Exploring the Factors Affecting Hotel Outsourcing: Taiwan Case

The purpose of this study was to examine factors affecting hotel outsourcing in Taiwan. A series of two studies was performed. In study 1, content analyses of senior hotel manager interviews were conducted to explore factors determining hotel outsourcing, including jobs requiring capabilities and skills that may be difficult to afford with the hotel’s tight or limited resources, a hotel’s resources and its business scale, transaction costs, and jobs with standard operation procedures. A questionnaire survey was used in study 2, and results indicated that the percentage of current outsourcing and desired outsourcing for international tourist hotels in Taiwan was very low, showing that strategic outsourcing has not received much attention among Taiwanese international tourist hotels. The most outsourced hotel departments were housekeeping, security, maintenance, and information systems. The findings of study 2 also showed that only hotel’s resources influence the outsourcing decision-making. The effect of predicting outsourcing was not significant for transaction costs. The results of this study provide both hotel management and outsourcing service providers with insights of hotel outsourcing in Taiwan.
Keywords: Hotel outsourcing; transaction costs, valuable resources; asset specificity; international tourist hotels

Introduction

Due to economic globalization, market maturity, technological change, and fiercer competition, as well as the need to respond to the customers’ increasing demands, today’s business environments have become unstable and unpredictable. Many companies must focus on their core competencies and capabilities and turn to external sources to achieve desired objectives. The outsourcing of materials, services and components has been recognized as a source of competitive advantage when it results in higher value for the organizations (Gupta and Zhender, 1994; Jennigs, 1997; Espino-Rodriguez and Padron-Robaina, 2004). Recent years have seen increased attention given to hotel outsourcing in the literature (Goldman & Eyster, 1992; Hallam & Baum, 1996; Hemmington & King, 2000; Espino-Rodriguez & Gil-Padilla, 2005; Lam & Han, 2005). Espino-Rodriguez and Gil-Padilla (2005) determined the factors affecting outsourcing of information system/information technology activities in hotels, and Espino-Rodriguez and Padron-Robaina (2004) studied hotel outsourcing and its impact on operational objectives and performance. However, little research has been done to explore determinants of hotel outsourcing in Taiwan. This study attempts to investigate factors affecting hotel outsourcing in Taiwan.

Literature Review

Strategic outsourcing

Strategic outsourcing refers to the company totally or partially outsourcing activities or operations essential to the company that are not core competencies, leading to medium or long-term cooperation with the suppliers. The companies would then be able to concentrate on its core competencies that generate added value to produce competitive advantage (Quinn, 1999). From review of theoretical and empirical literature on the main strategic advantages of outsourcing (Ford & Farmer, 1986; Johnson, 1997; Saunders, Gelbet, & Qing, 1997; Espino-Rodriguez & Gil-Padilla, 2005), ten advantages of hotel outsourcing were identified. Out sourcing allowed hotels to:
1) Acquire capabilities and skills that are difficult to access with hotel own resources;
2) Increase flexibility in performing hotel operations;
3) Focus on the hotel’s core activities;
4) Reduce investment;
5) Complement hotel resources and capabilities;
6) Access to more qualified, more experienced personnel;
7) Acquire the service more cheaply than if it were performed by the hotel;
8) Suppliers offer the hotel good services;
9) Facilitate the performance of in-house hotel operations;
10) Reduce hotel costs

Transaction cost and outsourcing

Transaction costs are comprised of the costs of seeking the suppliers, inspection of goods and establishing and formalizing the terms of agreement, including the means to both guarantee compliance with the terms and protect against the potential expropriation of the investments made, to ensure that contract conditions are fulfilled (Williamson, 1985). Espino-Rodriguez and Gil-Padilla (2005) determined the factors affecting outsourcing of information system/information technology activities in hotels from the resource-based view of the firm. Results of their study indicate that the greater the transaction costs, that is the greater the costs that information, negotiation and supervision of compliance entail, the less the tendency to outsource the activity. Based on the above, this study proposes that the greater the hotel’s transaction costs, the more likely the hotel will be not outsourced.

