions from one company to another.  The Company – “recipient” should specialise in this branch.  From here it is possible to create one of outsourcing’s principles: «I leave to myself only that I can do better than others, I give to the external executor that it does better than others».  Other principles and the most practical types and forms of outsourcing will be considered in second chapter.

Outsourcing has become an important strategic tool in today’s competitive business environment (Zhu, Hsu and Lillie 2001).  As any tool of business it has its own advantages and disadvantages.

Outsourcing offers several advantages, such as enabling existing staff to concentrate on core activities on organisational specialisations, focusing on achieving key strategic objectives, lowering or stabilising overhead costs, and thereby gaining cost advantage over the competition, providing flexibility in response to changing market conditions, and reducing investment in high technology (Kliem, 1999; Quinn 1999 cited Kakabadse, N. and Kakabadse, A. 2000).  Thus it is possible to ear-mark three big advantages of outsourcing in general, not only for hotels and hospitality industry.  The first advantage – outsourcing allows to pay almost all attention and resources to the core direction of the business and to charge to foreign company noncore functions.  Thereby, company will have competitive advantage.  Also redistribution and optimisation of human resources of the company will be possible.  The second advantage is decreasing of material input.  Very often attractions of the foreign executor essentially cheaper than the maintenance of own department for execution of certain job.  It is caused by lower price cost of outsourcer’s job since the chosen direction is its specific specialisation.  And the third advantage – using outsourcing, companies can get technologies and the decisions of higher quality level which might be absent at the organisation.  Besides this there is a possibility of using specialised functions which only experts can perform.  Also it is important to remember about transfer of all responsibilities of the assigned functions to outsourcer.

But besides these pluses there are also some disadvantages of outsourcing.  Schniederjans and Zuckweiler (2004) introduce very helpful summary of those.  They suggested that it is possible to divide this lacks in four groups:

• Managerial implications. Such as loss of control over critical functions and suppliers.
• Financial implications. Such as failure to realise cost savings.
• Operational implications. Such as dependence on suppliers and responsibility for quality of their work.
• Human resource implications.  Such as lower morale of permanent employees.

Thus after confrontation these disadvantages and meaning of the process it is possible to ear-mark one of the most important shortcoming of outsourcing.  It is possible to criticise it for loss of workplaces.  As the result of such process, the company can release many workplaces, replacing the in-house workers with more professional (or cheaper) from other company.  As the result of this, first of all, workers are getting in the worst position because very often there is no labour contract or any guarantees about their future job between them and the employer.

Remembering all the minuses, lacks and disadvantages but aspiring to benefits, pluses and advantages of outsourcing hotels should understand the reasons, right time and business situation when to outsource.  According to William and Faramanz (1999), firms should consider outsourcing when it is believed that certain support functions can be completed faster, cheaper, or better by an outside organisation.  Tasks that are not core competencies of the hotel – human resources, payroll and benefits, information systems, even food service – are ripe for being contracted out.  Moreover, Blake (1997) gave three main reasons for organisations for turning to outsourcing:

• Where others do it better
• To focus on their core business
• To reduce their cost base.

Therefore the hotels should use outsourcing to concentrate on the primary activity, instead of to be engaged in management of dining rooms, cleaners or catching of computer viruses.  Another factor to exploit the outsourcing within hotel industry is the situation when the external provider of services is capable to provide economy and/or higher level of services because of specialisation or cheaper labour.  Outsourcing can help to save resources of the hotel. One more not very visible objective to use outsourcing within hotels is to study from the service provider.

Consequently, Milgrom and Roberts (1992 cited Lamminmaki 2005) said that understanding hotels’ motivation for outsourcing is important, as organisation is as important as technology, cost, and demand in determining success.

To conclude this part of the chapter, it is useful to remember statement of Kotler (1988): “Entrust others that what they will make easier and more cheaply”.

1.4 Purpose of Study

The purpose of this study was to examine factors that influence on hotel sector for outsourcing or maintaining internally business processes.  By analysing existing studies related to outsourcing in general, it can be valuable in applying to the outsourcing within hotel sector where there is little research.  In additional, there are few management accounting studies concerned with the hotel sector (Collier and Gregory 1995).  Furthermore, the research will evaluate advantages and disadvantages of using outsourcing for hotels.  This study will critically assess the innovative part of outsourcing for hotels and what type and form of internal business processes is going to be more successful for them.

