MULTICRITERIA MAKING DECISION MODEL FOR OUTSOURCING CONTRACTOR SELECTION

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1 2008/2 PAGES 8 16 RECEIVED ACCEPTED V SOMOROVÁ MULTICRITERIA MAKING DECISION MODEL FOR OUTSOURCING CONTRACTOR SELECTION ABSTRACT Ing Viera SOMOROVÁ, PhD Department of Economics and Management of the Building Industry Faculty of Civil Engineering Slovak University of Technology Bratislava Radlinského 11, Bratislava Tel: 02/ vierasomorova@stubask Research field: facility management, application of facility management to management of supporting activities, outsourcing as an effective form of facility management KEY WORDS Outsourcing represents the management of support activities by an external form A qualified supplier of facility management services is a determining factor for the successful functioning of outsourcing A systemic approach to the choice of a qualified service provider by establishing criteria and an exact supplier offers an evaluation according to the criteria in the decision-making process and conditions the outcome This article focuses on multicriteria decision-making and its application in the phase of the choice of a facility management service provider Supporting Activities Outsourcing Process of Outsourcing Implementation Outsourcing Contractor 1 PREFACE In a building different entities are situated organizations, business organizations, etc There are different activities in running organizations, such as: Core operations (primary activities) We can define them as a dominant process performed by an organization with regard to the purpose for which they have been created Non-core operations (support activities) They create successful conditions for core operations Maximum effectiveness should be the main goal of an entity running its primary activities in a building This requires the effective operation of support activities (Somorová, 2007) The facility management method enables management of modern non-core business activities within an organization The European Facility Management Standard STN EN defines it as the integration of processes within an organisation to maintain and develop the agreed services which support and improve the effectiveness of its primary activities (Somorová, 2006) Outsourcing is one of the ways to manage support activities The support activities of an organization (customer) are delivered by another organization (facility management service provider) STN EN defines the supplier of facility management services as an organisation that provides the client with a cohesive range of facility services within the terms and conditions of a facility management agreement SLOVAK UNIVERSITY OF TECHNOLOGY Somorovaindd :49:39

2 2 OUTSOURCING Outsourcing is the provision of support services by an external firm This is how to complement a primary activity in an appropriate manner and how to exclude the support activities from management However, top management continues to be responsible for the management of such support activities and has to manage at least on a strategic level (Vyskočil, Štrup, 2003) Outsourcing increases the effectiveness of support activities if the organization has created a facility management department The facility manager of such an organization (customer) and the supplier of facility management services have to create a good cooperating team; on the other hand, they have to require good quality work from their partner (Kalinová, 2007) 21 OUTSOURCING ADVANTAGES Implementing outsourcing within an organization requires: decrease operating costs: Outsourcing support activities assumes the decreasing or elimination of many workers who have performed such an activity, increasing effectiveness focused on the primary activity: top management controls support activities only at the strategic level The responsibility for such support activities falls therefore fully within the competence of the facility management service provider The effectiveness of the performed activity is increased, higher quality management of the supporting activities: the facility management service provider has highly qualified professionals at its disposal, unengaged capital minimizing investments in outsourced fields: the client can make investments in his primary activity, increased cost awareness transparent costs of provided services The supplier of facility management services submits exact facility management cost calculations, increased awareness of the status of the organization s assets: the client gains a detailed overview of the quantity and state of its assets based on regular reporting, increased damage guarantee: the client s employees have only limited guarantees; the facility management service provider is fully responsible for the damages incurred, etc 22 OUTSOURCING RISKS When creating an outsourcing project, choosing a qualified supplier of facility management services and implementing the project into the organization scheme, the following risks may occur (Somorová, 2007): underestimation of the time needed to develop a quality project: A good quality project requires an