Valuable resources and outsourcing

Recent studies are adopting a more strategic perspective to explain the outsourcing decision (Teng, Cheon, & Grover, 1995; Poppo and Zenger, 1998). From a strategic perspective, the resource and capabilities approach would seem to be an appropriate framework for explaining the determining factors in hotel outsourcing (Espino-Rodriguez & Gil-Padilla, 2005). From the resource-based view, the core competences approach suggests that a company must focus on those service operations that constitute the core competencies, because they provide the company with growth and direction (Peteraf, 1993), and outsource the other service operations (Quinn & Hilmer, 1994). Before the company decides to outsource a service operation, it should evaluate the resources that sustain that service operation. The competitive value of a service operation is determined by the conditions that make those resources sources of competitive advantage. Barney (1991) indicated that sources of sustainable competitive advantage have to be valuable, rare, inimitable and non-substitutable (Barney, 1986). Grant (1991) and Peteraf (1993) believe that, in addition to fulfilling those requirements, resources must also comply with another condition that allows the company to appropriate the rents generated by these strategic resources: the resources must not be directly transferable on the market, thus making it possible for the company to appropriate the rents generated by those resources and capabilities. Lamminmaki (2005) applied Williamson’s six dimensional typology of asset specificity as a theoretical framework for appraising the nature of outsourcing activities in hotels and indicated that the greater the asset specificity, the more likely a transaction will be not outsourced. From the resource and capabilities perspective, the decision to outsource depends on the extent to which these activities enable the company’s knowledge, capabilities and organizational routines to be exploited. The more specific those routines and skills are, the less likely that the company will outsource them (Cox, 1996; Poppo and Zenger, 1998). Espino-Rodriguez and Gil-Padilla (2005) determined factors affecting outsourcing of information system/information technology activities in hotels from the resource-based view of the firm. Results of their study indicate that the more valuable the IS/IT activity of the hotel, the less it will be outsourced. Based on the above, this study proposes that the greater the hotel’s resources, the more likely the hotel will be outsourced.

Study 1

Method Study 1 employed a qualitative method to determine hotel managers’ perceptions toward outsourcing and explore the key factors affect the outsourcing decision-making.

Subjects and Design

In-depth interviews were conducted with eight senior managers working in seven hotels and two senior hotel consultants. The researchers have taken into account hotel managers who are willing to share their experience and have time available to be interviewed. Ten interviewees were introduced by hotel professionals and invited to participate in the study. The interviewees were invited to talk in general terms about their hotel’s degree of outsourcing and approach to outsourcing. They then were asked to describe factors that influence their hotel’s decision of outsourcing. The emphasis and level of detail on topics varied, depending on who was being interviewed, but in every case the researcher encouraged interviewees to provide concrete examples of their points. With many interviewees, the researcher conducted follow-up interviews and phone calls to clarify issues. The researcher audio taped each interview conversation and took handwritten notes, which were reviewed and edited following the interview.

Results

The contents of interviews were recorded and written in transcript. Using content analysis of dialogues, four major factors that influence hotel’s decision of outsourcing were determined. The interviewees’ profile is shown on Table1. The four primary factors were identified as: outsourcing jobs requiring specialized capabilities and skills is not always feasible for hotels with small or tight budgets, a hotel’s resources and its business scale, transaction costs, and jobs with standard operation procedures.
Four major factors influencing hotel’s decision of outsourcing

Outsourcing jobs requiring specialized capabilities and skills is not always feasible for hotels with small or tight budgets.

All interviewees indicate that hotel management currently outsources those jobs that require specialized professions such as kitchen sanitation, sewer cleaning, marble floor shining, carpentry, cement work, plumbing, large construction, etc. For example, subject 4 indicated that their hotel was “Outsourcing those jobs that cannot be done by hotel employees.” “The investment return rate is key because it costs hotels a lot to train employees to accomplish jobs that require special expertise.” “The engineering department is responsible for electrical repair and routine maintenance and cannot offer carpenter services to fix banquet chairs.” “Carpentry and cement work can be outsourced for small scale hotels, and electrical rough-in can be outsourced for small ones but may not be outsourced for larger ones.” “Boiler service is outsourced because of its specialty and high risk.” “Gardening can be outsourced to save money.” (Subject #4) “Hotel is outsourced because of its specialty and the investment cost. The investment cost is too high to have uncertainty in return rate.” (Subject #4) “Laundry is outsourced because of its high labor costs and use of the detergents requires licenses.” (Subject #8) “The engineering department could outsource one special construction project based on its specialty and the size of the project. The routine maintenance and parts changing are not outsourced but the malfunction of a boiler can be outsourced.” (Subject #6 and Subject #7) “Setting up a laundry within a hotel is very difficult because it uses many kinds of chemicals and the regulations for polluted water are very strict.” (Subject #9)
A hotel’s resources and its business scale Four out of ten interviewees mentioned that the business scale of a hotel determines the departments being outsourced and the extent of which is outsourced. The operation services that may be outsourced include laundry, cleaning of the public areas in the hotel, restaurant services, and in-store bakery. Generally speaking, most of international tourist hotels are less outsourced because of their capacity. For instance, Taipei Sheraton owns space, equipment, technology, and human resources, so it has its own laundry. However, middle and small size hotels tend to have laundry outsourced due to the labor costs and the shortage of specialty equipment. The relationship between outsourcing and the business scale is not negative. For example, if it is a small hotel and its public area is limited, the housekeeping department is responsible for the cleaning. However, the job of cleaning the public area is usually outsourced for most hotels. Restaurants in small and middle size hotels are more likely to be outsourced than those in large hotels because of restaurants’ large labor costs. Table 2 summarizes representative dialogues expressing that a hotel’s resources and its business scale are important factors of determining outsourcing.

