THE LIMITS OF SERVICE OPERATIONS OUTSOURCING FROM THE RESOURCE-BASED VIEW: EMPIRICAL EVIDENCE IN THE HOTEL SECTOR

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1 THE LIMITS OF SERVICE OPERATIONS OUTSOURCING FROM THE RESOURCE-BASED VIEW: EMPIRICAL EVIDENCE IN THE HOTEL SECTOR Tomás F. Espino Rodríguez University of Las Palmas de Gran Canaria, Spain ABSTRACT The objective of this work is to examine, from the resource-based view of the firm, the relationship between the propensity to outsource hotel services and outsourcing s capacity for being a source of competitive advantage. The work also analyzes the strategic risks that restrict the use of service outsourcing. The results enable services to be classified according to their capacity for being a source of competitive advantage. They also confirm that services forming part of the core competencies, that is, those that are valuable, rare, and non-substitutable and that allow rents to be appropriated, are outsourced less than those that do not meet those conditions as given by Barney (1991). They show that the main drawbacks or risks limiting outsourcing are basically related to the loss of control and autonomy and distrust of suppliers, rather than its possible influence on loss of competitive advantage. 1. INTRODUCTION One of the problems facing any type of organization is that of service outsourcing, in other words, transferring a part of the firm s operations to specialist suppliers for them to perform. The need to respond on a day-to-day basis to changes and new demands in measures adopted to offer higher-quality service, the search for greater flexibility in management, cultural changes in customers, and new technologies are among the factors that make it necessary for firms to focus on their core competencies and outsource in those areas that can be improved by using specialist suppliers. The literature has examined the risks involved in outsourcing services that fall within the core competencies since it may have a negative effect on innovation and differentiation, as well as create problems in renewing capabilities, which can harm the organization s performance, especially its non-financial performance (Kotabe, 1990, Teece, 1987). However, there has been no empirical analysis of that theory in the tourist sector. Outsourcing takes on special importance in the hotel sector, where an increasing number of suppliers offer services covering practically all of the activities necessary to the hotel product, including catering, laundry, cleaning, maintenance services, etc. This means that services important to the hotel business can be outsourced, and so it becomes necessary not only to know the strategic risks that outsourcing entails, but also how far hotel service outsourcing should go. Outsourcing is a strategic decision by which certain 1

2 services that are not part of the core competencies essential to providing the operation are acquired outside the firm by means of agreements or contracts with companies more able to perform those services in order to improve the competitive advantage. This definition suggests that outsourcing has to be strategic and that the firm must identify those activities or services in the chain of value that entail the least risk for the company. In view of the above, hotel companies must be very clear about which services to outsource and which not, and identifying the conditions that a service must meet for it to be outsourced is problematic. It is essential, not only to define the services the hotel considers strategic, but also to find out whether outsourcing is justified on the basis of the firm s resources and capabilities. Venkatraman (1993) points out that outsourcing is driven by factors of supply and demand that bring pressure to bear on the firm. Within the supply factors, there must be some consideration of the narrow service supplier margins that drive them to enter new fields of business. Demand factors include the need to focus on operations essential to the business and to redesign information technology operations, although we believe that other areas of the company need to be redesigned as well. In this respect, firms increasingly outsource their services and/or activities, even some which form part of their core business. As the tourist sector is so strategically important to the economy of the Canary Islands, we examine the limits of services that can be outsourced on the basis of their capacity for being sources of competitive advantage and the drawbacks and barriers that prevent outsourcing from becoming more widely deployed by hotel management. Firstly, the strategic outsourcing decision is presented from the resource-based view of the firm, with special attention to the risks entailed. This is followed by the main research objectives, the methodology, analyses and results. Finally the main conclusions of the work are described. 2. STRATEGIC OUTSOURCING AND THE RESOURCE-BASED VIEW OF THE FIRM The use of outsourcing for strategic reasons enables companies to strengthen their resources in order to reinforce their competitive advantage. However, that is a relatively new idea, since the concept of outsourcing has evolved, leading to different reasons for today s companies to outsource their services. Various authors, such as Gildrón and Rueda (1998) and McIvor (2000) consider that the concept of outsourcing has changed from a tactical approach seeking short-term results, especially cost reduction, to a more strategic approach that aims to achieve and maintain competitive advantage. From this more strategic perspective, the analysis of the value chain, the core competencies and the strategic risks of outsourcing must all be taken into account when deciding to outsource any of the firm s different activities (Lonsdale and Cox, 1997). Firms are increasingly opting for an outsourcing strategy, which has become fashionable, both because of its advantages and its possible influence on organizational performance, as it enables the hotel to focus on its core competencies, that is, on what it really can do well. However, companies must consider what type of service to outsource and the strategic risks entailed. Cheon et al. (1995) state that the resources of a given activity can be more or less strategic, depending, on the one hand, on the attributes that enable them to meet the conditions described by Barney (1991) by which competitive advantage can be achieved (valuable, rare, inimitable and non-substitutable) and, on the other hand, on the resources allocated to the activity, based on their availability, or on the firm s interest in developing and strengthening those resources to attain a position of leadership. According to Cheon et al. (1995) both aspects determine the shortcomings in the hotel s capability to perform the services adequately, so the decision to outsource may be said to be a linear function as follows: 2