appropriate time frame, underestimation of the costs for realizing a project: development of documents for competitive tendering and concluding a contract imposes a significant workload on employees, unrealistic hopes: The decision to employ outsourcing delivered by one supplier is a strategic one for an organization Therefore, the choice of a supplier requires some time, non-existing or bad relations between the outsourcing and projects within the organization: implementig an outsourcing project is connected with huge changes in an organization is structure All the project teams have to have mutual communication channels, insufficient experience of the project and realization team: when choosing one supplier of facility management services, problems may arise from an insufficient knowledge of multi service management, underestimation of the implementation of an outsourcing project: competitive tendering of a facility management provider cannot be underestimated from the point of view of time; it may last several months, and many times it has to be repeated, choosing an unqualified service provider: According to STN EN a qualified service provider in the meaning of competence and ability to provide facility management services The future supplier of facility management services gradually becomes one of his client customer s departments Its stability is of crucial importance for the long-term success of an outsourcing project and its effectiveness Other possible risks are: disclosure of confidential information, growing dependence on an external provider, risk connected to the loss of control over the outsourced activity Disadvantages connected to outsourcing, eg: long takeover phase, complex contractual guarantee, not respecting the standard of provided services, etc 3 OUTSOURCING PROCESS We can define the outsourcing process as the implementation of facility management in an organization through outsourcing The outsourcing process consists of the following steps: decision to outsource the selected activities, outsourcing project, choice of supplier of facility management services MULTICRITERIA MAKING DECISION MODEL FOR OUTSOURCING CONTRACTOR 9 Somorovaindd :49:42

3 31 Decision to Outsource the Selected Activities Upon making the strategic decision to implement outsourcing the organization decides to have support activities provided by an external supplier of facility management services The implementation of outsourcing is justified via technical - economic studies; these represent a summarization of information and knowledge in marketing, techniques and economics as sources for the decision to start outsourcing Since the initial phase is quite a heavy burden both on finance and time, it is necessary: to choose the support activities the organization wants to exclude - have provided - by an organization offering facility management services Before the organization gives the services to an external service provider, it has to define all the activities belonging to its core business and support activities The determined activities are not static; they have to be updated continuously according to the market, legislation, technology, etc to clarify and exactly describe the requirements that the primary activity sets up as support activities, to exactly specify the goals the organization expects from support outsourcing activities to the facility management service provider, to conduct an extensive audit of the support activities, to establish requirements for the provision of services through outsourcing Outsourcing increases the effectiveness of support activities if the organization has a facility management department The supplier of facility management services and the facility manager inside the client s organization (FM department) have to create a good team together; on the other hand, they have to require good quality work from their partner 32 Implementation of Outsourcing Project The goal is to define the financial and organizational aim of the outsourcing According to standard STN EN , part 8252, Definitions and clarification for facility management services, the outsourcing project also needs to define the: quality, scope, and volume of the service, place where the service is going to be carried out, standards applicable to the service, specific techniques needed for the service providing, duration, etc An outsourcing project is a base on which the service provider develops the offer During the phase of choosing a qualified facility management service provider, this project has to contain the key choice criteria, including a system for these criteria (STN EN ) A criterion should be understand as a point of view or measure when evaluating the variants in the decision-making process The goal to be achieved from the point of view of evaluating the entity conditions the system of the criteria The criteria comprising the criterional system have to be clearly defined and have to be mutually independent of each other (Púchovský, 2003) A criterion set up in an outsourcing project is a conditioning factor for the successful choice of a qualified supplier