Outsourcing and Hotels

Introduction

What is Outsourcing?

Outsourcing can be defined as a business relationship in which two or more companies work together to achieve a collective advantage. Rugman et al (2003)

If you look back ten – fifteen years ago outsourcing in hotels was not a popular concept but more recently with the downturn in the economy in the nineteen nineties more and more hotels are turning to outsourcing to help increase their revenues and maximize their profit potential. The use of outsourcing enables firms to maximize their resources and to reinforce their competitive advantage. One of the most popular areas for outsourcing in hotels would have to be the Food and Beverage sector. The decision to outsource by many hotels has been traditionally based on cost reduction rather than on any type of strategic motives.

While many hotel companies have experienced success with outsourcing of many support services such as security, maintenance and laundry; the delivery of a core dimension of a hotel product in association with a partner is somewhat likely to be more intricate and can be potentially dangerous to the hotels image and brand identity.

Outsourcing is a new concept which partially substitutes the more traditional term of �subcontracting’. Van Mighem (1999) defines subcontracting as the acquisition of an item i.e. a product or a service, which the hotel is capable of developing whereas outsourcing involves the acquisition of an item which the hotel is not capable of producing internally to a satisfactory level. According to many authors such as Gildrion and Rueck (1998) and Mc Ivor (2000) the motivation to outsource is adopting an increasingly tactical profile as a search for the short term achievement of results in particular the terms of cost reduction.

The decision to outsource

A survey was conducted by Elmuti and Kathewala and it was found that outsourcing projects are conducted for the following reasons: Cost reduction, quality improvement, increase exposure to world wide technologies, delivery and reliability, improvements, gain access to materials only available to abroad and to establish a presence in a foreign market, and the knowledge needed for operations, make capital funds available for more profitable operations.. Elmuti & Kathawala (2000) p116

Outsourcing can be as a result of factors which lie outside a hotel, these factors may include; competition, changes in technology and also competitive legislation. If the competitive situation between hotels becomes fiercer, hotels may begin to refocus on maximizing failing revenues by evaluating their costs associated with doing their day to day business. By identifying these costs outsourcing may become a viable option to help reduce those costs significantly.

Running a hotel requires the operator to have the proficiency in a variety of different areas. These range from the front office to catering to laundry department to IT systems to conference systems to name a few. Outsourcing provides an opportunity to pass on responsibility for fulfilling these functions to specialists who have the knowledge, procurement expertise, the back office systems, to perform the outsourced task more efficiently and effectively, leaving an operator to focus on marketing to attract and retain customers.

Seven different types of outsourcing

Heywood (2001) p28-29 identifies seven different types of outsourcing.

1. Full or Total outsourcing means that the majority of business functions have been transferred to the service provider for the period of the contract.

2. Part or Selective outsourcing this involves a large part of the hotels functions will be controlled in house with only a small amount been outsourced

3. Co- sourcing involves more than one third party just like the agreement that lies between Hilton International and Compaq computers.

4. Transitional outsourcing refers to a firm who transfer control of legacy system but retain the development of new systems to its in house IT Staff.

5. Transformational outsourcing is the opposite of transitional outsourcing. The service provider re engineers the work of specific functions and at the end of the contract the client regains full responsibility and control.

6. Joint venture outsourcing involves the use of a niche in the given market and setting up a new company. The client provides the staff and the assets. The profits from the company will be divided out as in the agreement.

7. Equity stakes is the strengthening of the outsourcing agreements by either the client or the provider of the equity stake