Universiteit van Amsterdam
Amsterdam Business School
Executive Programme in Management Studies
Thesis
A comparison between manufacturing and service
firm outsourcing
Student Name: Michiel Stoffels
Student number: 10278818 Date of submission: 20-02-2014
Institution: Amsterdam Business School – University of Amsterdam Course: Executive Programme in Management Studies – Strategy Track First Supervisor: Erik Dirksen MSc.
Preface
This thesis was written as part of the requirements for the Master of Science in Management Studies. It was completed over the course of 6 months starting September 2013. It looks into the reasons for outsourcing in service industries – hotels particularly. I would like to thank all interviewees who devoted some of their time and efforts into answering my questions. On top of that I would like to thank my thesis tutor, Mr. Erik Dirksen, for his advice during the whole process.
Dear reader, I wish you a pleasant time in reading this thesis and hope you turn out to be more informed on the subject of service firm outsourcing.
Regards,
Michiel Stoffels
January 2014
Supervisor: Erik Dirksen MSc.
Abstract
This research attempts to compare reasons for outsourcing in manufacturing firms to the reasons for outsourcing in service firms. There is an apparent lack of research in the field of service firm
outsourcing, especially in the field of hospitality outsourcing. The reasons for outsourcing in
manufacturing firms have been derived from the abundance of literature on the subject building on two main economic theories; Transaction cost Economics and the Resource Based View. The reasons for outsourcing in service firms (hotels, as a prime example of service firms, have been used) are derived from 10 interviews with operations managers in Amsterdam based hotels. Data shows that service firm outsourcing is motivated by very similar, if not identical, reasons for outsourcing in manufacturing firms. This thesis can be used as a guideline for further research in service firm outsourcing. Other research could include financial data to improve the reliability of its outcomes. Multiple geographic locations could be used, especially in rural or less developed areas. This is limited in its generalizability to other industries as a single industry approach was chosen.
Keywords: Outsourcing motivation, hotels, transaction cost economics, resource based view, service industry, operations management, Amsterdam,
TABLE OF CONTENTS PREFACE__________________________________________________________________________ 2 ABSTRACT ________________________________________________________________________ 3 TABLE OF CONTENTS ______________________________________________________________ 4 1. INTRODUCTION ____________________________________________________________ 6 2. RESEARCH QUESTION _______________________________________________________ 8 2.1 CONTRIBUTIONS ______________________________________________________________ 8 2.2 THE RESEARCHER _____________________________________________________________ 8
3. LITERATURE REVIEW AND FORMATION OF PROPOSITIONS ________________________ 10
3.1 OUTSOURCING ______________________________________________________________ 10
3.1.1 TRANSACTION COST ECONOMICS AND OUTSOURCING ____________________________________ 10 Asset specificity ___________________________________________________________ 11 Frequency ________________________________________________________________ 13 Uncertainty _______________________________________________________________ 14 Bounded rationality ________________________________________________________ 15 Opportunistic behavior ______________________________________________________ 15 3.1.2 RESOURCE BASED VIEW AND OUTSOURCING __________________________________________ 16
Core capabilities ___________________________________________________________ 17 Capability complementarity __________________________________________________ 19 Cooperative experience _____________________________________________________ 19 Relational capability-building mechanisms ______________________________________ 20 Organizational flexibility _____________________________________________________ 20 Access to knowledge _______________________________________________________ 21 Improve service quality _____________________________________________________ 22 3.1.3 REASONS FOR OUTSOURCING NOT GROUNDED IN ECONOMIC THEORY _________________________ 22
Corporate policy ___________________________________________________________ 23 Organizational imitation _____________________________________________________ 23 Lack of suppliers ___________________________________________________________ 24 Lack of capital _____________________________________________________________ 24 3.2 MANUFACTURING FIRMS VERSUS SERVICE FIRMS _______________________________________ 25 3.3 HOTELS AND THE HOTEL INDUSTRY ________________________________________________ 26
3.4 HOTEL OUTSOURCING _________________________________________________________ 27
3.5 CONCEPTUAL MAP ______________________________________ ERROR!BOOKMARK NOT DEFINED.
4.1 PROPOSITIONS ______________________________________________________________ 30 5. METHODOLOGY ___________________________________________________________ 32 5.1 DATA SOURCE ______________________________________________________________ 32 5.2 INTERVIEWS ________________________________________________________________ 33 5.3 CONTRIBUTIONS _____________________________________________________________ 36 6. RESULTS _________________________________________________________________ 37
6.1 TRANSACTION COST ECONOMICS _________________________________________________ 37
6.2 RESOURCE BASED VIEW________________________________________________________ 42
6.3 REASONS FOR OUTSOURCING NOT GROUNDED IN ECONOMIC THEORY ________________________ 46
7. CONCLUSION _____________________________________________________________ 48
8. LIMITATIONS, RECOMMENDATIONS FOR FURTHER RESEARCH AND DISCUSSION _______ 52
9. BIBLIOGRAPHY ____________________________________________________________ 54
10. TABLE OF FIGURES _________________________________________________________ 61
11. CODING SCHEME __________________________________________________________ 62
11.1 TRANSACTION COST ECONOMICS _________________________________________________ 62
TRANSACTION COST ECONOMICS – GENERAL ________________________________________________ 62
ASSET SPECIFICITY __________________________________________________________________ 65
FREQUENCY ______________________________________________________________________ 68
UNCERTAINTY _____________________________________________________________________ 70
BEHAVIORAL ASSUMPTIONS ____________________________________________________________ 74
11.2 RESOURCE BASED VIEW________________________________________________________ 80
PERIPHERAL OR CORE NATURE __________________________________________________________ 80
COMPLEMENTARITY _________________________________________________________________ 82
COOPERATIVE EXPERIENCE ____________________________________________________________ 83 RELATIONAL CAPABILITY BUILDING MECHANISMS _____________________________________________ 84
ORGANIZATIONAL FLEXIBILTY ___________________________________________________________ 86
ACCESS TO KNOWLEDGE ______________________________________________________________ 89
IMPROVED QUALITY _________________________________________________________________ 92
1. Introduction
Outsourcing, or vertical dis-integration, is everywhere [Belcourt, 2006]. Widespread competition in world markets, the increasing importance of fixed costs, rapid technological development and the rising complexity of input and output markets have forced firms to be increasingly flexible in serving their markets [Nooteboom et. al., 1997]. These changes in the environment lead to clear reasons as to why outsourcing exists. The ability to grow and maintain a technological or competitive edge, access to expertise, cost reduction, increase in efficiency, service or product improvements, maintaining flexibility, organizational politics and ability to focus on core activities have all been mentioned. [Stacey, 1998; Ang & Cummings, 1997; Butler & Callahan, 2011; Belcourt, 2006].