of facility management services The criteria should be well formulated so that they enable the unambiguous selection of the best offer 33 Choosing a Supplier of Facility Management Services An important factor influencing the outcome of the outsourcing process is the choice of a qualified service provider based on offers developed by service providers according to the outsourcing project In the decision - making process the client should choose a qualified provider and conclude a contract with it 331 Determination of an Optimal Offer for Facility Management Services The client gradually evaluates the offers he gets from various facility management service providers These offers will represent the offer variants in the decision-making process The goal is to find an optimal variant In order to have exact evaluations of offers from suppliers of facility management services, the problem has to be transformed into a mathematical calculation model Mathematical - it is multicriteria decision-making In decision-making theory, the decision-making processes are characterized by the subject s ability to make a decision based on information systems and with the use of decision-making methods, which are affected by essential factors such as: the final system goal, the quality and quantity of information about the system, the individual characteristics of the decision makers In order to evaluate offers according to the fulfilment of criteria expressing the client s requirements the following, are used: a multi-valued evaluation system, a variant assessment based on weight criteria 332 Multi-Valued Evaluation System We will carry out a decision-making analysis to determine a optimal facility management services provider, taking into consideration 10 MULTICRITERIA MAKING DECISION MODEL FOR OUTSOURCING CONTRACTOR Somorovaindd :49:45

4 essential economic and empiric a criteria we have agreed to be of decisive importance We consider the following provider offers to be variants V 1, V 2,,V j,, V n, to which we can apply independent criteria K 1, K 2,, K i,, K m Let us consider these criteria to be non-additive, and their values for the individual construction system variants are given: Variant Criterion V 1 V 2,, V j,, V n K 1 a 11, a 12,, a 1j,, a 1n K 2 K i a ij K m a ml a mn We will gradually make the transformation T Let us mark a i = min { a ij }, i = 1, 2,, m /3/ 1 j n A i = max { a ij }, i = 1, 2,, m /4/ 1 j n where a i is the minimal component of matrix A in the i th row and A i is the analogically maximal component of the matrix in the ith row Taking into consideration the number of criteria K i let us establish the average length of the separation intervals between the values a i and A i with an average step k i so that: i = 1, 2,, m, n is a variant number /5/ Then we create J ir transformation intervals which we may describe by matrix A, if A = [ a ij ] m, n /1/ where component a ij denotes the value of ith economic criterion K i at jth variant V j of an evaluated offer Components a ij are discrete values, specific to the relevant variant Matrix A is an initial basis for the decision making process within the meaning of decision-making analysis and it is called decisionmaking matrix Components a ij of matrix A we can classify according to the criteria K i from the point of view of the measure unit: a) values a ij are given in dimensioned quantities quantitative criteria b) values a ij cannot be determined in dimensioned quantities (they are non dimensioned quantities) qualitative criteria A Let us assume that the components a ij are given in different dimensioned quantities, where it is not possible to add these quantities or their criteria In order to evaluate measurably the individual offer variants from the point of view of the established criteria, it is necessary and sufficient to make a transformation T of matrix A into such a matrix C, C = [ c ij ] m, n /2/ in which all the components c ij will be in a unique dimensioned quantity or non-dimensioned quantities ( points) i = 1, 2,, m; r = 1, 2,, s where s is the number of point evaluations in matrix C Value s is determined by the decision-maker, and the multi-valued system is called an s valued evaluation system The J ir intervals are closed from the left and opened from the right; the last interval (r = s) will be completely closed Let us set up the point scale range of the components c ij of matrix C so that, c i is the lower limit and C i is the upper limit of the point evaluation: /6/, i = 1,2,,m /7/ Introducing transformation intervals J ir we will get to the point where each component value of matrix A belongs to either one or the other interval Matching the c ij point values to the a ij components, we will make the following transformation with the minimizing criterion: a ij Є J ir C i ( r 1 ) h i /8/ i = 1, 2, m; j = 1, 2,, n; r = 1, 2,, s and the maximizing criterion: a ij Є J ir c i + ( r 1 ) h i /9/ i = 1, 2, m; j = 1, 2,, n; r = 1, 2,, s MULTICRITERIA MAKING DECISION MODEL FOR OUTSOURCING CONTRACTOR 11 Somorovaindd :49:47