3 Outsourcing= f (shortcomings in capabilities) Shortcomings = f (resource attributes, allocation of resources) The firm determines its outsourcing strategy on the basis of those shortcomings, which, in turn, are affected by the state of the resources that support the services. Grant (1991, 1996) points out that the organization s competence is its capability to combine resources and organizational processes to meet the desired objectives. Grant (1991) also states that the conventional approach to the creation of resources has focused on the company s lack of resources and capabilities. In other words, in order to exploit certain of its resources, the company may need to acquire external complementary resources it does not possess. Thus, the firm is not limited to exploiting its own stock of resources and capabilities (Teng et al., 1995), but can cover its shortcomings by purchase or strategic alliance, one form of which is outsourcing. Therefore, suppliers can also be considered resources that consolidate the organization s internal competencies. Based on the above, when the results of the organization s services fall below those expected or desired, outsourcing is a viable option for covering the differences or shortcomings (Teng et al., 1995). The results of those service will indicate whether the firm s capabilities are able to perform them in house or whether it needs to turn to the outside market. That potential for competitive advantage can be transferred to companies acquiring services in terms of lower costs, greater professionalism and higher quality of the outsourced services Strategic risks of outsourcing In the case of services, the outsourcing process is more difficult, since the customer experiences them directly and those services may become critical to competitive advantage because the perception of quality is influenced by the interaction between the customer and the employee (Chandra, 1999). This situation, and such intrinsic characteristics of a service, such as intangibility, simultaneous production and consumption, heterogeneity and expiration (Parasuman et al., 1985; Grönroos, 1983, 1984) make this type of outsourcing much more difficult than others (e.g. manufaturing insutries). Inappropriate or increased use of outsourcing, often as a result of lack of competitiveness, has meant that many companies enter a stage of decline that can leave them without the capabilities and skills necessary to compete (Bettis et al., 1992). Outsourcing can play an important part in the decline of a country since organizations can find themselves pressured, both individually and corporately to improve costs and profits, by the financial control that large diversified industries exercise over businesses with a lower-thancorporate-average profitability. This situation can lead to a company opting to outsource activities that may lead to a loss of competitive advantage.in Quinn s model (1999), to determine which activities/services to outsource, management must base outsourcing on the possible risk or strategic vulnerability involved in the outsourcing decision. As Figure 1 shows, when services exercise a strong influence on competitive advantage, they require close strategic control and must therefore be performed in-house, since outsourcing is very risky. However, when the influence of services on competitive advantage is weak, less control is required, because the company does not run any great risk by outsourcing the service as there can be no loss of competitive advantage. At an intermediate level, the question is not whether to make or buy, but how to attain the desired balance between supplier independence and incentives and purchaser control and security. The services at this level have some influence on competitive advantage and cannot be handed to just any provider; the firm has to maintain strict control over strategically critical relationships with its 3