The majority of the existing literature is however based on manufacturing industries that ‘create’ products from either raw materials or semi-finished goods. The literature used in this study hardly has any mention of its applicability to service oriented firms. Williamson’s many publications over the past four decades (all on TCE) consistently display examples from the manufacturing industry or test his theories to manufacturing industries: coal industry [Williamson, 2005], plastics, chemicals [Williamson, 1998], automobile industry [Williamson, 1981], trucking industry [Williamson, 1979, p258] . Other authors have also merely included manufacturing firms in their TCE research [Buvik & Reve, 2001; Martinez-Noya, 2012; Murray et.al, 1995].
Olsen & Roper [1998] conclude their comprehensive review of hospitality specific research with saying that ‘industry matters’ and that there is a lack of strategic literature applied to the hospitality industry. The goal of this research is therefore comparing the reasons for outsourcing in
manufacturing industries (extracted from the abundance of literature) to the reasons for outsourcing in a service industry. As a prime example of a service industry, hotels will be analyzed (the
Amsterdam hotel industry will be used) and data obtained from interviews with operation managers will be used for the comparison.
Whenever ‘motivations for outsourcing’ or ‘reasons for outsourcing’ is mentioned one should interpret this as ‘motivations for and against outsourcing’ or ‘reasons for and against outsourcing’. This format is used for improved overall readability.
2. Research Question
The research question is as follows:
What reasons for outsourcing in hotels can be identified and are they identical to reasons for outsourcing in manufacturing firms as presented in academic literature?
This thesis will start by giving an overview of two existing theories of the firm. Reasons for
outsourcing will be extracted from those theories. From this literature study a research question is derived, accompanied by three main propositions and several sub propositions. Then I will continue by stating the research methodology that has been used. Data is then gathered and analyzed after which the research question is answered and discussed. Implications for managers and suggestions for further research are given.
2.1 Contributions
The subject for the research in this paper has been carefully selected based on suggestions by Espino-Rodríguez & Padron-Robaina [2005], Espino-Rodríguez & Robaina [2004] and Lamminmaki [2006]. They propose a lack of research in the hospitality industry in general, and a lack of
outsourcing research within the hotel industry specifically.
The main contribution of this paper is the empirical comparison between reasons for outsourcing in manufacturing firms and hotels. The reasons for outsourcing in manufacturing firms are derived from the abundance of literature that has been published on the subject. They are based on existing theories about Transaction Cost Economics and the Resource Based View. The reasons for outsourcing in service companies will be derived from qualitative data gathered in this study.
2.2 The researcher
After finishing my Bachelor program in Hospitality Management at Stenden University in
Leeuwarden, the Netherlands, I felt the need for more theoretical depth in my knowledge of the hotel industry. The Amsterdam Business School (part of University of Amsterdam) offers a unique
program in which students can learn and work at the same time. I completed this program with a specialization in corporate strategy. The combination of my knowledge of and work experience in hotels and the theoretical backing on the subject I had picked up over the years sparked my initial interest in hotel outsourcing. I then started to learn the apparent lack of research in the field of hospitality and especially hotel outsourcing: rather peculiar for a near 500 billion USD industry [Deloitte, 2010, p7] 1
1 Deloitte LLP, Hospitality 2015: Game changers or spectators?, 2010
3. Literature review and formation of propositions
3.1 Outsourcing
The definition of outsourcing has been manifold. Simply put, a company pays another company to do some work for it [Belcourt, 2006]. There seems to be a clear division in corporate activities; core and non-core activities are identified. The first cannot be rented in, and only the latter should be
outsourced [Prahalad & Hamel, 1990]. This same distinction is made by Gilley & Rasheed [2000] with their core- and peripheral outsourcing. ‘Make or buy?’ seems to describe it all: a firms’ decision to either have one Strategic Business Unit (SBU) create a product for another in-house SBU, or to buy that same product from an external SBU is what its all about [Harrigan, 1985]. However, the above definitions are all grounded in different economic theories; namely Transaction Cost Economics and the Resource Based View.
3.1.1 Transaction Cost Economics and outsourcing
The godfather of transaction cost economics (TCE from here onwards) is thought to be R.H. Coase with his 1937 paper “The nature of the firm”. The theory, however, was popularized by Williamson’s 1981 paper “The economics of organization: the transaction cost approach”. TCE explains the boundaries of a firm in terms of ‘economic assessment [of transactions]: what is it that determines
when a firm decides to integrate and when instead it relies on the market? ‘ [Williamson, 1981, 550]. Why not organize everything in one big firm? (the Coasian Puzzle) [Williamson, 1999] Transactions
occur when goods or services transfer between two separable entities [Williamson, 1999]. Friction that exists in these transactions are so called transaction costs. Transactions can either take place through the use of markets or by firm integration (hierarchies). These two are named ‘modes of governance’ [Williamson, 2010]. A metaphor is used by Williamson [1981] in which he compares transactions in the economic sense with machinery (from the field of engineering). A well-oiled, well maintained and closely monitored machine will not show any signs of ‘friction’ just as two
well-cooperating parties in a transaction will not show any ‘transaction costs’: signs of delay, conflict or malfunctions.
Based on the above definition of TCE the following proposition is made:
P1. Reasons for outsourcing from a transaction cost economics perspective influence outsourcing in hotels
‘Transaction costs are the roots of all evil’ unambiguously describes most economists opinion on the matter [Dahlman, 1979]. Williamson [1979B] puts forward asset specificity, frequency and
uncertainty as determinants for transactions costs (potential sources of ‘friction’ in transactions). Two behavioural assumptionsb are also mentioned. I will now discuss these five aspects.
Asset specificity
Transactions between two parties require investments from both parties. Sometimes these
investments are nonspecific to that particular transaction. A bread factory buying all-purpose flour from a flour factory requires little to no transaction-specific investments. If one party were to pull out from the deal, no harm to the other party is done. The supplier could easily sell his flour to someone else whereas the buyer could easily obtain its flour from someone else.
This changes, for example, once the scale of the transaction (and investments) changes. Imagine the same example. The same buyer now requires such a great amount of flour, the supplier decides to obtain additional flour production facilities. If that buyer were to suddenly pull out of the
transaction, the supplier is now stuck with over-capacity from its brand new machines. If the supplier would pull out, because he negotiated a higher price for its flour elsewhere the buyer will have issues running its production facilities and such high quantities can’t be obtained easily elsewhere. Non-marketability arises when the specific identity of both parties is important to the transaction [Williamson, 1979B].
A supplier is locked into an agreement whenever his investments are specific to a transaction and when these investments, put into work in an alternative transaction, are less profitable (non re-deployable investments). Physical assets are not the only investments that generate transaction costs; human capital, knowledge and other less tangible assets are even more likely to induce transaction costs as their transferability is much lower. [Williamson, 1979B. De Vita et.al., 2010]. In some cases, asset specific transactions can even become maladaptive; they deliver more risk or costs than they deliver profit [Williamson, 2005; Williamson, 2010].