5 Gradually we progress through the a ij raw components according to the transformation rule /8/ The point scale is usually set up so that step h i in equation /7/ is a natural number, which simplifies the matrix C and makes the evaluation more transparent The complex suppliers offer variant is created in relationship to all the criteria vector c : c = (c 1, c 2,, c n ) /10/ in which the individual components c j are given by the equation, j = 1, 2,, m /11/ For the valued K i criteria with the maximizing character and matching to the equation /8/ is minimizing, the optimal variant is going to be V j for which the number c j is minimal For the valued K i criteria with the minimizing character and the matching to the equation /9/ is maximizing, the optimal variant is going to be such a V j variant for which the c j number is maximal B In the case matrix A contains non-dimensioned quantities (a ij values cannot be determined in dimensioned quantities), we will make a transformation of these K i criteria to matrix C matching point c ij values to a ij components based on knowledge of the requirements to these criteria The decision maker will analyze the criteria according to his requirements and, based on this detailed analysis, he will make a decision on the point evaluation 333 Weight Criteria Method The decision maker assigns to each criterion a weight according to its importance The weight he gets in this way he uses to multiply the point evaluation of the variants from the first method, which makes a correction to the variant judgement The individual K 1, K 2,, K m criteria we evaluate by weights, which is determined by the weight vector in v = (v 1, v 2 v m ), /11/ while v i = m + 1 p i, i = 1, 2,, m, where p i is a natural number marking the sequence of importance K i Oo the criteria, i = 1, 2, m, given in the decision-making period according to the organization s needs Then the d ij components of the matrix D would be d ij = c ij v i /12/ and the variant evaluation would be analogous as it was in case A according to equations /9/ and /10/ 4 APPLICATION OF THE CALCULATION MODEL In the application part, a specific provider choice case is developed for the purpose of verifying how the suggested method works in practice The purpose is to define according to the criteria defined by the customer of the facility management services from the offer variants using a generally developed facility management service provider calculation mode, which would, to its full extent, fulfil the main outsourcing goal savings in operating costs and increasing the quality of the services provided An analysis of an existing outsourcing project will serve as a basis for defining the criterion system The objective of the outsourcing project was technical building administration, ie: low-pressure boiler, heat delivery special inspection, test, preventive and minor maintenance, fire protection, etc The bases for the practical application are variants of five specific provider s offers We consider the individual variants as V 1, V 2,,V 5, which are evaluated according to the selected criteria: K 1 = organization s turnover (EURO/year) K 2 = price offer (SKK) K 3 = number of workers (production or provision of services) K 4 = quality of provided services K 5 = licences, certificates and permits to carry out the outsourced activity K 6 = references Let us set up the decision-making matrix A: Note: Criterion 5 (K 5 ) for the individual variants of the provider s offers can be: The provider can perform the activities: a) using its own capability and its own technical equipment b) using its own capability and its own technical equipment; only some activities are performed using a subcontractor c) provider perform the activities using only a subcontractor Criterion 6 (K 6 ) for the individual variants of provider s offers can be: 12 MULTICRITERIA MAKING DECISION MODEL FOR OUTSOURCING CONTRACTOR Somorovaindd :49:49

6 Table No1 Decision making matrix A Number of Offer variants Criteria criterion V1 V2 V3 V4 V5 1 organization s turnover (EURO/year) K price offer (thousands of SKK) K number of workers (production or provision of services) K ISO 9001 K4 yes no yes yes no 5 Licences, certificates K5 b c a c b 6 References K6 b c a b a a) large scope of activities when providing the same or similar work for important organizations b) smaller scope of same or similar activities provided for significant organizations c) small or no scope of same or similar activities provided for significant organizations 41 Choice of Supplier with the Method of the Multicriterial Evaluation System The criteria in a decision-making matrix are set up in different dimensioned quantities for the quantitative criteria In the matrix, the qualitative are also defined as criterial Therefore, it is not possible to think of adding these quantities In order to measurably evaluate the supplier s offer variants according to the established quantitative and qualitative criteria, it is necessary to transform the decisionmaking matrix into matrix C, in which all the components will be in a one-dimensional quantity,ň or in a non-dimensional quantity During the transformation, we can analyze