4 suppliers by forming strategic alliances or special agreements that do not damage their competitive advantage. Figure 1. What to outsource? Source: Quinn (1999:12) LOW MODERATE HIGH POTENCIAL FOR COMPETITIVE EDGE LOW MODERATE HIGH Low control needed (buy off the shelf) Moderate control needed (special venture or contract arrangements) Strategically control (produce internally) STRATEGIC RISK OF OUTSOURCING Within the resource-based view of the firm, the core competence approach provides one of the most powerful frameworks for explaining the reasons for outsourcing (Gilley and Rasheed, 2000). This approach suggests that an organization must invest in the activities comprising its core competencies and outsource the rest (Prahalad and Hamel, 1990; Quinn, 1992; Quinn and Hilmer, 1994; McIvor et al.,1997). The exchange of organizational routines and skills between the company and the specialist can give it the competitive advantage since their combined capabilities can generate additional rents (Chi, 1994). In this sense, outsourcing certain operations that do not generate core competencies can generate additional rents for the business when performed by a specialist supplier that has an advantage in those operations. Some research reflects that those companies that make more alliances by trusting in outside sources obtain better results, reduce risks and improve quality while increasing their capacity for innovation and flexibility and organizational performance (Clark and Fujimoto, 1991; Dyer, 1997; D aveni and Ravenscrefts, 1994). Moreover, Prahalad and Hamel (1990) state that better company performance comes from focusing on the resources that provide the core competencies. Those authors suggest that short-term success comes from prices and product attributes, but long-term competitiveness is based on the core competencies, which is obtained from collective learning by the organization. Addressing the a strategic outsourcing decision 4

5 based on resources and capabilities implies an in-depth understanding of the core competencies on which future competitive advantage can be built (Bettis et al., 1992). The core competencies must be directly linked to the desires and needs of the customer. Quinn (1999) points out that an organization must not outsource its core competencies, and systems must be created to protect them. In that author s opinion, core competence is not a product or thing that the company does relatively well, but activities that the firm performs better than others. To be specific, it is a set of skills and systems in which the firm s standards are the highest (i.e., best-in-world), thus providing the customer with the highest value. In this respect, when deciding which services to outsource, the hotel must distinguish those it does well from those it does only adequately, since hotels can benefit by outsourcing services that do not form its core competencies, provided that they are not best-in-class (cost and quality). If the company continues to perform an activity in-house when there are suppliers or competitors that do it better, it could lose competitive advantage since those services are necessary to protect its core competencies (see Figure 2). According to Quinn (1999), between 60% and 90% of services performed in-house produce inadequate results, that is, they do not significantly contribute to maintaining competitive advantage, and therefore, could be outsourced. Figura 2. What is core? Source: Quinn (1999:12) BEST-IN-WORLD - CAPABILITY CORE ESSENTIAL NON - CORE CONSIDER OUTSOURCING NON - CORE DEMANDED BY CUSTOMERS OR TO DEFEND THE CORE 5

6 Strategic outsourcing involves recognition of certain significant risks to the hotel if carried out inadequately and without the above-mentioned assessment of resources. One important risk is the possible loss of differentiation in the service, which, when outsourced to a supplier from whom another customer (i.e. another hotel) also acquires it, becomes easily imitable, and the possibility of gaining any competitive advantage from it is lost. Therefore, the hotel must develop specific, idiosyncratic relationships that enable it to generate relational capabilities and rents. Along these lines, Rothery and Robertson (1996) consider that companies outsourcing key functions or functions central to their business must preserve the means to establish policy and direction as well as monitor delivery of the service and control the supplier. Depending on the extent to which these services can be controlled, companies can opt to outsource more strategic services as long as there are more capable suppliers. Perry (1992) states that questionable efficiency when services are outsourced, either because of the risk of suppliers reducing quality to compensate for low margins arising from the lack of barriers to entry, or because of excessive interest in economies of scale, leads to the hotel s distrust of suppliers. Another disadvantage is the possible loss of autonomy and control, since, when a service is outsourced, its management passes into the hands of an outside supplier, risking supplier inability to provide the services in the required quantity and/or quality. In this respect, only day-to-day operation and management should be released, and never strategic service management or planning. Supply must also be assured by agreements on quality. Another drawback of outsourcing is the possible loss of long-term competitive advantage stemming from lost capabilities and skills needed to compete. Moreover, outsourcing may erode the organization s potential for organizational learning, especially in the services necessary to develop the core business and competencies (Lei and Hitt, 1995). Overdependence on a supplier may make it difficult to create knowledge and transfer it to the different company functions or departments. Consequently, for a company to maintain short-term leadership, it must continue to perform the critical parts of the value chain and acquire the non-key parts (Chesbrought and Teece, 1996). 3. RESEARCH OBJECTIVES Objective 1. To classify hotel services by their capacity for being sources of competitive advantage and to determine their relationship to the propensity to outsource. The objective here is to classify the different hotel services according to their capacity for being sources of competitive advantage. This would enable the hotel services with the highest demand for outsourcing and those which would not be placed in the hands of outside suppliers due to a loss of competitive advantage to be distinguished. According to Quinn (1999), the propensity to outsourcing services that generate core competence, that is, those services that are based on highly strategic resources, which must be valuable, rare, non-substitutable and inimitable, as well as permit appropriation of rents, and thereby have lower costs and higher quality (Poppo and Zenger, 1998; Argyres, 1996), will be lower, while those services that do not generate a core competence for the business have more propensity to outsourcing (Quinn and Hilmer, 1994). In light of the above, the following hypothesis is proposed: Hypothesis 1. Services that form part of the core competencies have less propensity to outsourcing than those in which outsourcing entails less risk for competitive advantage, (i.e. non-core services). Objective 2. Analyze the risks of outsourcing and their relationship with the propensity to outsource. 6

