Current issues in hospitality

Outsourcing of food and beverages in independent hotels

 

Table of Contents

Executive summary. 3

Introduction. 4

Research objectives. 4

Literature review.. 5

Outsourcing of food and beverages. 6

Conclusions. 9

Recommendations. 9

References. 11

 

Executive summary

Outsourcing services in the hotel is not a new concept and working with the suppliers has developed efficiencies, reduced the cost base and improved performance of hotels. Several studies have identified different perspectives of outsourcing and the overall industry experience is that outsourcing of certain services which are not value adding processes can contribute to increased efficiencies. Based on purely the value added concept and the core competency model, small and large scale independent hotels located at far off, out of town or unpopulated areas can have different type of core competencies than those hotels located in cities and those which have branded restaurants. The focus of the present report is to evaluate the concept of outsourcing and specifically analyse the aspects of outsourcing of the food and beverages operations or restaurants in independent hotels. It has been concluded that most of the outsourcing decisions are based on financial considerations and for a hotel who is depending on their guests alone as the customers for the food and beverage operations may find it financially viable to outsource such operations to a service provider who are able to bring in the efficiencies and performance, due to the fact that such service providers can concentrate on providing food and beverage services to more than one organisation. This can reduce the cost base of the hotel and provide it with an ability to concentrate on the core competencies and the specific value adding processes.

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Introduction

Hotel industry is facing numerous challenges and mainly in the developed countries recession is affecting the way in which the hotels are analysing and evaluating their operations. Strategic outsourcing has been one of the important methods or models adopted by business organisations to reduce their cost base, get access to improved resources and skills and promote efficiencies in their operations. Several studies and practical considerations have contributed to the outsourcing of the non-value adding processes in the hotels such as laundry, security, information technology, maintenance, purchasing, accounting, food production etc. These are the activities which are considered as not adding value to the organisations in a direct manner even though they are required. In most of the studies concerning outsourcing has been conducted by the analysing the theories relating to transaction costs economies, value chain model, resource-based viewpoint etc. Almost all of the studies also indicate that the financial motivations are the major factor rather than the strategic considerations for making decisions and to outsource certain services.

In the present report, focus is put on the advantages and disadvantages of outsourcing in the hotel industry and an analysis of whether food and beverage operations are contributing to the profitability, value chain and customer satisfaction. Several small-scale, independent and out of town hotels mainly depend on the guests alone for the food and beverages or as the customers of the restaurant. A restaurant operation need some level of scale and also requires large resources in terms of employees and other assets. The demand and supply of such independent hotels which are located out of town cannot be determined in an accurate manner and hence the restaurant operations are also likely to be unprofitable. These small hotels have to consider the financial aspects and evaluate whether outsourcing of their food and beverages operations can be conducted as it can reduce the cost base significantly. Based on this the following research questions have been developed which is answered in the literature review, and certain recommendations have been generated for the Independent hotel chains regarding the operations of food and beverages.

Research objectives

  1. What are the advantages and disadvantages of outsourcing in the hotel industry?
  2. Do the Independent hotel chains generate value addition and profits from their food and beverage operations?
  3. Does the outsourcing of food and beverage operations for independent hotel chains decrease the cost base and increase profitability?
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Literature review

Outsourcing is the process of contracting a business function to an outside organisation either partially or fully (Ojiako, Maguire and Guo, 2009). Outsourcing in the modern management strategic literature is considered as a business strategy taken in order to absolve an organisation from participating in it is non-value-added processes which are contracted to a third party for a period of time, making the organisation’s focus on its core competencies (Fried, Lovell, Schmidt and Yaisawarng, 2002). Gilley and Rasheed, (2000) refers to the concept of strategic outsourcing where an organisation contracts for such activities and operations that are essential for the operations but are not core competencies leading to a time oriented cooperation with the suppliers. According Gorg and Hanley, (2004) many organisations have become unviable due to the enormous cost base and a large part of this cost is accrued by the operations which are not the core competencies of the company (Gilley and Rasheed, 2000). Several organisations are focusing on their core competencies and in the hospitality sector; outsourcing can be seen especially in large hotels where almost all kinds of activities which are not directly affecting the customer can be outsourced.