Specifically, literature will be within the hospitality sector.  Moreover, how will outsourcing affect costumers and their needs will be analysed.

Finally, based on the findings of the study, solutions for the hotel sector will be provided.

1.5 Rationale

This research is about outsourcing or internal business processes within hotel industry.  And it is significant for several reasons:

• Hospitality industry is one of the fastest developing industries.  And In many countries, tourism industry is the leading industry, which stimulates development of other sectors.
• Outsourcing – relatively new business idea but it has been used already in numerous sectors of economy including hospitality.
• Using outsourcing or internal business processes hotels can cut their production cost.
• There is a high potential to improve quality of hotel’s services.
• Most of the hotels have to find some new ideas for their development and reduction of risks during the financial crisis period.  And outsourcing could be one of them.

1.6 Research Questions

This study aim is to answer following Research Questions:

• What is considered ‘outsourcing process’ within the hotel sector?

To begin with, it is vital for the research to explain and to make it clearer, what is outsourcing in today’s economy.  Also it is important to elucidate if this term is innovative method for the business or it is just a new expression of existing already processes within hotel sector.

• What are the advantages and disadvantages of outsourcing for hotel sector?

As any type of business relationship, outsourcing should have not only advantages and positive moments but also disadvantages and obstacles.  To be more objective, it is vital to compare both to be able to make a conclusion whether outsourcing is a big opportunity for the hotels or it will bring more difficulties rather than profitability.

In addition, it is significant to understand the specific type of action of outsourcing within hotels and its the most widespread forms

• What are the factors for outsourcing or maintaining internally business processes within hotel sector?

Internal and external factors of using outsourcing for the hotels will be examined.  And the research will emphasise specific reasons of starting using outsourcing within hotel industry.  Moreover, ‘financial crisis’ as one of the factors will be discussed.

• What are the main aims of outsourcing within hotel sector?

And last but not least, it will be achievable to acquire the main aims and results of outsourcing within hotel sector.  
Additionally, after analysing the interview and questionnaires, preferred types and the specific benefits from outsourcing for the hotels will be seen.

1.7 Definition of Terms

Core business: Core business means the commercial activity from which the company derives most of its profits (www.resourceconservation.mb.ca).  According to Alexander and Yong (1996), there are four main points to define ‘core’ activities:

• Activities which traditionally performed in-house;
• Activities which critical to business performance;
• Activities which create current or potential competitive advantage;
• Activities which will drive further growth, innovation, or rejuvenation.

Financial Crisis: There is no precise definition of “financial crisis,” but a common view is that disruptions in financial markets rise to the level of a crisis when the flow of credit to households and businesses is constrained and the real economy of goods and services is adversely affected (opencrs.com).

Hotel Sector:

Outsourcer:The service provider (outsourcer) is responsible for delivering the contracted services, resolving day-to-day operational problems and managing the request and implementation of routine changes in accordance with the framework of contracts, standards (Kent 1998).

Outsourcing: Greaver (1999) defined outsourcing as the act of transferring some of an organization’s recurring internal activities and decision rights to outside providers, as set forth in a contract.  Later Beaumont and Sohal (2004) explained outsourcing as having work that was formerly done inside the organisation performed by an external organisation.  The vendor (hereafter the outsourcer and outsource are, respectively, referred to as vendor and client) may be an independent entity or a wholly owned subsidiary.

1.7 Limitations

This study will limit itself to surveying and interviewing hotels only from two countries – Greece and Russia and most probably will not represent the complete situation of European hotel industry as well as worldwide hotel industry.  Moreover it will not represent the whole situation even in both chosen countries for the reason that researcher sampled only those who have agreed to be sampled.

The convenience sampling procedure decreases the generalisation of findings.  This study cannot be generalised to populations but may relate to other defined contexts with caution.

For the purpose of this study the mixed approach was used, which include utilisation of both quantitative and qualitative data analysis which are always connected with sensibility, reliability and validity.  But on the other hand it has also its advantages such as expansion and collaboration.