7 The aim is to analyze the relationship between the different dimensions of the propensity to outsource (present outsourcing, desired outsourcing, and increase in outsourcing services), and the main strategic risks identified in the literature. Based on the above, hotels would consider the risks involved in outsourcing, and limit their use of this strategy accordingly. In this respect, the propensity to outsource depends on management s perception of the strategic risks involved. There is strong evidence that decisions (in this case, the outsourcing decision) depend on management attitudes and perceptions (Einhorn and Hogarth, 1981). Kotabe and Murray (1990) state that companies tend to retain activities inhouse when they perceive that this will produce better results than outsourcing them. Drawbacks and barriers to outsourcing perceived by management will have a negative effect on the strategy, in terms of present and desired level of outsourcing in the future. Venkatesan (1992) states that fear of deciding for outsourcing stems from such possible disadvantages as loss of control of those activities, and loss of quality in the products or services, ignorance of the benefits of outsourcing and distrust of outside suppliers, all of which may influence the firm s acquisition of outside services. This leads us to propose the following hypothesis: Hypothesis 2. The higher the perceived risk associated with outsourcing, the lower the propensity to outsource. 4. METHODOLOGY OF THE EMPIRICAL STUDY 4.1.Research environment and target population The environment chosen for the study was the Canary Islands, one of the main European winter tourist destinations that receives more than 10 million visitors a year. The tourism system must be broken down into strategically differentiated segments, understood as product segments/tourist markets competing for the same customers (Camisón, 1996). Competition in tourism occurs between companies and tourist activities forming part of a single cluster. The choice within the Canary Islands was southern Gran Canaria, which is a strategic segment considered to be one of the clusters competing in the worldwide sun and beach product/segment. San Bartolomé and Mogán are the two main communities receiving tourists in that area. According to data provided by the Spanish National Statistics Institute, occupancy in 2001 (when it was decided to carry out the study) was 77.97%, the highest in the Canary Islands Region and the second highest in Spain. This area enjoys good weather practically all year long, so there is little seasonal fluctuation. The choice of a single tourist destination is due to the fact that, strategically and organizationally, the environment forms the relationships among companies working in tourism located there (Monfort, 2000). Therefore, this tourist destination is our unit of macroanalysis while the companies located in it are the unit of individual analysis. Moreover, it should be recalled in such studies that outsourcing of services depends to a great extent on the local supply of services (Ono, 2003), because their development may affect the outsourcing strategies applied, so that analysing different regions together could skew the results. Southern Gran Canaria is a consolidated sun and beach tourist segment with signs of maturity currently undergoing a critical stage that requires that it become more competitive as new tourist destinations and products appear. This means that the offer must be high-quality and more competitive in order to offer tourists better services, which may obligate many tourism professionals to redesign their management practices, and outsource hotel services, for example, to focus on the core business. 7