the criteria, and according to the requirements, we can evaluate the criteria matching them with points by the transformation rule /8/, /9/ The requirements for criteria are defined as: Quantitative Criteria K 1 for the customer, this criterion has a maximizing character A higher turnover assures the provider of the stability of the supplying organization on the market K 2 Criteria value the price offer for the services delivered should be minimal K 3 The number of workers providing services gives to the service customer a guarantee of the continuing provision of services The criterion is maximizing Qualitative Criteria: K 4 expresses the quality and stability of the services delivered when the service provider is a holder of ISO 9001 K 5 customer requires that the supplier not use subcontractors or use them only to a minimal extent are only with the customer s agreement K 6 for criterion K6 = references are, from the customer s point of view, the number and type of buildings being administered A In order to apply this method we have decided to use a threevalued evaluation system, ie, the number of evaluations s = 3 If the bottom limit is c i = 1 and the upper limit C i = 3, then a step of the point evaluation value is (according to equation No 7): 3, for i = 1, 2 and 3 The transformation of the decision-making matrix A to the final evaluation matrix C We will then perform according to the transformation rule (equation No /8/) gradually for the quantitative criteria K i (i = 1, 2 and 3) B Criteria K 4, K 5, and K 6 are non-dimensioned quantities (the a ij values cannot be set down in dimensioned quantities); we will make the transformation of these criteria from the matrix C matching point values c ij to the components a ij based on the customer requirements for these criteria K 4 criterion: If the supplier of facility management services has a quality management system, ie, he is a holder of, an ISO 9001 or 9002 certificate, the criterion is assessed as 3 points; if he is not a holder, then the criterion is evaluated as 1 point The transformation of components a 4j is then: J 41 = (a 41, a 43, a 44 ) = 3 points J 42 = ( - ) = 2 points J 43 = (a 42, a 45 ) = 1 point K 5 criterion : If the supplier can perform all the activities based on all the essential documents: MULTICRITERIA MAKING DECISION MODEL FOR OUTSOURCING CONTRACTOR 13 Somorovaindd :49:51

7 Table No 2 Final evaluation matrix C Number of Offer variants Criteria criterion V1 V2 V3 V4 V5 1 organization s turnover (EURO/year) K price offer (thousands of SKK) K number of workers (production or provision of services) K ISO 9001 K Licences, certificates K References K c a = his own capacity and his own technical equipment = 3 points b = his own capacity and his own technical equipment, with some activities being delivered by subcontractors = 2 points c = the supplier performs activities only via subcontractors = 1 point Criterion K 6 : The decision making on the point evaluation was made by the comparative method where the variant V 3 with quite a large scope of significant administered buildings served as a basis of comparison and represents the highest score: a = large scope of activities when providing the same or similar works for significant organizations = 3 points, b = smaller scope of same or similar activities provided for significant organizations = 2 points, c = small or no scope of same or similar activities provided for significant organizations = 1 point a ij components of K i criterion transformed to point evaluation create a final matrix C We will carry out a complex variant evaluation (Table 2) of the outsourcing supplier variant offers by creating vector c The method of variant assessment by the weight criteria according to the importance paid to the individual criteria by the decision maker This method changes and specifies the order of the variants, which had the same point evaluation (between variants V 1 and V 3 and between variants V 4 and V 5 ) For d 3 is valid: d 3 = max, then the optimal variant of the supplier delivery on the outsourcing subject is V 3, similar to the tri-valued evaluation system The following variant order is determined by the decision making method: V 4 ; V 1 and V 5 ; V 2 42 Choice of Supplier with the Weight Criteria Method The outsourcing service provider offers a variant evaluation by an analysis of the individual criteria; their consequent transformation by matching points based on the analysis does not take into consideration the priorities which the decision maker has towards the criteria In the final matrix A all the criteria are equivalent If the customer decides to consider the variant offers according to the multiple criteria, then a multicriterial choice is made by setting the preferences among the individual criteria Therefore, the decision-maker matches a weight to each criterion according to the significance which he pays to these criteria These weights will multiply the point evaluation of the first method variants, which corrects the consideration of the individual variants The criteria weights always represent a subjective opinion