Several advantages are realised by various researchers to go for a decision relating to strategic outsourcing of the several activities in the hospitality sector or specifically in the case of hotels. One fundamental reason for going in for outsourcing according to Heshmati, (2003) is that many activities of the hotel such as laundry, security, decorations, maintenance, other services etc. are not directly affecting the core competency of the hotel which is the service to the guests. According to Riley, (2005) even the food and beverages operations in the hotel are also being outsourced nowadays. But there have been criticisms against outsourcing of the activities of the hotel even though they are not considered as adding to the value chain (Barros, 2005). Reasons promoted for outsourcing of services in the hotel is that the organisation is able to acquire the service in a financially efficient manner than performed by the hotel (Heshmati, 2003) facilitate the improvement of performance (Ojiako, Maguire and Guo, 2009) and an overall reduction in the costs (Gorg and Hanley, 2004). When analysing several research literatures, the main factors which go on the decisions on outsourcing is the financial and strategic reasons.

Several theoretical considerations have been used in the analysis of evaluating the decision-making process relating to outsourcing. Concepts related to transaction costs economies (Hemmington and King, 2000) are being utilised to evaluate the advantages and disadvantages to organisation. From a strategic perspective, researchers have contradicting ideas related to outsourcing of several services in many industries. Particularly relating to the hotel industry Espino-Rodrıguez and Padron-Robaina, (2004), have identified that valuable resources and capabilities cannot be built in a short time period due to outsourcing of such functions. Hemmington and King, (2000) have contended that outsourcing is viewed from a resource-based viewpoint and the competitive value of the organisation is determined by the conditions that make those resources, sources of competitive advantage.

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Outsourcing of food and beverages

Outsourcing, when considering from the strategic viewpoint and also the resource-based viewpoint, facilitate the contracting of non-essential for non-value-added processes such as laundry, security, maintenance, decorations, food production, information technology, purchasing etc. But several of studies have analysed that for large and small hotels the core competency is in providing competitive room rates to the guest and all other activities can be considered as a secondary activities from the viewpoint of the value chain process. Riley, (2005) have suggested that the provision of food and beverages does not contribute to the profits of a hotel mainly offering premium rated the rooms. Several other research studies have also indicated the unprofitable character of the food and beverage operations, although contributing to the overall satisfaction of the guest and hence a necessity. There are also cases where the restaurants in hotels are not considered as the favoured dining options especially in the premium segment. Many hotel guests in the premium segment opt to dine out in speciality, branded and other favoured restaurants. Some other research studies by Bolat and Yilmaz, (2009) have indicated that food and beverages although contributing to the value addition to the customer is not particularly profitable or their percentage of profit generation capacity in the overall revenues of the hotel is limited. It is based on this concept that several hotels have now adopted the business model of only offering rooms, bed and breakfast concept, motel concept etc. Lamminmaki, (2005) have evaluated that the food and beverages operations require significantly higher resources with specialisations in order to provide a level of satisfaction to the guest whereas, purely from providing rooms to the guest, a hotel need not require such high levels of resources.

Several studies have identified those independent hotels in the premium and budget segments have higher expenses as a percentage of revenue for the food and beverage operations. The hotel chains in the United Kingdom such as Travelodge and Travel Inn has developed the business model of providing only rooms to the guests but are being strategically located near independent food and beverage outlets. Several other hotels have also discontinued their food and beverages operations due to the lack of profitability and the huge financial resources needed to maintain them. Other hotels have continued to offer food and beverages to the guest but have utilised either leasing of the restaurant or outsourcing their food and beverage operations. Glickman, Holm, Keating and White, (2007) have identified that food and beverage operations need scale to be efficient and financially viable which may not be effective from the hotels perspectives mainly because they are relying on the guest of the hotel only and not outside customers (Lamminmaki, 2005). Many hotels located in out of the country or unpopulated areas, cannot strategically position their food and beverages operations because of the lack of consumers (Burgess, 2000). This is significant in the case of small-scale hotels where the number of rooms is less, the occupancy rates are less and even the guest of the hotels travels during the daytime that the food and beverage operations do not generate any kind of scale.

Outsourcing of restaurants in a hotel according to Ottenbacher and Harrington, (2009) is based on financial as well as strategic considerations. The outsourcing of the restaurant reduces the overall cost since it is not required to maintain the specialist employees and tie up resources for the food and beverage operations. Moreover from a strategic point of view outsourcing of the restaurant or the food and beverage operations enables the hotel to concentrate on core activities. The other considerations of maintaining a restaurant food and beverage operations is with respect to the quality and consistency. Hemmington and King, (2000) have identified that along with the scale of operations, the quality and consistency also has to be maintained for viable and continued operations.