Williamson [1998, p36] divides asset specificity into six categories:
• Human asset specificity; where organizational learning, human capital and knowledge are specific to a transaction. Imagine the implementation of a new piece of software. Employees corporate wide have to be trained in the use of the system. If the new system is then
unwillingly replaced by another due to opportunistic behavior (the supplier failing to deliver necessary updates for example), the outsourcing firm incurs great costs training their employees into the use of yet another system once again.
• Brand specificity; where suppliers specifically tailor a product to fit a firms’ needs. A retailer selling private branded products that have been produced by external companies for example.
• Temporal specificity; where a product or service loses value if not used in a timely manner. Its present day value > its value in the future. Imagine a firm’s desire to benefit from a first movers advantage in entering a new, previously unexplored market. If a supplier causes delays, a competitor might be first in entering the market and the first mover advantage is lost. If time is of great essence, temporal specificity is high.
• Physical asset specificity; where specialized assets such as capital equipment or modified products are key to the transaction. More generic, standardized products can easily be acquired from other suppliers who possess identical assets.
• Site specificity; where two parties in a transaction are geographically near to each other as to economize on logistical costs and inventory expenses. Imagine the proximity of a firm’s logistical needs (warehouse, infrastructure) to its production facilities.
• Dedicated asset specificity; where one or both firms in an outsourcing contract has invested in assets specific to this one outsourcing contract (supplier-buyer specific assets). If one party were to opt out, that same asset would immediately decrease in value as it only lives up to its true potential under the conditions of the outsourcing contract.
The following proposition was created:
P1a High asset specificity in hotel transactions decreases outsourcing
One thing that might justify investing in assets specific to a transaction is the frequency at which that transaction occurs. Costs are much more easily recovered in recurring transactions [Williamson, 1979B].
Frequency
‘[..]Frequency matters[..]’ [Williamson, 1979B]. Frequency, or simply put the amount of times a certain transaction take place, is another decisive factor in the markets/hierarchies trade-off. Three categories have been identified; one-time, occasional and recurrent. Higher frequencies are often seen in ordinary purchasing agreements: one party buys goods (or services for that matter) from another party. Developing the knowledge to produce the acquired goods or services in house is never beneficial: all costs for the internal development are attributed to the one time use of that particular product or service. Low frequency occasional and recurrent transactions can be either outsourced or developed internally. High frequency transactions more often take place within the firm as internal control mechanisms are less costly than creating complete contracts that safeguard against opportunism.
P1b High frequency of a certain transaction in hotels decreases outsourcing
Uncertainty
Last but not least, uncertainty is considered another important determinant of transactions costs [Williamson, 1979B]. Uncertainty captures the degree to which ex-ante contractual costs and ex-post
monitoring and enforcing costs are augmented by environmental and behavioral unpredictability, respectively [de Vita et. al., 2010]. In other words; uncertainty increases the costs of making
complete contracts before committing to a transaction, and increases costs of monitoring and enforcing during and after the transaction phase. Unstable or highly dynamic environments increase uncertainty and with it, transaction costs. Gatignon and Anderson (1988, p. 315) state that
environmental uncertainties are ‘generally understood to mean the extent to which a country’s political, legal, cultural, and economic environment threatens the stability of a business operation’. The definition however is somewhat narrow as so many firms now-a-days operate in a multinational context, even across continents, so that one country’s environment alone is not a large enough determinant.
The following proposition was therefore created:
P1c High uncertainty in hotel transactions decreases outsourcing in hotels
The above three sources of friction are to some extent all present in every transaction. The higher degree of transaction costs in a certain transaction, the more likely a firm is to decide to integrate a product or service instead of letting the market handle that specific task. This has to do with the advantages obtained by internalizing a transaction: internal methods of monitoring and control (hierarchy) are less costly and more effective[Williamson, 1971].
Bounded rationality
Agents are limited in adapting optimally, or even satisfactory, to complex environments [Simon, 1981]. Limited cognitive abilities are part of humans’ nature. A system that allows for precise evaluation of all courses of action is absent. Simon [1955] even goes as far as stating that ‘there is a
complete lack of evidence that, in actual human choice situations of any complexity, [statistical computations of outcomes of all available choices] can be, or are in fact, performed.’ He goes on
proposing a set of modifications corresponding to the observed human decision making process that lead to severe simplifications from the classical concept of full rationality. Simon [1961. From: Williamson,1979] argues that ‘attention, i.e., our capacity for considering and processing a given
piece of information, is the scarce resource, not information.’ It is therefore not the absence of
certain information that leads to incorrect decisions, but the lack of analytical capacity to process a bulk of information and use it effective accordingly. Bounded rationality, as opposed to full- or hyper rationality therefore simplifies the decision making process [Williamson, 1979].
Opportunistic behavior
Agents are motivated by self-interest; at least some of them are even opportunistic (self-interest with guile): ‘making false or empty, that is, self-disbelieved threats or promises’ [Goffman, 1969]. Hirshleifer [1977] in his research found that the key for viable exchange, exchange in the context of this thesis being a transaction, is control of cheating. Not all agents act opportunistic, but finding out who does and who does not is costly. [Williamson 1979]. Whereas bounded rationality simplifies the decision making process (make-or-buy in this context), opportunistic behavior makes that process much more complex. How can one control for intentional, unpredictable, self-interest driven behavior from agents? Bowen & Jones [1986] relabel opportunistic behavior as ‘goal incongruence’; promoting one’s owns parties interest over the others as the expected returns from competitive behavior exceed the returns from cooperative behavior.
Radner [1968]puts forward the inseparability of both behavioral assumptions. It is the combination of both behavioral assumptions that forces internalizing some transactions. Clearly, if both parties, although boundedly rational, can be trusted to act as they agreed to in a contract and respond in a mutually beneficial manner once unanticipated events occur, there exists no reason to internalize any transaction: after all, markets and not hierarchies are the optimal form of governance
[Williamson, 1979B] The other way around also delivers an explanation for internalization of transactions: if parties were to be fully rational, designing complete contracts that incorporate all possible situations and include hazard mitigating responses would be an easy task [Williamson, 1999]
Considering the inseparability of both behavioral assumptions from the three sources of transaction costs, the following proposition was created:
P1d Bounded rationality and opportunistic behavior moderate transaction costs in hotels
The cost driven approach to outsourcing that TCE promotes is however not the only rationale for outsourcing [Belcourt, 2006; Quinn, 1999]
3.1.2 Resource Based View and outsourcing
What Williamson and Coase were, and are, for TCE, Barney from 1986 onwards puts forward the Resource Based View. The resource based view theorizes about why firms exist and why some firms perform, in the sense of profits, better than other firms. It suggests that a firm is merely a set of combined resources. If these resources, or better yet the unique combination of these resources, hold up to a set of four characteristics, they can be called a (sustained) competitive advantage. These characteristics are [Barney 1991]:
• Valuable; a resource should be valuable in the sense that it creates returns for a firm
• Rare; a resource should be scarce by nature. An abundance of a resource would, through the market mechanism, cheap, not valuable [Barney, 1986]
• Inimitable; in the sense that the resource should be costly to copy, or even completely inimitable. Socially complex or knowledge based resources are often highly inimitable up to a point that it is unclear what specific resource creates the actual competitive advantage (causal ambiguity) [Peteraf, 1993]
• Non-substitutable; in the sense that similar resources that can be put to the same use should be non-existent [Dierickx & Cool, 1989]
Although all four factors should be present for a competitive advantage to be sustainable, the presence of all four does not automatically create competitive advantage [Dierickx & Cool, 1989]. As now seems clear, the theory of RBV guides firms into making their outsourcing decisions.