8 Once the research environment had been decided, the number of 1 to 5-star hotels 1 operating in the area chosen had to be found. For this purpose, a list was made of hotels in the San Bartolomé de Tirajana and Mogán tourist region. To identify the name, category, address and telephone number of each hotel, several databases (Canarian Statistics Institute, Tourspain and The Las Palmas Federation of Entrepreneurs, Hotels and Tourism) were consulted and updated, and a target population of 58 registered hotels was obtained. The managers of the hotels in the population were contacted for a personal survey, with the final sample comprising 50 hotels, with 95.5% reliability with a sampling error of 5.2% Measure of variables The questionnaire was prepared by beginnning with a review of the theoretical and empirical literature on measuring service outsourcing, the characteristics services must have to be considered sources of competitive advantage and the various risks of outsourcing, in order for the questions for each of the constructs to be reliable and valid. Hotel services. Those activities or services that the hotel must provide and that are frequently performed in-house were considered. As a result of reviews of the literature (Kasavana and Brooks, 1995; Cerra et al., 1997; Martín Rojo, 2000), the interviews and the pretest, 20 hotel activities belonging to different hotel departments 2 (reception, rooms, food and beverage, maintenance, administration and accounting, leisure, safety and security) were chosen. Table 1 shows the classification of these services by the department or area where they are performed. Propensity to outsource. To achieve the proposed objectives, we were interested in finding the hotel s propensity to outsource each of the services as well as the intensity of its outsourcing. We therefore attempted to assess not only the hotel s present outsourcing, but also its tendency or desire to outsource services, regardless of whether they are currently outsourced or not. The methods used to measure present outsourcing and the tendency to outsource are explained below. The aim of the questionnaire was to measure present outsourcing of each of the services under study. In this respect, after prior interviews in the sector and review of outsourcing studies, subjects were asked to quantify the degree to which an service was outsourced on a 7-point Likert-type scale where 1 represented not outsourced and 7 totally outsourced, as used by Hamilton (1997) and Patry et al., (1999). As an service may be totally or only partially outsourced, since it comprises a set of tasks or sub-activities (Poppo and Zenger, 1998; Greaver, 1999), a scaled answer is better than a simple dichotic yes or no. Some authors such as Gilley and Rasheed (2000) and Poppo and Zenger (1998) ask for the percentage of the activity that is outsourced, but we used a numerical scale because of the difficulty in establishing a percentage. For each of the 20 services under study, an indicator of the amount of outsourcing was obtained. We also obtained an indicator that measures the amount of total outsourcing, that is, the extent to which the hotel turns to the market to perform its services. As in the work of Gilley and Rasheed (2000), this indicator was calculated from the arithmetical average of each of the services. We also asked the subjects for their opinion on the how much each of those services should be outsourced at the hotel, regardless of whether 1 This study includes hotel estblishments but not guest-houses and hostels since they offer only very limited services. 2 Among hotel services there are other services that are mostly outsourced and that were not object of our study, since they are not necessary, although demanded at present, such as shops, health services and audits of safety and hygiene. In the interviews held prior to the personal surveys, hotels were observed to outsource these services; however, not all the hotels in the sample offer these services so they were not included. 8

9 the services were outsourced at the time or not, or whether an ideal supplier could be found. Then, the arithmetical mean was calculated, providing an overall indicator of the tendency to outsource, or the outsourcing desired at the hotel. The increase was calculated as the difference between desired outsourcing or tendency to outsource and present outsourcing of the activities under study, which produced an indicator of the mean potential increase in outsourcing. Table 1. Classification of the hotel services by department DEPARTMENT Reception Housekeeping Food and beverage Maintenance Administration Leisure Hotel security HOTEL SERVICES Reception Reservations Room cleaning Common areas cleaning Laundry Purchasing and receiving Restaurants Bars Kitchen operation Technical service Swimming-pool maintenance Gardening services Administration Training Personnel selection Sales activity Promotion and advertising Information systems Leisure activities Security and surveillance Sources of competitive advantage. Our purpose was to identify the extent to which a hotel service can be a source of competitive advantage. The conditions established by Barney (1991) were considered necessary for the resources employed in the service to be sources of competitive advantage (valuable, specific or rare and non-substitutable or inimitable). The result of the service, or rents, was considered the factor determining capabilities (Loh and Venkatraman, 1993; Teng et al., 1995). Five questions were asked in this respect about each of the above- mentioned hotel services. The hotel managers gave their opinions about the value, specificity, non-substitutability, cost and quality of the services on a numerical Likerttype scale. Since the majority of the services are labor intensive, most of the questions referred to the staff performing them, as did Poppo and Zenger s (1998) questions concerning information systems activities. 9