The idea or the concept of outsourcing food and beverages which is considered as a radical step has also been based on an analysis of the value chain model. The value chain model contends that there are primary and secondary activities which contribute to the revenues of the organisation (Rodríguez-Díaz and Rodríguez, 2006). An organisation has to analyse the different processes which is adding value, and which can be analysed from the pure financial as well as resource-based viewpoint. For many hotels, when analysing the food and beverage operations from a purely financial point, it has been found that they are adding only an insignificant percentage to the bottom line whereas tying up large-scale assets. Moreover Bolat and Yilmaz, (2009) have identified that trained employees are required to maintain these operations. Another significant consideration is that satisfying the guests in the food and beverage operation is more difficult to achieve because of its high level of contact and the customer expectations (Riley, 2005). Another important research study by Heshmati, (2003) have identified that in the hotel operations, it is the restaurant or the food and beverages section which has the most problems and management difficulties. When considering purely from the employee resource perspective, more number of employees are needed in order to operate a good quality food and beverage or restaurant operations.

The operations of the hotel are also dependent on the demand conditions and from the demand and supply perspective, it is more detailed to predict of forecast the demand for food and beverages than the demand for rooms. But outsourcing of food and beverages in the hotels have been criticised by several authors researchers and analysts. Many authors consider the food and beverage operations as adding to the core competency and providing for customer satisfaction. Bolat and Yilmaz, (2009) have identified that food and beverage operations in fact add to the value chain even though the financial resources required for the operations are higher than when compared to the other operations. But the argument for or against outsourcing food and beverages, for many hotels is based on the financial viability rather than the value chain model or the resource-based view. Many researchers agree that the core competencies of one hotel may not be the same for others and in the case of independent hotels, the resources required for maintaining the restaurant and food and beverages is higher than for chain hotels.

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Conclusions

The literature review concentrate initially on the concept relating to outsourcing and mainly from the strategic perspective and provided the several advantages and disadvantages of outsourcing from a general industry viewpoint. Focusing more on the hospitality and in the hotel sector, several advantages along with their criticisms have been identified. The conclusions from the initial evaluation of the literature are that outsourcing decisions are often based on financial considerations rather than strategic motivations. Although several economic, financial and business management concepts such as transaction costs economies, value chain analysis, resource based viewpoint etc. are utilised in order to understand the several effects of outsourcing, many organisations adopt their decisions based on financial considerations. The next section of the literature review focused on outsourcing of the food and beverages or the restaurant operations and it has been identified that there are mixed results about outsourcing of food and beverages in the hotels. Several advantages have been identified from the financial viewpoint each indicates that the food and beverage operations contributes to an insignificant level of profit while tying up financial resources in terms of employees and other assets. It has also been found that the operations and the complexity in food and beverage operations are much higher than the other areas in the hotel. Independent and small-scale hotels are most affected by the low efficiencies and lack of scale in the food and beverage operations. The conclusion is that the hotel organisation should evaluate the core competencies, and the financial aspects of various value adding processes and analyse whether the food and beverages operations are contributing to the value chain in terms of satisfying the guest and also financially viable.

Recommendations

As discussed in the literature review and concluded, organisations decide on outsourcing based on financial motivations, strategic considerations and ability to focus on core competencies. But it also has been identified that the strategic considerations are not purely evaluated or analyse when outsourcing decisions are taken and it is mainly financial motivations which forces many organisations to outsource certain activities. In light of this, along with other reasons such as the viability and the long-term sustainability of operations, the author contends that financial motivations must be one of the stronger and important considerations when making outsourcing decisions. The focus of the literature review was on outsourcing of the food and beverages in the hotels and several researchers have suggested different perspectives. Based on the literature and an independent analysis of the hotel industry the following recommendations are made specifically for the small scale or large scale independent hotels.