The following proposition was therefore created:
P2. Reasons for outsourcing derived from the resource based view influence outsourcing in hotels
Core capabilities
RBV scholars agree that a firm should focus on its core capabilities, those activities in which it possesses a sustainable competitive advantage, and that it should outsource those parts of the organization other firms excel at [Venkatesan, 1992]. In doing the latter, firms can refocus their strategy on doing what they are good at [Prahalad & Hamel, 1990].
Alexander and Young (1996, p117) name four aspects of these core activities:
• Activities traditionally performed internally with long-standing precedent • Activities critical to business performance.
• Activities creating current or potential competitive advantage.
• Activities that will drive the future growth, innovation or rejuvenation of the enterprise
• Activities are traditionally performed externally (‘often’, instead of ‘traditional’ would be a better choice of words here).
• Activities are non-critical to firm performance; in performing these tasks no • Activities do not create current or potential competitive advantage
• Activities do not contribute to growth, innovation or rejuvenation of the firm
Quinn & Hilmer [1994] propose two strategic approaches:
• Concentrating firm resources to serve a set of core competences in which it can provide ‘definable preeminence and unique value for customers’ [Quinn & Hilmer, 1994, p46] • Strategically outsource other activities in which a firm cannot create significant value, ‘even
those that are traditionally considered integral to any company’ [p46]
The successful combination of these two strategies leads to serious benefits in four ways [Quinn & Hilmer, 1994]:
• Capitalizing on what a firm does best by concentrating investments on a firm’s core competences
• The creation of large barriers to entry for existing and future competitors
• Decrease in investments and risk, shorter cycle times and improved adaptability to customer needs
• And, last but not least the most important benefit achieved from combining the two
strategies within the context of this thesis: ‘full utilization of external suppliers’ investments, innovations and specialized professional capabilities that would be prohibitively expensive or even impossible to duplicate internally.’
On the contrary, Handley [2012] argues that firms should not underestimate the loss of internal capabilities that occur when a process is outsourced. The decision to outsource or not, in which in some cases entire departments or at least some human or physical assets are eliminated, reflects a firms opinion on whether that particular resource is a core competence or not [Barney, 1991].
The decision matrix that Sislian & Satir [2000] propose is another way of separating core
competences from peripheral processes. The matrix however relies heavily on the decisions makers’ knowledge externalities such as supplier capabilities, quality level , process maturity and risk of opportunistic behavior: information that in most cases is not readily available.
The following proposition was therefore created:
P2a. The either peripheral or core nature of certain firm processes moderates outsourcing in hotels
Holcomb & Hitt [2007] identify several other rationales for outsourcing grounded in RBV literature:
Capability complementarity
Complementary capabilities are those capabilities that can be sourced from a partner firm in such a way that it uniquely complements a firms own assets. It is the combination of these capabilities that creates a synergy; 1+1 >2. Duplicating this combination of capabilities is hard for competitors as they cannot acquire it on the strategic factor market. Rothaermel [2001] in his very extensive empirical research theorizes and proves that incumbent firms can improve performance by partnering with other, new, smaller firms who feature groundbreaking new technologies in their product portfolio. Incumbent firms possess the managerial and other capabilities for a radical innovation to be fully exploited, an aspect that smaller firms often fall short of. The following proposition was therefore created:
P2b. The potential complementarity of certain firm processes with partner firm core capabilities increases outsourcing in hotels
Cooperative experience
Over time, firms build up experience in their daily routines with partner firms. Trust, or ‘repeated ties’ reduce information asymmetries and heighten awareness of specialized capabilities that could potentially be sourced from partner firms. ‘It reduced the risk of opportunism when the possibility for unfair behavior presents itself. [Holcomb & Hitt, 2006, p476] On the other hand, Quinn [1999,
p20] finds ‘equally important, the outsourced operation must not later be overseen by someone who has a vested interest in the way things were done before. Such people can easily become critics, not champions, and quietly sabotage the relationship.’
‘Relation norms’ [Donada et el., 2009, p369] in supplier-buyer relationships built up over time are valuable factors that can be of great influence in the outsourcing decision. On the other hand, having no experience with outsourcing whatsoever can be a disincentive to explore opportunities in the field.
The following proposition was therefore created:
P2c. High firm cooperative experience with outsourcing increases outsourcing in hotels
Relational capability-building mechanisms
Teece et. al. [1997] theorize about firm dynamic capabilities as the driver of sustained competitive advantage. They argue that the capability of integrating, building and developing resources is where a firms actual strengths lie, not in the capabilities itself. A firm with strong dynamic capabilities excels at recombining existing resources within the firm and leveraging specialized capabilities sourced elsewhere [Holcomb & Hitt, 2006, p476]
The following proposition was therefore created:
P2d Strong firm relational capability-building mechanism increase outsourcing in hotels
Organizational flexibility
Organizational flexibility entails several reasons for outsourcing. Achieving flexibility can be done through the creation of networks: Partnering with multiple firms, creating a web of firms. Several advantages can be gained from this:
• Quick access to new technologies or markets (the constructs of ‘quick access’ and ‘access’ are treated as two different constructs, the former relating the speed at which a firms gains
access to new technologies, the latter relating to actually getting access to certain knowledge, which is discussed below) [Quinn, 1999]
• Cope more easily with fluctuations in demand; especially important for smaller firms [Kakabadse & Kakabadse, 2005; Lankford & Parsa, 1999]
• Cope more easily with long term issues such as the (unexpected) obsolescence of products through competitor’s disruptive innovation
One should not confuse adaptation with flexibility. The former refers to a reactive, temporary process that occurs when a firm needs to respond to changing externalities. The latter refers to the pro-active actions management has taken to incorporate a system that allows for modifications in response to those changing externalities (demand fluctuations for example) [Fjeldstad et. al., 2012]
Organizational flexibility decreases firm risk as flexible organizations can more easily adapt to
changing environments, hereby more quickly restoring revenue streams or decreasing incurred costs [Arias-Aranda et.al., 2011]
P2e. The need for organizational flexibility influences outsourcing in hotels
Access to knowledge
Quinn [1999], amongst other authors, argues that access to expertise in for example new products, techniques, productions facilities or even new markets in new geographical locations is critical in sustaining competitive advantage. Developing similar capabilities in-house might seem more cost effective at first but Quinn [1999, p19] correctly raises the error of firms neglecting to incorporate costs associated with ‘non-innovation, missed opportunities and management time’. Chesbrough [2003] adds that innovation or the development of new products now-a-days doesn’t come from within. Instead an open innovation system should be pursued, looking for innovation through, for example, outsourcing. Wagner [2009] even goes as far as saying that firms should actively seek and attract suppliers with an innovative track record. Suppliers and their knowledge, absent in one’s own
firm, can improve quality and reduce costs as well as create first mover advantage in new markets [Ellis, Henke & Kull, 2012].