10 Risks of outsourcing. The purpose of this series of questions is to identify the main strategic risks of outsourcing services as perceived by management. Based on the review of the theoretical literature on the main strategic risks of outsourcing (Ford and Farmer, 1986; Quinn and Hilmer, 1994, Bragg, 1998; Leit and Hitt, 1995; Greaver, 1999) a multi-dimensional scale incorporating the information on the disadvantages mentioned above was prepared. Other drawbacks related to the resource-based view of the firm were added in order to improve content validity and reliability. In this respect, we asked those surveyed to indicate the extent of their agreement or disagreement with 10 statements on a 7-point Likert type scale. 5. ANALYSIS AND RESULTS Testing Hypothesis 1. Before Hypothesis 1 could be tested, the groups of hotel services in which the characteristics for them to be sources of competitive advantage are different had to be identified. To form these groups, we ran a cluster analysis using the average scores obtained by the hotel services (reception, reservations, cleaning, etc.) for each of the variables used.the algorithm used to form the groups was the non-hierarchical K-means method, which permits the reallocation of groups throughout the process. This technique requires the number of groups to be set beforehand. In this case, three was considered suitable because it meets the method s convergence criteria for validity and reflects the differences in conditions for being sources of competitive advantage. Thus, the inter-group distances are relatively large compared to intra-group distances. The results shown in Table 2 reflect the existence of three groups made up of 6, 8 and 6 hotel services, respectively. The distance between the centroids indicates that the three groups are clearly differentiated, with the greatest differences between Groups 1 and 3, and 2 and 3, while the most similar groups are 1 and 2. Table 2. Distance between centroids GROUPS , ,951 0, ,091 1,607 0,000 In Table 3, which shows the average value of each of the groups with regard to each of the outsourcing dimensions, the three groups can be seen to differ with regard to the different measures of the conditions for competitive advantage, as Snedecor s F statistic reveals. To find out which factors were the most important in forming the groups, a variance analysis was performed. The results shown in Table 3 indicate that substitutability and specificity were the most relevant of the five attributes used in forming the groups, and to a lesser but still significant extent at 10%, quality and value. 10

11 SOURCE OF COMPETITIVE ADVANTAGE Table 3. Average value of the attributes of the resources of the service groups GROUP 1 GROUP 2 GROUP 3 F Sig. Valuable Non-Substitutable , Specific Quality , Cost , Figure 3 shows the services in each of the groups. Group 1, services with strong potential for competitive advantage, comprises six services that, in general, are valuable, specific, and non-substitutable, as well as generating value for the hotel, since they produce good results in terms of quality and cost. These services require strict strategic control and so there should be less outsourcing. Figure 3. Competitive advantage versus strategic risks of outsourcing hotel services LOW MODERATE HIGH POTENCIAL FOR COMPETITIVE EDGE LOW MODERATE HIGH Low control needed Room cleaning, Common areas cleaning, Laundry, Swimming pool maintenance, Gardering services, Safety and vigilance Moderate control needed Technical service, Purchasing and receiving, Leisure activities, Training, Personnel selection, Information systems, Sales activity, Promotion and advertising Strategically control Reception, Reservations, Kitchen operation, Restaurants, Bars, Administration STRATEGIC RISK OF OUTSOURCING 11

12 Group 2 services with medium potential for competitive advantage, is made up of eight services which, on the whole, show a certain level of specificity and substitutability. However, they support the Group 1 services, in other words, they influence the core competencies, constituting a set of services demanded by customers or needed to protect the core competencies, and are essential to providing good hotel service, and, therefore, require moderate or medium control. Group 3, services with low potential for competitive advantage, contains six services that are more standardized and substitutable than those in the other groups. This group requires less strategic control and, therefore, outsourcing them involves less risk to competitive advantage, although the hotel should not neglect their performance since they are important to the hotel s business. Once the services had been classified, we proceeded to test Hypothesis 1, which states that services influencing the core competencies have less propensity for outsourcing than services that do not affect competitive advantage, using eta, eta 2, ANOVA, student t-test, and other statistical analyses. Table 4. Relationship between outsourcing and the groups of services formed according to their influence on competitive advantage Propensity to F t Group n Average eta eta 2 Outsource (p) (p) Outsourcing services present (0.00) (0.00) (0.00) (0.00) Outsourcing services desired (0.00) (0.00) (0.00) (0.00) The results shown in Table 4 reveal a certain relationship between outsourcing and the groups of services defined by their effect on competitive advantage, since the different tests indicate variability in the propensity for outsourcing, which is explained to a great extent by the differences between the groups. Therefore, we can accept that distribution differs according to the service group. This result was confirmed by a t test for independent samples that showed there were significant differences between Groups 1 and 2, Groups 1 and 3, and Groups 2 and 3. We can therefore accept the hypothesis that hotels outsource more those services that entail lower risk to competitive advantage and retain those that are essential to competitive advantage in-house, since they require closer strategic control. Testing Hypothesis 2. Before testing Hypothesis 2, a reliability analysis was performed for the scale of ten items, and then a factorial analysis aimed at reducing it. Internal reliability was very good, as verified by a Cronbach s alpha of The results of factorial analysis confirmed the suitability of the technique. While the Bartlett s sphericity test of non-correlation between variables rejected the hypothesis, the Kaiser-Meyer-Olkin (KMO) measure of adecuacy was 0.78, which means that it is rather good, and resulted in three factors explaining 73.79% of the total variance: loss of control and autonomy, loss of competitive advantage, and distrust of outside suppliers (See Table 5). 12