When considering the operations of independent hotels, several researchers have analysed that the food and beverages operations does not contribute to significant profit as a percentage of the overall profit of the organisation. Although strategic considerations need to be evaluated in making outsourcing decisions, financial considerations should be the number one motivating factor of analysis when making decisions relating to outsourcing of food and beverages. In the present competitive context, the organisations must try to reduce the cost and increase their revenues. In any small-scale hotels, working in an independent manner and focusing on the revenues from the rooms as the basis for their profits should analyse the contribution of food and beverages operations to the bottom line. A comparison study of the contributions of different value adding processes such as the room service, food and beverages etc. can contribute to the conclusion whether the food and beverages operations are contributing to the margins. But it is also necessary to evaluate the value chain and the contribution of food and beverages to the customer satisfaction and the customer requirement perspective.

When considering independent hotels located at remote or rather un-populated areas that are depending on their guests as the main contributor to the revenues for the food and beverages, it might be financially viable to either outsource the operations or discontinue it altogether. If the hotel is able to generate interest from third parties who are competent in applying or taking the contract of the restaurant, the hotel may be able to reduce the cost of operations significantly. A supplier of food and beverage operations would have higher efficiencies because they are focusing on providing such services to more than one customer. Hotels giving the food and beverages services to their guests alone may not be able to achieve such level of efficiencies. In such cases outsourcing of the food and beverage operations can significantly reduce the cost, provide the hotels with an ability to focus on the value adding process and core competencies.

 

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References

  1. Barros, C. P. (2005) “Measuring efficiency in the hotel sector”, Annals of Tourism Research, 32, 456–77.
  2. Bolat, T. and Yilmaz, O., (2009) “The relationship between outsourcing and organizational performance: Is it myth or reality for the hotel sector?”, International Journal of Contemporary Hospitality Management, Vol. 21 Iss: 1, pp.7 – 23
  3. Burgess, C., (2000) “The hotel financial manager – challenges for the future”, International Journal of Contemporary Hospitality Management, Vol. 12 Iss: 1, pp.6 – 12
  4. Charnes, A., Cooper, W. W. and Rhodes, E. (1978), “Measuring the efficiency of decision making units”, European Journal of Operational Research, 2, 429–44.
  5. Espino-Rodrı´guez, T. F. and Padro´n-Robaina, V. (2004), “Outsourcing and its impact on operational objectives and performance: a study of hotels in the canary Islands”, International Journal of Hospitality Management, 23, 287–306.
  6. Fried, H. O., Lovell, C. A. K., Schmidt, S. S. and Yaisawarng, S. (2002) “Accounting for environmental effects and statistical noise in data envelopment analysis”, Journal of Productivity Analysis, 17, 157–74.
  7. Gilley, K. M. and Rasheed, A. (2000) “Making more by doing less: an analysis of outsourcing and its effects on firm performance”, Journal of Management, 26, 763–90.
  8. Glickman, T. S., Holm, J., Keating, D. and White, S. C., (2007) “Outsourcing on American campuses: National developments and the food service experience at GWU”, International Journal of Educational Management, Vol. 21 Iss: 5, pp.440 – 452
  9. Gorg, H. and Hanley, A. (2004) “Does outsourcing increase profitability?”, Economic and Social Review, 35, 267–88.
  10. Hemmington, N. and King, C., (2000) “Key dimensions of outsourcing hotel food and beverage services”, International Journal of Contemporary Hospitality Management, Vol. 12 Iss: 4, pp.256 – 261
  11. Heshmati, A. (2003) “Productivity growth, efficiency and outsourcing in manufacturing and service industries,” Journal of Economic Surveys, 17, 79–112.
  12. Lamminmaki, D., (2005) “Why do hotels outsource? An investigation using asset specificity”, International Journal of Contemporary Hospitality Management, Vol. 17 Iss: 6, pp.516 – 528
  13. Ojiako, U., Maguire, S. and Guo, S., (2009) “Global operations management during major change: An exploration of industrial practice”, Business Process Management Journal, Vol. 15 Iss: 5, pp.816 – 839
  14. Ottenbacher, M. C. and Harrington, R. J., (2009) “The product innovation process of quick-service restaurant chains”, International Journal of Contemporary Hospitality Management, Vol. 21 Iss: 5, pp.523 – 541
  15. Riley, M., (2005) “Food and beverage management: A review of change”, International Journal of Contemporary Hospitality Management, Vol. 17 Iss: 1, pp.88 – 93
  16. Rodríguez-Díaz, M. and Rodríguez, T. F., (2006) “Developing relational capabilities in hotels”, International Journal of Contemporary Hospitality Management, Vol. 18 Iss: 1, pp.25 – 40