The following proposition was therefore created:
P2f. The need for access to knowledge increases outsourcing in hotels
Improve service quality
As Cheon, Grover & Teng [1995] found, activities are often outsourced due to dissatisfaction with quality; even more often than they are outsourced due to dissatisfaction with costs. Plugge et. al. [2013, p281] in their very recent research state that ‘[a firm] must be willing and able to adapt their
outsourcing capabilities and organizational structure to achieve high quality performance and thus to remain competitive’, hereby saying that outsourcing can be fundamental in achieving firm
performance. Poppo & Zenger [1998] also state one of three main reasons for outsourcing (market exchanges) to be the need for quality improvements.
The following proposition was therefore created:
P2g. The need for improved quality increases outsourcing in hotels
I will now continue with describing several reasons for outsourcing that are not grounded in economic theory.
3.1.3 Reasons for outsourcing not grounded in economic theory
Although not explicitly present in economic theories concerning outsourcing, through logical reasoning and the researcher’s work experience in hotels, several other factors possibly influencing outsourcing in hotels can be identified. Corporate policy, or the rules and regulations set out by a corporate parent is one of them.
Corporate policy
Alexander & Young back in 1996 discovered that, although most firms see outsourcing as a localized issue, one third of companies have a policy in place regarding outsourcing [p116]. Hotels might be bound to certain suppliers that have been contracted by their corporate parent on a global scale. A supplier code might be in place, describing guidelines on what traits suppliers need to have to be considered for outsourcing (Corporate Social Responsibility programs or ISO certifications for example).
Organizational imitation
Imitation of competitors is another factor that might be of influence to outsourcing.
Inter-organizational imitation is the imitation of what other firms have been doing. Haunschild & Miner [1997] distinguish three different kinds of imitation:
- The copying of practices that many competitors have been doing in the past, or ‘frequency imitation’ is rather tautological. It explains the habit of firms to adopt certain strategies or make certain decisions based on the sheer amount of firms that have been doing the same thing in the past, and in doing so contributing to that mass of firms making the same decisions and increasing the frequency imitation by others.
- The copying of practices what competitors with certain traits have been doing is named ‘trait-based imitation’. These traits can be many things: size, quality, brand perception, perceived success, etc.
- The copying of practices of competitors that have proven to be successful in their business (‘outcome based imitation’) is a sort of variation-selection-retention process in which a firm seeks to copy those processes that have had a positive outcome in competitor firms while avoiding decisions that seemed to have a negative outcome in competitor firms.
Lack of suppliers
A firms geographical location can be of great influence to the resources it has access to. One can logically argue that, for example, fresh produce is nowhere to be found in remote areas with unfertile soil, or that fish is a rarity in those few countries that have no border adjacent to a large body of fresh or salt water. The same thing goes for more sophisticated firm needs; not every city or village has an industrial Laundromat, maintenance services or employment agency that has trained hotel workers available at will. Even basic food and beverage activities in hotels in some
well-developed areas that can potentially be outsourced struggle to supply in their needs [Navdar, 2013]. Ono [2011] theorizes and proves that demand in one geographic location for a certain input drives suppliers of that input to that location, thereby increasing the use of that input, increasing
competition between suppliers and decreasing costs for end-users. Logically, a lack of demand for input leads to an absence of suppliers.
Lack of capital
As Funkhouser [2012] points out, a lack of capital can greatly influence the amount of outsourcing. A lack of funds to invest in assets increases the need to outsource. Specialized companies that benefit from economies of scale by supplying to several different firms can more easily justify an investment in for example expensive equipment, software or human capital.
Based on all three reasons stated above, the following proposition was created:
P3. Reasons for outsourcing not grounded in economic theory influence outsourcing in hotels
3.2 Service Firms
I will now continue with a summary of what has been discussed previously and the reason as to why this thesis is focussed on service firms. As one can see, the subject of outsourcing has been covered in an abundance of literature from all over the world and across many fields of study (strategy, psychology, sociology, economy). The majority of the existing literature is however based on manufacturing industries that ‘create’ products from either raw materials or semi-finished goods.
The literature used in this study hardly has any mention of its applicability to service oriented firms. Williamson’s many publications over the past four decades (all on TCE) consistently display examples from the manufacturing industry or tests his theories to manufacturing industries: coal industry [Williamson, 2005], plastics, chemicals [Williamson, 1998], automobile industry [Williamson, 1981], trucking industry [Williamson, 1978, p258]. Other authors have also merely included manufacturing firms in their TCE research [Buvik & Reve, 2001; Martinez-Noya, 2012; Murray et.al, 1995]. This view is shared by Espino- Rodriguez & Padron-Robaina [2005, p707]: ‘most research has been from the perspective of transactional costs theory […], albeit mostly in the context of non-service industries’.
There is quite some research on outsourced service tasks such as HR functions, IT and financial services , but these outsourced tasks are outsourced originally from within manufacturing companies [McCarthy & Anagnostou, 2004; Cheon et.al., 1995]. Many, such as Bustinza et.al. [2010] look into service firm outsourcing but focus on the effects of outsourcing on competitive capabilities and performance in these firms. Arias-Aranda et.al. [2011] have done some exploratory work on outsourcing in service firms but sought to find the relationship between outsourcing and
organizational flexibility; not the motivations for outsourcing in those firms. What remains absent in the literature is empirical proof that a manufacturing firm’s reasons for outsourcing are identical to a service industry firm’s reasons for outsourcing.
This gap in the existing literature is remarkable as service firms in so many aspects differ from the more traditional manufacturing firms.