the customer has about the different criteria There is a decision-making matrix A (Table No 1) for seven offer variants with six criteria K i We will set down criterion order p i When deciding on criteria preferences and their order, we have taken into consideration the criteria analysis and their importance for existing offer projects depending on how they were set down by the facility management service customer Through the analysis, one can see that the most important criterion is the price offer, the organization s turnover/year, and the organization s references especially concerning the significant objectives for which the organization delivers services similar to those being subject to outsourcing, quality of guarantee, and conditioned by ISO 9001 or 9002 as well In our case study we set down the following criteria order: Order Criterion 1 Price offer (K2) 2 Licence, certificates (K5) 3 References (K6) 4 ISO 9001/9002 (K4) 5 Organization s turnover/year (K1) 6 No of workers (K3) An overview of the importance of the order number of the criteria and the weights of the criteria derived from this order: 14 MULTICRITERIA MAKING DECISION MODEL FOR OUTSOURCING CONTRACTOR Somorovaindd :49:53

8 Table No 3 Criterion K i Order of importance p i Order of criterion v i K K K K K K c ij components of transformed matrix C (Table No 2 Final evaluation matrix C) are corrected by matching the weights to the relevant criteria (equation /12/) Then the corrected final evaluation matrix D is: Table No 4 Evaluation matrix D Criterion mark Criterion weight Variants V 1 V 2 V 3 V 4 V 5 K K K K K K d Method considering the variants on the basis of the weight criteria according to the criterion of significance changes and specifies the order of variants that had the same score in the point evaluation (among variants V 1 between V 3 and between variants V 4 and V 5 ) For d 3 it is valid: d 3 = max, then the optimal variant of the supplier offer for the outsourcing is V 3, similarly in the three valued evaluation system The next variant order set down by the decision-making method was as follows: V 4 ; V 1 and V 5 ; V 2 Conclusion: In the decision-making process the weight criteria method we used in the case study led to the following understanding: generally, without setting down criteria preferences for facility management service provider offers despite the highest price offer (V 1 ), or second highest price offer (V 3 ), these variants are considered to be the most advantageous (see Table 2: Final evaluation matrix) This is conditioned by several factors: the possibility of ensuring the outsourced activities by one s own staff (K 5 criterion licence, certificates); they are holders of ISO 9001 (a presumption of quality and stable services K 4 criterion) We state that the multicriteria variant evaluation system without setting down the criteria system s importance does not respect the customer s primary requirement operating cost savings, which is conditioned by the low cost of the facility management service When setting down the preference criteria with the help of the weight criteria according to the decreasing preference, we can state this method established the optimal supplier offer variant V 3 with the second highest price offer; the second position was held by the V 4 variant It is fact the V 4 does not provide a higher quality of facility management services being delivered (it is not a holder of ISO 9001 K 5 ); it is not able to provide these services on its own (K 3, K 5 ) This article uses only one simple multicriterial decision model (MCDM) for the selection of an outsourcing contractor The aim of the approach is to simply illustrate how MCDM can help decision makers This article has been developed within the grant scheme VEGA 1/0813/08 Application of Facility management method in modelling cyclical and corrective building maintenance costs MULTICRITERIA MAKING DECISION MODEL FOR OUTSOURCING CONTRACTOR 15 Somorovaindd :49:56

9 REFERENCES SOMOROVÁ, V (2007): Project of the Facility management application using outsourcing Scientific Paper Bratislava, Editorship STU, 91 pp SOMOROVÁ, V (2003): Facility Management Unknown Term? EUROSTAV, March 2003, 50 pp SOMOROVÁ, V (2006): Facility Management Method of Effective Building Administration Bratislava; Editorship STU, p13 ISBN VYSKOČIL, V ŠTRUP, O (2003): Supporting Processes and Decreasing of Operational Costs Praque; Professional Publishing, 97 pp ISBN KALINOVÁ, G (2007): Personal Accession of Facility Manager at Building Administration SOMOROVÁ, V, et al (2007): Optimisation of the Administration Costs of Buildings Using the Facility Management Method Bratislava, Editorship STU 81 pp ISBN SOMOROVÁ, V (2003): Outsourcing A Form of Facility Management in an Organisation Bratislava Conference (CD) PÚCHOVSKÝ, B (2003): Methods of Evaluating Offers in the Process of Public Acquisition TRÁVNIK, et al (2003): Valuation of Economic Effectiveness of Public Works, Bratislava, Editorship STU pp ISBN X STN EN Facility Management (2007) 16 MULTICRITERIA MAKING DECISION MODEL FOR OUTSOURCING CONTRACTOR Somorovaindd :49:58