Furthermore, this study will concentrate on outsourcing within hotel sector, but at the same time there may be other factors that influence and affect business processes in the hotels.

1.9 Summary

This chapter has introduced the thesis by outlining the topic of this study, the statement of the problem, background literature, purpose of this study, its rationale, presented research questions, definition of the terms and limitations of the study.

In this first chapter the study’s main focus was identified as examining and understanding the importance of outsourcing within hotel sector.  A critical examination of meaning of outsourcing, its advantages and disadvantages should be able to assist in determining how the hotel industry can be affected or altered by using outsourcing process.  Finally, this study would determine reasons and forms of outsourcing which are the most recent, available and useful within hotel sector.

Afterward, Chapter Two will discuss the theoretical framework and conceptual models of factors for outsourcing or maintaining internally business processes within hotel sector.  The analysis will be connected with four Research Questions.  Finally, next chapter will classify particular insufficiencies in the literature leading to the need of the present study.

Chapter 2: Literature Review

2.1 Introduction

The purpose of this chapter is to critically analyse the existing literature on outsourcing or maintaining internally business processes within hotel sector.  Based on the research questions discussed in the first chapter of the given study, four general areas have been established. 

More specifically this chapter will begin with a general description of related texts and then gradually concentrate on the precise areas in which the study has a focus on.

The studies in the four major areas provided the theoretical foundation for the research conducted in this study.  The areas are:

• Consideration and explanation of outsourcing processes within the hotel industry.  This area relates to Research Question #1 – What is considered ‘outsourcing process’ within the hotel sector?
• Advantages and disadvantages of outsourcing for the hotel industry.  This area relates to Research Question #2 – What are the advantages and disadvantages of outsourcing for hotel sector?
• Factors and motives of using outsourcing processes within hotel industry.  This area relates to Research Question #3 – What are the factors for outsourcing or maintaining internally business processes within hotel sector?
• Aims and results of outsourcing for hotel sector. This area relates to Research Question #4 – What are the main aims of outsourcing within hotel sector?

The general areas were supported by the literature are all directly related to this study.  The purpose of the literature review for the author was to obtain a greater understanding and depth of knowledge by having critically analysed all areas pertaining to the Research Questions.
These Research Questions are achievable as the researcher has a close and continual contact with the industry and has sufficient access to the information in numerous hotels in Greece and Russia.

2.2 Review of General Area I: Consideration and explanation of outsourcing processes within the hotel industry
This section provides the theoretical framework for Research Question # 1.

The hotel industry is one of the formidable business in the world but it does not mean that they are strict in incorporating business strategies in their business (http://www.outsourcing-weblog.com).  Also, according to Burgess (2007), financial controllers in their turn consider that departmental and general managers do not have enough business skills – and finance skills in particular – to optimise costs and revenues and hence maintain profits.  Thus outsourcing practice might be a very useful and successful way in order to help owners of the hotels nowadays as well as in future.

According to Kakabadse, N. and Kakabadse, A. (2000), outsourcing practice dates back to eighteenth-century England and has been in continuous use in numerous industry sectors.  However, the term ‘outsourcing’ – English neologism has appeared in the American explanatory dictionaries only in the beginning of 80th (Ostrovsy 2009).  Since then this expression is strongly located in a business lexicon of the majority of the world languages.  Traditionally, outsourcing has concentrated on activities which are remote from the heart or nerve centre of the company (Brown 1997).

Greaver (1999) defined outsourcing as the act of transferring some of an organisation’s recurring internal activities and decision rights to outside providers, as set forth in a contract.  Consequently, outsourcing it is one of interaction form between two organisations which is determined by the contract.  And following this contracts experts of one company accomplish duties of other company.

‘Out-sourcing’ — can be understood as ‘use of another’s resources’.  Moreover, according to Lankford and Parsa (1999) outsourcing is defined as the procurement of products or services from sources that are external to the organisation.  In other words outsourcing is a transfer of some functions of the organisation to external highly skilled executors — outsourcers.  Also it is refusal of own business process, and acquisition of services in realisation of this business process at specialised organisation.