3.3 Manufacturing firms versus service firms
Service firms in general differ greatly from manufacturing in many aspects; intangibility of output (customers do not obtain ownership of a service), delivery on demand versus delivery from
inventory, people (customers, employees) are part of the product, greater variability in operational inputs and outputs (difficult to standardize), value in service delivery is much harder to evaluate for customers and time plays an important role (speed of service, 24/7 availability) [Lovelock & Wirtz,
2011; Mills et. al, 1984]. Service firms require more labor than manufacturing firms require labor, even customers participate in the service delivery process [Bowen and Jones, 1986; Erramilli and Rao, 1993]. A service is often, but not always, both inseparable -production and consumption are
geographically linked and a service firm needs to be present when the service is delivered - and perishable - a service cannot be stocked up nor can it be delivered from inventory - [Bowen and Jones, 1986].
Considering all these differences that lie at the core of service firms – the nature of their products, the delivery process, value evaluation – it is important to test whether reasons for outsourcing in service firms are identical to those in manufacturing firms. Donada & Nogatchewsky [2009, p372] stress the need for more research on outsourcing in service firms ‘where the processes are very different from those of manufacturing industries’. Similar research has been done in the past. However, few studies have taken a single industry approach: Murray & Kotabe [1999] analyze outsourcing in Fortune 500 service companies; Bolat & Yilmiz [2009] do take the single industry approach but seek for the relationship between outsourcing and firm performance. Lam & Han [2005] seek for the perceived effectiveness of outsourcing; not the motivations behind it.
3.4 Hotels and the hotel industry
‘Outsourcing takes on special importance in the hotel sector’ [Espino-Rodriguez, Padron-Robaina, 2005]. Lam & Han [2005] in their research state that hotels have adopted outsourcing to a great extent in an attempt to decrease operating costs, increase revenue, decrease risk and improve productivity. Donada & Nogatchewsky [2009] mention that, because of the recent economic downturn in the west, hotels have, more than other industries adopted outsourcing into their everyday business practice. Hotels are typical service firms. Table 1 displays service firm characteristics as mentioned above, applied to hotels.
Table 1: Service firm characteristics and hotels
Service firm characteristic from literature Applied to hotels
Intangibility of output Room nights are intangible
Delivery on demand (perishability) The service is delivered as a guests checks in People are part of the product Hotel employees define a hotel’s service Variability in operational inputs and outputs Quality, such as cleanliness or friendliness, can
vary greatly per guest value in service delivery is much harder to
evaluate for customers The value of a room night is dependent on many factors: quality, location, brand perception, etc time plays an important role Hotels are, due to the nature of room nights,
available 24/7 Production and consumption geographically
linked (inseparability) Room nights are ‘produced’ and ‘consumed’ on-sight People intensive Hotels are labor intensive [Pearlman & Schaffer,
2013]
3.5 Hotel outsourcing
Below is a list of hotel activities that can potentially be outsourced. This list of activities was taken from a 2005 article [Espino-Rodríguez, Padrón-Robaina] in which 14 extensive interviews were held to assemble this list.
- Department: Reception Activities: reception, reservations
- Department: Housekeeping Activities: Room cleaning, common areas cleaning, laundry - Department: Food and beverage Activities: Purchasing and receiving, restaurants, bars,
kitchen operation
- Department: Maintenance Activities: Technical service, swimming-pool maintenance, gardening services
- Department: Administration Activities: Administration, training, personnel selection, sales activity, promotion and advertising,
- Department: Information systems - Department: Leisure activities - Department: Hotel security
These categories can benefit the quality of data gathered as this list, using probing questions, points the interviewee towards outsourced activities that might have been forgotten or overlooked.
3.6 Conceptual Map
The conceptual map increases overall understanding of the subject of outsourcing and the three given categories of reasons for outsourcing.
Table 2: Conceptual Map
4. Research question
The research question is:
What reasons for outsourcing in hotels can be identified and are they identical to reasons for outsourcing in manufacturing firms as presented in academic literature?
4.1 Propositions
P1. Reasons for outsourcing from a transaction cost economics perspective influence outsourcing in hotels
This proposition is split up in four sub propositions:
P1a High asset specificity in hotel transactions decreases outsourcing
P1b High frequency of a certain transaction in hotels decreases outsourcing
P1c High uncertainty in hotel transactions decreases outsourcing in hotels
P1d Bounded rationality and opportunistic behavior moderate transaction costs in hotels
P2. Reasons for outsourcing derived from the resource based view influence outsourcing in hotels
This proposition is split up in seven sub propositions:
P2a. The either peripheral or core nature of certain firm processes moderates outsourcing in hotels
P2b. The potential complementarity of certain firm processes with partner firm core capabilities increases outsourcing in hotels
P2c. High firm cooperative experience with outsourcing increases outsourcing in hotels
P2e. The need for organizational flexibility increases outsourcing in hotels
P2f. The need for access to knowledge increases outsourcing in hotels
P2g. The need for improved quality increases outsourcing in hotels
5. Methodology
5.1 Data source
The following list of hotels all contributed to this research by allowing a manager to be available for an interview (random order):
Table 3: Hotels that have been interviewed
Hotel name Chain Star level
CASA 400 Independent 3*
Hilton Doubletree Amsterdam Hilton 4*
Amsterdam Marriot Hotel Marriott 5*
Banks Mansion Amsterdam Independent 4*
Renaissance Amsterdam Hotel Marriot 5*
Mercure aan de Amstel Accor 4*
Hotel Pulitzer Amsterdam Starwood 5*
Westcord City Centre Hotel Amsterdam Westcord 3*
Hotel Vondel Vondel Hotels 4*
Best Western Apollo Museum Hotel Amsterdam City Centre Apollo 3* These hotels were all picked within a set of specific boundaries:
- Within a 10 kilometer radius of the historical center of Amsterdam. As Espino-Rodríguez & Padrón-Robaina [2004] and Lam & Han [2005] both motivate in their research, the choice for a single geographic location for the complete sample was easily made. This decision
improves uniformity of outsourced activities between the different hotels and the elimination of cultural differences in research outcome.
- Only 3, 4 or 5 star hotels were picked (Nederlandse Hotel Classificatie [NHC], a Dutch classification system of hotels that ranges from 1 to 5 stars)
- All hotels feature a minimum of 50 rooms and 1 food/beverage outlet. Maintaining a
minimum amount of rooms in the set of hotels forces the exclusion of small-sized hotels (Bed & Breakfast, hostels, etc) in this research that might have other motivations for outsourcing that are not applicable to the larger firms.
- The set of hotels, contains chain hotels as well as an independently operated property. The independently operated hotel is included in the data set as they might not have strict guidelines from headquarters in their choice of both what tasks to outsource and what supplier to choose [Donada & Nogatchewsky, 2009]2.
- Snowball sampling has been used; managers in the earlier interviews referred to other managers as potential additional sources of information.