Transaction costs

All interviewees indicate that transaction costs are included as one of the major factors when hotel management considers outsourcing. Most hotels evaluate the transaction costs of itself and the supplier and select the most cost-effective one. The outsourced service operations include the laundry, public area cleaning, and vehicles. Vehicle service is considered a non-core service operation and is usually outsourced for most hotels because of the great costs of purchasing, maintenance, and labor. Four hotels currently outsource their vehicle service.

Jobs with standard operation procedures

Five out of ten interviewees indicated that jobs with specialization following standard operation procedures are more likely to be outsourced. Hotels follow details included in the contract to examine the suppliers’ performance. For example, details written in the cleaning contract indicate the areas and frequency to be cleaned. Areas to be cleaned include guest rooms, public areas, kitchens, and parking lots. Six out of ten hotels have outsourced their public areas cleaning. In addition, Taipei Sheraton has outsourced the cleaning of guest rooms in two of its towers.

Hotel outsourcing barriers in Taiwan

Using content analysis, three major barriers were identified by more than half of the interviewees. They are customer-contact tasks, commercial secrets, and necessary supervision.

Customer-contact tasks

All interviewees indicate that service operations, which require people skills, are not outsourced such as front office, concierge and bellman service. Front office tasks are hotel core services requiring service skills and language competency. Outsource these service operations may result in loss of reputation and service quality. For those service operations, which involve customer-contact, are usually not outsourced because it is difficult to control personnel’s appearance, attitude, ethic, profession, and service quality.

Commercial secrets

Six out of ten interviewees indicated that those jobs involved with commercial secrets are not outsourced, including reservations, marketing and sales, finance, human resources, purchasing, and information systems. Marketing and promotion plans, customer survey reports, payroll systems, administration documents, employee profiles, labor costs, purchasing specifications and prices, food costs, and profits are all considered as hotel’s commercial secrets and cannot be externalized.
Necessary supervision Four out of ten interviewees indicate that supervision tasks cannot be outsourced. Supervision tasks include checking the quantity and quality of serving plates, utensils, uniforms and table clothes as well as monitoring public areas and guestrooms cleanliness. Outsourcing these service operations without supervision may result in a loss of profit and reputation.

The trend of hotel outsourcing in Taiwan

More than half of the interviewees indicated that guestroom cleaning, restaurant service, and employee recruiting tend to be outsourced in response to the more professionalized future trend. Some interviewees believe that outsourcing housekeeping operations can reduce the labor costs of hiring full-time housekeepers and produce a higher quality of cleaning. However, hotel management has to establish a standard operation procedure to ensure the quality and protect customers’ privacy. Restaurant service reputation would be the first priority to promote the hotel when outsourcing of restaurant service is considered. Hotel management can decrease the burden of recruiting employees by outsourcing employee recruitment to a human resource management company.

Study 2

Method

A questionnaire survey was used to examine the relationship between hotel managers’ intentions and transaction costs as well as corporation resources while making outsourcing decisions. The current outsourcing activities and activities that are likely to be outsourced were compared.