For the hotels outsourcing is a transfer to the external contractor of some business functions or parts of business processes of the company.  The contractor (outsourcer) adapts his universal means and knowledge, considering this specific business of the customer, and uses them in interests of the customer for payment, more often defined in the cost of services, instead of shares of profit.

According to Beaumont and Sohal (2004), wide variety of business process is now outsourced.  The use of outsourcing is becoming more sophisticated; more organisations are outsourcing responsibility for business processes.  Glickman et al. (2007) in his turn noted that outsourcing is becoming more widely accepted and the argument for outsourcing versus in-house operations is gaining more support.  As a result Beaumont and Sohal (2004) confirmed that today outsourcing is a fashionable management technique.

Hence, it is possible to mention that the outsourcing market endures rapid growth.  The growing demand and supply mutually accelerate each other.  Specialised outsourcing companies of cleaning and service of hotels are developing.  Outsourcing leads to growth of some professions for hotel sector.  More often, it is either low paid and not enough prestigious jobs (such as tidying and cleaning), or very specialised trades where maintenance of necessary professional level of employees or their work-load for the organisation is problematic (an example can be service of computer systems and IT).

Consequently, as Glickman et al. (2007) stated, outsourcing has become a widely accepted practice that provides substantial cost-saving benefits for different organisations in general and hotels particular.  And hotels will always outsource some activities (the supply of water and electricity) but insource others (Beaumont and Sohal 2004).

Therefore, there is a question: what kind of activities should hotels outsource key business processes or non-core functions?

As outsourcing is a means of improving the performance of the company (Brown 1997).  And the overlay supplier is providing financial expertise which is difficult and expensive to create within a corporate treasury. The overlay provider, by offering the expertise to a broad range of clients, is able to provide it to each client at a lower cost than it would be for them to create their own capability (Winterton 2000).  Today outsourcing is considered as the business technology which is transferring to outsourcing companies processes and functions from the in-house business and hence, it is possible to make a conclusion, responsibility for result of performance of these processes as well.  So, for how big can be this shifting off responsibility for the hotel sector?

The majority of authors consider that core activities should stay in-house, whilst non-core activities can be outsourced, in order to preserve core competencies (Prahalad and Hamel 1990, Bettis et al. 1992, Lacity et al. 1995, Quinn and Hilmer 1994, Rothery and Robertson 1995, Kelley 1995, Peisch 1995, Mullin 1996 cited Kakabadse, N. and Kakabadse, A. 2000).  From here it is possible to draw a conclusion that the sense of outsourcing comes to the simple formula: to concentrate all resources to that kind of activity which is the core for the company, and to transfer the other (supporting, accompanying) functions to the reliable and professional partner.

But Struebing, (1996) argued that especially relevant is the outsourcing of key business processes and financial functions.  Nevertheless, Lankford and Parsa (1999) in their turn stated that focus on core business activities, companies can no longer assume that all organisational services must be provided and managed internally.  Competitive advantage may be gained when products or services are produced more effectively and efficiently by outside suppliers.  Thus, outsourcing is a direct transfer of non-core business processes of the company to the external organisation – outsourcer, for their further performance within the limits of the signed contract.  And there may be big benefit for the company if transferred business processes are the exact specialisation of outsourcer.

Consequently, outsourcing is management strategy because of which hotels can optimise in-house processes and, without distracting on minor functions, completely concentrate on core activities.  As a matter of fact outsourcing is attraction of external sources with the purpose of the decision of internal problems of the hotel.  Outsourcing can also be characterised, as the sale to hotels services for maintenance of their activity, i.e. outsourcer can take on the balance almost all non-core activities of the hotel.  As a result of that the client can give all his time only to the core business, thus occurs minimisation of risks concerning to not profile kinds of activities (a corporate meal, IT-service, transportation service, installation works, cleaning etc.).

In hotels, outsourcing has been used for many years for some operational tasks such as cleaning, but only recently (Cline and Warner 2001, Lamminmaki 2006 cited Burgess 2007), has been considered for accounting, following the example of other industries (Burgess 2007).

Holiday Inn for instance created its hotel reservations business as a separate entity based on its relationship with IBM’s ISSC to serve the entire hotel and hospitality market (Venkatraman, 1997).