- The sample consists of three 3* properties, four 4* properties and three 5* properties. In the Amsterdam area there are 108 3* properties, 75 4* properties and 14 5* properties.
5.2 Interviews
10 Interviews have been conducted of which 9 have been recorded with a voice recorder. One interviewee (coded with the letter F) did not agree on the interview being recorder; extensive notes were therefore taken instead. Below is a table of interviewees and their coding letters:
Table 4: Respondent characteristics
Code letter Age Job Title
A 25-30 Duty Manager en HR manager
B 25-30 General Manager
C 25-30 Director of Operations
D 25-30 Assistent General Manager
E 40-50 Executive Housekeeper
F 30-40 Executive Housekeeper
G 30-40 Operations Manager
H 30-40 Assistant Operations Manager
I 30-40 Executive Housekeeper
J 25-30 Assistant Duty Manager
These interviews were of a semi-structured nature, allowing for deviations from the pre-determined set of questions. The interviewees are all managers in the operations of Amsterdam based hotels.
2 Banks Mansion Amsterdam is however part of the Carlton Hotel Collection – a group of hotels that seek for
synergies in purchasing, marketing and other areas of general interest.
The burden, in the sense of time, this thesis puts on the hotels staff had to be minimized. General Managers, highest in rank in any typical medium to large sized hotel, are likely most suitable to answer questions about such company wide, important subjects as make-or-buy decisions.
Operations managers however, often being second or third in rank, will also have the knowledge that is needed for answering the interview questions. Although high in rank as well, their time is
somewhat less scarce than a hotel General Manager’s time might be.
The interviews entailed a broad set of questions about:
- The degree of outsourcing in their hotels (e.g. what aspects have been outsourced?) - The aspects that lead to the decision to outsource (or insource)
- The perceived advantages and disadvantages of outsourcing in their hotels
- Special attention has gone to managers who mentioned that they have been involved in a tender for outsourcing in their hotel. In a tender process, reasons for outsourcing are carefully weighed against costs. In doing so, managers are forced to think about everything that involves outsourcing.
The interviews have been structured as follows:
• Personal introduction, small talk to set the mood
• Introduction to thesis subject, goal of this research, estimated interview time (30-45 minutes), permission to record the interview
• Start recording
• Explain anonymity of interview: transcripts or quotes from interviews cannot be connected to a person or company.
• Ask some pre-determined questions with vast opportunity for deviations from the interview grid. Ask questions in response to interviewees’ answers. Ask probing questions about all potentially outsourced activities (as displayed in a list above).
• Thank interviewee for their time and ask whether they wish to receive a copy of the final thesis.
Each interviewee has been assigned a letter from the alphabet, starting with the letter A for the first person that was interviewed. Each quote from a certain interviewee will then be coded with its corresponding letter and a number, starting at 01 and counting up. Also, a ‘subject
abbreviation’ is added to the code. The following abbreviations have been used:
Table 5: Abbreviations used in coding
Transaction Costs TC Asset Specificity AS Uncertainty UN Frequency FR Behavioral Assumptions BA Access to Knowledge AK
Capability Building Mechanisms CB
Complementarity CO
Cooperative Experience CE
Improved Quality IQ
Organizational Flexibility OF
Peripheral or Core Nature of process PC
Not Grounded in Economic Theory NG
A-TC-1 is therefore the first quote obtained from the first interviewee on the subject of transaction costs. All interviews have been transcribed.
NVivo 10 has been used to structure and categorize quotes from the transcriptions into nodes. These nodes and their sub-nodes correspond to the three propositions P1, P2 and P3 and their sub-propositions P1a-d and P2a-g. A table is presented below, clearly giving an overview of all people that have been interviewed with their respective job titles and letter code used for quotes. Peoples’ and companies’ names have been anonymized as interviews might contain
competitor sensitive information and this thesis will be publically available. A list of company names that employ the interviewees has been given in random order.
5.3 Contributions
The subject for the research in this paper has been carefully selected based on suggestions by Espino-Rodríguez & Padrón-Robaina [2004] as well as Lamminmaki [2006]. They propose a lack of research in the hospitality industry in general, and a lack of outsourcing research within the hotel industry specifically.
The main contribution of this paper is the empirical comparison between reasons for outsourcing in manufacturing firms and hotels. The reasons for outsourcing in manufacturing firms are derived from the abundance of literature that has been published on the subject. They are based on existing theories about Transaction Cost Economics and the Resource Based View. The reasons for outsourcing in service companies has been derived from qualitative data gathered in this study.
6. Results
The following chapter will give an overview of the responses given in the interviews. The chapter is structured according to the propositions and sub-propositions. I will start with transaction cost economics, then continue with the RBV and conclude with reasons for outsourcing not grounded in economic theory. Below is an overview of all nodes and sub nodes with their corresponsive number of quotes extracted from interview transcripts:
Table 6: Nodes and number of sources & responses
Name Sources References
TCE based reasons for outsourcing 10 22
Frequency 4 13
Asset Specificity 7 21
Uncertainty 8 31
Behavioural assumptions 9 44
RBV based reasons for outsourcing 0 0
Complementarity 2 4
Cooperative experience 7 11
Capability building mechanisms 7 9
Improved quality 7 15
Peripheral or core nature of proccess 8 12
Access to knowledge 8 15
Organizational flexibilty 10 25
Reasons for outsourcing not grounded in economic theory 8 24
6.1 Transaction Cost Economics
D-TC-1: I think its a recurring important factor, costs. Its the first and most important reason to
outsource.
Costs, or the change of costs incurred through outsourcing (whether it be decreased or increased), has been reported by all 10 interviewees as being one of the reasons for outsourcing. There seem to be conflicting opinions on the matter of costs. Respondent C, E and G agree that outsourcing an
activity costs money – more than that same activity would cost if it were to be insourced. The others however all mention potential cost savings as being a reason for outsourcing. At first outsourcing seems expensive, but after taking all uncertainties into account it turns out to be similar or cheaper. This is clearly illustrated by
B-TC-2: Bottomline, it turns out to be cheaper, as well as D-TC-3: It definitely leads to cost savings (and J-TC-1)
Assets specific to a transaction can incur transaction costs due to opportunistic behavior of one or both parties. Interviewees agree on the fact that outsourcing standardized tasks, such as those performed by room attendants (room cleaning), is more effective than those processes tailored to a specific organization (F-AS-1 for example). 9 Out of 10 hotels used in this research have their housekeeping department outsourced either partially or completely. Knowledge, assets and
processes are homogenic throughout the industry so that, to a certain extent, complete contracts are possible (E-AS-1 and D-AS-1).