Subjects and Design

The subjects in study 2 were department managers of 60 international tourist hotels in Taiwan. Five copies of questionnaires were sent out to each hotel, and a total of 148 valid responses were obtained after eliminating the missing and invalid data. As a result, a response rate of 49% was reported. The respondents consisted of unit directors (69%), directors (9%), assistant managers/general managers (9%), and others (13%). One third of the respondents possessed six to ten years of work experience (34%) and followed by eleven to fifteen years (20%), twenty one years or above (16%), five or fewer years (16%), and sixteen to twenty years (14%) (Table 3). The questionnaire developed includes three sections: measurement of transaction costs, hotel resources, and propensity to outsource.
Transaction cost According to Williamson (1985), there are two types of transaction costs:(i) the ex-ante costs of the actions and tasks that take place when establishing the contract – selection, evaluation, negotiation, drafting and agreement guarantee; and (ii) the ex-post costs, or costs originating in administration, obtaining information, supervision and enforcing the conditions of the contract. To be specific, transaction costs comprise the costs of seeking the other party, inspection of goods and establishing and formalizing the terms of agreement, including the means both to guarantee compliance with the terms and to protect against potential expropriation of investments made to ensure that the contract conditions are fulfilled. Based on the transcripts of in-depth interviews conducted in study 1, nine question items were generated for transaction costs measurement: 1) outsourcing can produce labor cost reduction; 2) outsourcing can produce a cost reduction by decreasing the capital investment required to purchase equipments; 3) hotel management would consider time, capital investment, and labor costs while seeking the right outsourcer; 4) hotel management would consider time, budget, and labor costs while negotiating and drafting contracts; 5)hotel would consider outsourcing when ex-ante costs are reduced; 6) hotel management would consider outsourcing when ex-post costs are reduced; 7) hotel management would consider outsourcing when transferred costs are reduced; 8) the transaction process while outsourcing requires many human and material resources; 9)hotel management would consider outsourcing if the quality produced by the outsourcer is the same as the quality carried out in-house. A 7-point Likert scale anchored by extreme disagreement (1) and extreme agreement (7) was used. The coefficient alpha for transaction cost was .83, showing that the measurement had good internal consistency reliability. Coefficients of internal consistency validity for each item ranged from .46 to .63, demonstrating that each item measured the subjects’ perceptions in transaction costs.
Hotel resources Hotel resources are defined as tangible and intangible resources (Lado & Wright 1992; Barney, 1991; Kotter, 1989; Bensaou, 1999; Lamminmaki, 2005). Question items for measuring hotel resources were generated on the basis of the transcripts of the in-depth interviews conducted in study 1. Thirteen items were designed to measure the subjects’ perception of hotel resources. A 7-point Likert scale anchored by extreme disagreement (1) and extreme agreement (7) was used. The coefficient alpha for hotel resources was .83, showing that the measurement had good internal consistency reliability. Coefficients of internal consistency validity for each item ranged from .46 to .64, demonstrating that each item measured the subjects’ perceptions in hotel resources.
Propensity to outsourcing The study attempts to assess not only a given hotel’s current level of outsourcing, but also its inclination or desire to outsource, irrespective of whether it was actually outsourcing at that particular moment. Based on the interviews carried out in study 1 and taking into account the service operations of departments that are frequently carried out in the hotel and that are necessary to the hotel’s service, 13 different hotel departments were determined: front office, housekeeping, food and beverage, human resources, marketing & sales, purchasing, finance, information systems, membership club, public relations, maintenance, and security. The outsourcing measurement was generated from the transcripts of the in-depth interviews conducted in study 1 and by modifying a questionnaire developed by Espino-Rodriguez and Padron-Robaina (2004). Respondents were asked to indicate the level of outsourcing of the department on a 6-point Likert scale, with 0 indicating “not resourced” and 6 “totally outsourced”.

Results

Table 4 shows the average measurements of the inclination to outsource (present and desired outsourcing) for each main service classified by hotel departments. As seen in Table 4, the average number of outsourced departments of current international tourist hotels is less than 2.5. Housekeeping is the most frequently outsourced department among all hotel departments. In contrast, the finance department is least likely to be outsourced. The hotel departments most often outsourced are the ones related housekeeping, security, maintenance, and information systems. The results are consistent with the study conducted by Espino-Rodriguez and Padron-Robaina (2004). Furthermore, results show that the hotel managers would like to outsource more departments than at present, as long as they were able to find suppliers capable of offering good services. In contrast, departments displaying the smallest tendency to be externalised are those related to finance, purchasing, human resources, and front office, since these constitute the basic operations of the hotel. The findings were the same with the study by Espino-Rodriguez and Padron-Robaina (2004). Multiple regression analyses were employed to analyze data. Transaction costs and hotel resources were independent variables, while the average value of departments outsourced at present was the dependent variable. Results of the multiple regression-enter method are shown in Table 5. As seen in Table 5, the prediction of the linear composition of independent variables to outsourcing decision-making is significant (F(2, 145) = 4.54, P