13 The factor analysis enabled three types of risk very similar to those identified in the literature to be clearly distinguished. Hypothesis 2 was therefore split into 3 sub-hypotheses by risk. Hypothesis 2a. The greater the loss of control and autonomy associated with outsourcing, the less propensity to outsource the hotel services. Hypothesis 2b. The greater the loss of competitive advantage associated with outsourcing, the less propensity to outsource the hotel services. Hypothesis 2c. The greater the distrust of outside suppliers, the less propensity to outsource the hotel services. Table 5. Factorial analysis and reliability of the scales measuring the strategic risks of outsourcing FACTOR 1: LOSS OF CONTROL AND AUTONOMY FACTOR 2: LOSS OF COMPETITIVE ADVANTAGE FACTOR 3: DISTRUST OF OUTSIDE SUPPLIERS KMO= Π 2 = , (p=0.0000) ITEMS COM. C.F. Loss of autonomy in decision making Difficulty in controlling operations Decisions irreversible for the hotel Difficulty in coordinating services Possible loss of control of services EIGEN VALUE VARIANCE EXPLAINED BY FACTOR % ITEMS COM. C.F. Damage to resources and capabilities Reduced hotel results EIGEN VALUE VARIANCE EXPLAINED BY FACTOR % ACCUMULATED VARIANCE 63.29% ITEMS COM. C.F. Ignorance of the benefits of outsourcing Ignorance of how suppliers work Loss of differentiation of product and service EIGEN VALUE VARIANCE EXPLAINED BY FACTOR % ACCUMULATED VARIANCE 73.79% Three multiple regressions with present outsourcing, desired outsourcing, and increased outsourcing as the dependent variables, were performed to test those hypotheses, in order to see which risks are barriers to implementing an outsourcing strategy in hotels (see Table 6). Testing hypothesis 2a. The propensity to outsourcing is negatively related to loss of control and autonomy, in other words, the greater management s perception that outsourcing means a loss of control and autonomy, the less the propensity to outsource. This relationship is especially strong and significant in the case of desired outsourcing (B=-0.38). There is a negative but weak relationship with present outsourcing with a 7% significance. The increase in outsourcing is also seen to be limited by this risk (B=-0.37). Therefore, Hypothesis 2a is accepted. Testing Hypothesis 2b. No significant negative relationship is seen between the propensity to outsource and the dimension referring to loss of competitive advantage, thus, hotel management does not consider 13