On the contrary, five respondents mention that certain personality traits such as politeness, the rules of engaging with guests, enthusiasm and the true hospitality feeling ‘…can’t be taught’ (C-AS-2). The human asset specificity of certain transactions is mentioned by many interviewees. They state that specific knowledge of internal processes is important. All respondents (Except C, G and J) mention the highly specific nature of their hotels’ own technical services department.
E-AS-4: ‘it concerns knowledge built up over 15, 25, 30 years working at this company’
and
D-AS-5: ‘What else do you want to do? Replace that guy with someone who has to start from scratch?
The physical asset specificity of those assets used in industrial laundry services is rather low. Although machinery is very costly (as mentioned in F-AS-2 amongst others), outsourced companies can easily deploy their assets for use in another transaction. A hotel could simply obtain the same service from another supplier if a supplier were to pull out of a transaction.
As for brand asset specificity, one manager mentions the obligated purchase of certain branded linen supplies by their outsourced laundry service company (E-AS-2). However, as the supplier is the one purchasing the linen, there is little risk for the hotel in question: they can simply switch suppliers if their current supplier is unwilling to cooperate.
No support was found for temporal, dedicated and site specificity.
The frequency at which a certain task is performed is another decisive factor identified in manufacturing firm outsourcing. B-FR-4 mentions ‘we don’t need full-time sales & marketing
managers at this property’, referring to the fact that these services have been outsourced because of
the low frequency nature at this particular hotel. D-FR-4 concurs with saying that linen services have been outsourced as the hotel is too small for full-time linen facilities that are expensive to operate. C-FR-2 agrees as well, saying certain annual maintenance services have been outsourced due to its frequency.
C-FR-1: ‘we are a large hotel, it really pays of this way. If you talk about a small hotel, that’s a
different case’, referring to having many services in-house. D-FR-2 agrees: ‘We have 6 or 7 people in our technical services department, that’s a lot’
J-FR-1: ‘For us, because we are so small, we only need housekeeping services for a part of the day’
On the other hand however, volume should not be confused with frequency. Some managers state that their reason for outsourcing is in fact the high volume of certain tasks. With high volume comes low prices as two respondents state:
B-FR-1: ‘Our 90% occupancy rates increases the amount of money we can save with outsourcing’
D-FR-1: ‘we can get a relatively low price as we are a large company’
Another potential source of transaction costs is uncertainty – the costs incurred to the
unpredictability of ex-ante contractual costs and ex-post monitoring and enforcing costs [de Vita et. al., 2010]. Some managers mention that their outsourcing contracts are rather complete.
A-UN-2: In a case where they don’t live up to the agreed productivity standards, or when their
employees do not meet our quality standards, we can reprimand them for it.
E-UN-5: we agreed on certain quality standards, 85% score. If they fail to reach this week after week, alarm bells start ringing so that the company can adjust their practices.
E-UN-6: If they don’t realize our goals, we definitely have a discussion about it. If they do not improve
we can even cut a certain % from their invoices. That’s all in our contract with them.
J-UN-3: ‘We have so many layers of room checks in place – management, supervisors, front office
staff – we can always guarantee quality standards.
And once the contracts are set up, managers mention that signing away part of the risk associated with running a hotel is one of the reasons they outsourced their activities. F-UN-1 ‘outsourcing gives
stability’, J-UN-1 ‘We agreed on a fixed price, independent of time spent cleaning the room, amount of room attendants required, weekends, weekdays, we just get billed per room’ and E-UN-4 ‘it gives us peace of mind, knowing in advance what its going to cost us’. J-UN-5: ‘They replace worn down linen for us – we don’t pay for it’. The uncertainties that come with having one’s own staff is another
reason for outsourcing in hotels, managers say. A-UN-1, B-UN-1, E-UN-2 and J-UN-2 all say that not having to deal with the costs of sick leave of employees is a reason to outsource.
D-UN-2 states that it is impossible to predict benefits and costs that come with outsourcing: ‘Managing the contract by monitoring quality and productivity may incur great costs while savings
can be gained from not having to recruit and select staff yourself. Many firms will believe it to be automatic cost savings. But upfront, its impossible to say anything about it’
E-UN-1 mentions that activities in housekeeping, cleaning rooms, are easily described in a contract and that one can easily attach a price to cleaning a room because duties, productivity and quality standards in that particular department are unambiguous. The unpredictability of types of activities that are needed in other hotel departments seems to be a reason not to outsource. D-UN-1: ‘Water
leaks, power-outages, elevator malfunction; you name it. He is on a 24/7 schedule, we can call on him any moment to get him to the hotel as soon as possible’.
As for the two behavioral assumptions I discussed one aspect seems to present itself over and over again: employee turnover and loyalty issues with outsourced employees (B-BA-3, C-BA-1, D-BA-7, E-BA-2, F-E-BA-2, H-BA-3, I-BA-7 and J-BA-1 amongst many more refer to it).
D-BA-6: ‘If you work with someone who will be replaced next week by someone else, then the week
after that again, and again the week after that; you won’t even know their names at one point. Getting the maximum potential out of your employees is impossible that way’.
B-BA-1: ‘there is someone there now, but he might be gone next week because the pay is better
elsewhere. I have no influence on that, but the loss is on my side’
D-BA-1:’I think simply because they walk around in a hotel that, who is not their employer. The drive
to perform induced by loyalty is nowhere to be found, because they know they aren’t paid by the hotel, they are paid by the cleaning company. They couldn’t care less what happens to the hotel’
E-BA-7: ‘bonding with these people, seeing some sense of responsibility, really taking interest in what
6.2 Resource Based View
A consensus seems to exist in what departments can and should be outsourced and what departments should be kept in house. Out of ten hotels, nine had a partially or fully outsourced housekeeping department. Out of ten hotels, nine had an internal technical department (the tenth hotel had an only partially outsourced technical department). Managers seem to implicitly make a division in what’s their core business and what’s not.
B-PC-1: ‘What do I outsource? Things that are standardized. Anything that has to do with guests
services or true hospitality I keep inhouse.’
C-PC-1: ‘I did contact a company to outsource my front desk at one point, because that was their
specialty. But in the end I decided that we need to keep service delivery inhouse.
F-PC-1: ‘Any jobs that involves having to deal with guests means: keep inhouse. Because of the
necessary brand training and standard procedures’.
Not only the nature of the work is decisive in the make or buy decision:
I-PC-2: ‘You could choose to outsource the linen management, but the laundry services we have
outsourced are one of the major expenses, so we choose to keep its management in house’
I-PC1: ‘We have € 60.000 a year in staff uniform expenses and its crucial to the well-functioning of the
whole hotel – we really don’t want anyone else to do it’.
and freeing up physical space as well as management capacity seems to weigh in as well:
F-PC-2: ‘We don’t have inhouse industrial services anymore – we built extra guest rooms instead’
D-PC-1: ‘Anything you can possibly outsource during the opening phase of your hotel is worth