Other examples of outsourcing within hotel sector could be: cleaning, laundry service, human resource management, employees meal, IT-service and support, marketing, statistics, security service, creating web-sites, organisation of celebrating and conferences via an event company and many others which are not core competences of business, and could very easily and more economically be contracted out to service companies (Winterton 2000).

Nevertheless, according to Lamminmaki (2006), an activity will tend not to be outsourced if it results in a subcontractor being placed in a position enabling it to (wittingly or otherwise) inflict damage on the reputation of the hotel’s business.

Now it is an appropriate and good point to understand how innovative the outsourcing model is.  In general, outsourcing is just the variety of cooperation.

Outsourcing of the hotel activities is definitely not a new phenomenon.  In 1963, for example, Storey (2001 cited Glickman et al. 2007) examined outsourcing in the military (Glickman et al. 2007).

From the previous part of the chapter it is possible to mention that benefit of outsourcing consists in more quality and less spend of accomplishment of the transferred function.  Higher quality explained by availability of highly paid professionals who have a wide experience in the given problematic.  As outsourcer has big amount of works in the specific sphere, he has a possibility to receive solid experience and on its basis to create various workings out for completing the transferred function.  When the work is outsourced, the overlay traders are immersed in the market (Winterton 2000).  Outsourcer is engaged in this sphere, and not for only one company.  Hence, professional specialisation is taking place.  And as a result expenses’ decrease and accordingly, the effect of accumulation begins: the bigger and better specialisation – the easier management, easier management – cheaper the whole process.  Moreover, Glickman (et al. 2007) noted that outsourcers who provide the same functions to a number of different hotels are able to purchase larger quantities at lower prices.  Thus, expenses become lower using outsourcing, than at independent accomplishing of matching function.

On the other hand one of the biggest problems of this statement is that using by the hotel highly paid professionals will not allow to achieve this with small money.  And it is really not so easy to operate this process.  So actually, what kind of innovation is here?  There were always contract and subcontract works, there was a specialisation of both workers and enterprises, there was a strict selection of suppliers.  And can it be differently with modern development of techniques and business?  The settled word ‘outsourcing’ goes today as a new method of work.  And this word has become extremely useful.

Also, it is relevant to know what place outsourcing takes in the quality management.  In standards ISO series 9000:2001 (http://ds1.twirpx.com) this word (not even this but only the verb) ‘outsource’ has been found by researcher just once in point 4.1.  That is why it is especially appropriate to remember the statement of Lonsdale and Cox (2000) with the note that it is some kind of substitute for the once fashionable enthusiasms for conglomeration, horizontal integration, vertical integration, and internal integration.

Consequently, considering outsourcing as the business phenomenon of the modern world, it is possible to allocate its pluses and minuses.  Also it is possible to separate core services and to understand, by what principles they work and what bring as a result to the hotels: benefit or losses.  In addition, it is possible to analyse a situation of loosing work places because of outsourcing processes within the hotel sector, increasing percent of unemployment or, on the contrary, allows hotels to develop and grow faster, increasing their weight in the market.

2.3 Review of General Area II: Advantages and disadvantages of outsourcing for the hotel industry

This section provides the theoretical framework for Research Question # 2.

According to Beaumont and Sohal (2004), outsourcing is used because it supposedly advantages the organisation.  The advantages and disadvantages can be categorized as strategic or tactical, long-term or short-term, and tangible or intangible.

The advantages in outsourcing can be operational, strategic, or both.  Operational advantages usually provide for short-term trouble avoidance, while strategic advantages offer long-term contributions in maximizing opportunities (Lankford and Parsa 1999).  When services are outsourced, it may become easier to handle problem situations because it is possible to go straight to the provider and have them work out the problem instead of having to figure out what went wrong internally (Glickman et al. 2007).

For hotels, benefits are substantial: reduced costs, expanded services and expertise, improved employee productivity and morale, and a more positive corporate image (Lankford and Parsa 1999).  Moreover, the hotel does not enlarge staff, removes from itself cares on personnel recruiting, and saves on social taxes.  At the same time if hotel organise his processes in correct way, quality of work of the personnel remains high.  Also hotels can leave taxes, administrative costs, worries about replacing equipment, warehousing, maintenance,