14 outsourcing to be limited by the possible influence of the loss of competitive advantage. Therefore, Hypothesis 2b is not accepted. Testing Hypothesis 2c. Hotels that perceive greater distrust of suppliers are less likely to outsource. It is evident that this is a significant negative relationship for desired outsourcing and even more so for increased outsourcing of services, therefore, this is the factor that can most limit an increase in outsourcing. We can therefore accept Hypothesis 2c. Table 6. Relative importance of risks to the propensity to outsourcing DEPENDENT VARIABLE: PRESENT OUTSOURCING B(p) Adjusted R 2 Accumulated R 2 Loss of control and autonomy (0.067) Distrust of outside suppliers (0.636) - - Loss of competitive advantage (0.96) - - DEPENDENT VARIABLE: DESIRED OUTSOURCING B(p) Adjusted R 2 Accumulated R 2 Loss of control and autonomy (0.000) Distrust of outside suppliers (0.000) Loss of competitive advantage (0.42) - - DEPENDENT VARIABLE: INCREASE IN OUTSOURCING B(p) Adjusted R 2 Accumulated R 2 Distrust of outside suppliers (0.000) Loss of control and autonomy (0.000) Loss of competitive advantage (0.26) - - Although most of the proposed hypotheses (2a y 2c) are accepted, the regressions showed that strategic risks explain a relatively small proportion of the variance in propensity to outsourcing (5% of present outsourcing, 24% of desired outsourcing, and 18% of the increase in outsourcing). Those data reflect the existence of other factors that limit service outsourcing that have not been examined in this study. 6. CONCLUSIONS With regard to the first objective, it may be pointed out that hotels currently outsource the more standardized non-differentiating services, that is, those services that are not sources of competitive advantage. However, services that could be sources of competitive advantage, that is, are valuable, rare, non-substitutable or inimitable and generate rents show less propensity to outsourcing since they are the services that have the most customer value and are therefore more resistant to outsourcing. Nevertheless, outsourcing is seen to have great potential in most of the services analyzed, especially those in Group 2. A hotel could retain its core business services and those that are sources of competitive differentiation inhouse, and outsource the rest, meaning that a high percentage of the services performed in a hotel may be outsourced. Nevertheless, how far outsourcing of services such as those in Group 2 may be taken in the future depends on a reduction in the risks associated with outsourcing certain services and the existence of good suppliers. This study has definitely shown the demand for the main hotel services as well as those that could be outsourced in the future. Based on the classification of Quinn (1999) applied to the hotel sector, three groups of services are proposed according to their strategic control. The services with the least propensity to outsourcing, that is the least present and desired outsourcing, are those where outsourcing entails the most risk for competitive advantage and must not be outsourced. Secondly, services that are complementary and involve a medium risk may be outsourced through strategic alliances 14

15 that enable the exchange of rents to be protected. This type of service ranks second in outsourcing. Lastly, the most outsourced services are those that have the least affect on competitive advantage and less strategic control is needed for them than for the rest. The strategic risks that restrict the use of outsourcing are those related to loss of control and autonomy and ignorance of outsourcing as well as a possible loss of differentiation. In this respect, it is confirmed that, although most of those surveyed were favorably disposed to outsourcing, many of them decided not to do so because of the risks or disadvantages involved. This is in line with the theoretical proposals of Venkatesan (1992) and Quinn and Hilmer (1994) that it is management s fear of outsourcing that limits its use. The absence of a relationship between outsourcing and possible loss of competitive advantage is to be emphasized. This may be due to the hoteliers knowing which services to outsource, while retaining those that are sources of competitive advantage in-house, since they have the least propensity to be outsourced. This means that management does not consider outsourcing to have a negative effect on competitive advantage. The results imply that outsourcing has not yet reached its limits. However, for the strategy to have continuity and increase there must be a change in the conception of interorganizational relations, with closer relationships between suppliers and hotels that limit the drawbacks and risks of outsourcing perceived by hoteliers. Along the same lines, a good network of suppliers able to offer good services to hotels must be developed Limitations and future research This study has some limitations that could be taken into account in future research. First, this research does not permit the results to be generalized since they can only be interpreted for the sector that was studied. Therefore, it is necessary to replicate the study in other service industries in order to compare the results obtained with empirical results in the other service industries (e.g. hospitals, banks, schools). Applying the analysis in other service industries will enable us to identify the demand for outsourcing in each of them. To do that, it is first necessary to identify the services in the chain of value in the sector to be studied. Second, the presence of other factors that may favor or limit outsourcing, as well as the possible influence of the strategy on competitive advantage, must be taken into account in other studies in order to establish new hypotheses. Third, the use of the quantitative technique enabled us to find out the use of the outsourcing strategy but not the complexities of the outsourcing decision. This study analyzed the risks or disadvantages of outsourcing for all the services as a whole without recognizing that hoteliers probably have different perceptions of risk for the different services, since what may be a disadvantage to one service may not be to another. In this respect, it would be interesting to perform more qualitative studies that might address these complexities. Lastly, it would be suitable to analyze the type of interorganizational relationship required for each of the services, based on the groups defined above. This is because the degree of interaction/integration with the supplier depends on the service s influence on competitive advantage. Furthermore, when interpreting the results, it should be remembered that managers often make outsourcing decisions because it is a fashionable strategy without having previously considered the possible risks or advantages of outsourcing services. These circumstances may be counteracted by longitudinal studies of the evolution of the outsourcing decision and the factors that could limit the strategy. 7. REFERENCES Argyres, N. (1996). Evidence on the role of firm capabilities in vertical decisions. Strategic Management Journal, 17,

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