OUTSOURCING IN THE HOTEL INDUSTRY: A MANAGEMENT ACCOUNTING PERSPECTIVE. Dawne Lamminmaki B.Comm (Concordia), MBA (Bradford), CMA (Canada)

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1 OUTSOURCING IN THE HOTEL INDUSTRY: A MANAGEMENT ACCOUNTING PERSPECTIVE Dawne Lamminmaki B.Comm (Concordia), MBA (Bradford), CMA (Canada) School of Accounting and Finance Faculty of Commerce and Management Griffith University - Gold Coast Submitted in fulfilment of the requirements of the degree of Doctor of Philosophy August, 2003

2 Dawne LAMMINMAKI OUTSOURCING IN THE HOTEL INDUSTRY: A MANAGEMENT ACCOUNTING PERSPECTIVE ABSTRACT The broad objective of this thesis is to develop an understanding of factors affecting outsourcing in the hotel industry and also the role played by management accounting in hotel outsourcing. The thesis draws on transaction cost economics (TCE), agency, contingency, and labour process theories in the context of appraising factors motivating outsourcing. Two empirical phases have been undertaken in the study. The first phase involved a series of interviews with general managers and financial controllers in large South East Queensland hotels. The second phase involved two distinct questionnaire surveys of large Australian hotels. The first was administered to hotel general managers, and the second was administered to hotel financial controllers. Significant findings arising from the study include: 1. In light of the substantial international literature describing hotel outsourcing, it appears that outsourcing in Australian hotels is relatively limited. This appears to be particularly the case with respect to food and beverage related activities. 2. Mixed support is offered for the TCE model. Both the survey and interview data provide some support for TCE s prescription that frequently conducted activities will not tend to be outsourced. Two specific extensions are offered to this aspect of the model, however. Firstly, where activities are conducted to a minimal extent, it can be uneconomic to outsource. Secondly, where large activities are undertaken by a group of organisations, their enhanced purchasing power can result in inexpensive outsourcing arrangements. With respect to TCE s uncertainty proposition, support is offered for the view that the propensity to outsource will be greater where behavioural uncertainty is lower. No support has been offered with respect to environmental uncertainty. The interview data provides some support for TCE s asset specificity proposition, however, minimal support was found in the survey phase. Despite this, the many dimensions of asset specificity (eg. site specificity, human asset specificity, etc) provided a useful checklist of issues to be considered in relation to the outsourcing decision. 3. Negligible support was found for labour process theory (LPT) in the interview phase of the study. In light of this, and the need to narrow the study s focus in the survey phase, LPT was not pursued further. LPT is a difficult construct to operationalise, given the social desirability error that may result. This may partially account for the absence of significant LPT findings in the interview phase. 4. The survey data provides some support for the agency theory view that risky activities will tend to be outsourced. 5. Considerable cross-hotel variation exists in management of, and accounting s involvement in, outsourcing decision making and control systems. Accounting appraisal of outsourcing proposals rarely includes long term oriented, sophisticated techniques such as net present value. It appears this may be because outsourcing decisions are not conducted in the context of the formal capital budgeting process. 6. High performing hotels and hotels that conduct their outsourcing decisions in the context of a long term outsourcing strategic agenda have more sophisticated outsourcing management systems. ii

3 TABLE OF CONTENTS Abstract... Table of Contents... List of Tables... List of Figures... List of Appendices Statement of Originality... Acknowledgment... Page ii iii xii xvi xvi xvii xviii CHAPTER 1: INTRODUCTION 1.1 Introduction Motivation Research objectives Thesis structure Conclusion... 6 CHAPTER 2: THEORETICAL FRAMEWORKS INFORMING THE STUDY 2.1 Introduction Transaction cost economics Transaction costs and efficiency What are transaction costs Other transaction cost issues Transaction attributes Asset specificity Uncertainty Frequency Difficulty of performance measurement Connectedness TCE Interactions Review of empirical studies employing the TCE framework Limitations and criticisms of transaction cost analysis Agency theory Labour process theory Contingency theory Strategy Competition intensity Performance Size Conclusion CHAPTER 3: MANAGEMENT ACCOUNTING AND GENERAL MANAGEMENT LITERATURES ON OUTSOURCING 3.1 Introduction Theoretical literature on outsourcing iii

4 3.2.1 Outsourcing guidelines: Management accounting textbooks Outsourcing guidelines: Management accounting and general management literatures Strategy and outsourcing The importance of coordination Outsourcing, downsizing and related terminology Reasons for outsourcing Maintenance of competitive advantage Focus on core activities Conclusion to reasons for outsourcing Benefits of outsourcing Specialisation Market discipline Flexibility Cost savings Costs of outsourcing Transaction costs Social costs Loss of control Difficulty in evaluating performance Costs of monitoring and evaluating performance Loss of inhouse skills Loss of innovation Achieving control and ensuring compliance Control through competition Control through contract length Control through trust Controlling risks Managing organisational change Empirical studies International surveys North American surveys UK surveys Outsourcing case studies Outsourcing failures Conclusion CHAPTER 4: THE HOTEL MANAGEMENT OUTSOURCING LITERATURE 4.1 Introduction General hotel outsourcing issues Activities outsourced in the hotel industry Food and Beverage (F&B) General issues in F&B outsourcing Factors affecting F&B outsourcing Outsourcing to increase profits F&B: Core or Non-core? F&B: Restaurants Restaurant outsourcing: further themes for discussion F&B: Leases and contracts iv

5 F&B: Restaurant franchises and TCE F&B: Administration and evaluation of foodservice Other F&B activities outsourced F&B: Catering F&B: Employee dining room F&B: In-room bars and safes F&B: Pre-prepared ingredients F&B: Room service F&B: Summary of findings Outsourcing of other hotel activities Accounting Business centres Cleaning: Housekeeping Cleaning: Night Concierge Laundry Management companies Parking facilities Sales and marketing Customer satisfaction research Security Information system management Reservation system management Conclusion CHAPTER 5: THE RESEARCH METHOD, OBJECTIVES, AND INTERVIEW DESIGN 5.1 Introduction The research method The relative merits of quantitative and qualitative research Qualitative research Quantitative research The research objectives Objective 1: To appraise the extent of outsourcing in large Australian hotels Objective 2: To describe the nature of outsourcing management systems The decision to outsource Initiation of the outsourcing decision Formalisation of outsourcing decision-making processes Appraisal of needs Contract price determination Analysis of bids Achieving control and ensuring subcontractor compliance Performance measurement Contractual arrangements Non-contractual methods Objective 3: To appraise TCE theory in the context of hotel outsourcing Uncertainty v

6 Frequency Asset specificity Objective 4: Appraise alternate theories in the context of hotel outsourcing Appraisal of agency theory Appraisal of labour process theory Objective 5: Appraise other factors motivating the outsourcing decision Core/Non-core activities Flexibility Promoting competition Availability of sophisticated specialist suppliers Availability of a choice of suppliers Avoidance of financial investments Quest for efficiency Alternative perspectives pertaining to factors affecting outsourcing Objectives 6 and Objective 6: Investigate for contingent factors relating to outsourcing orientations Strategy and propensity to outsource Competition intensity and propensity to outsource Size and performance affecting a propensity to outsource Objective 7: To investigate for contingent factors relating to the sophistication of outsourcing management systems Conclusion CHAPTER 6: INTERVIEW FINDINGS - PART A: APPRAISING THE TCE, AGENCY AND LABOUR PROCESS THEORIES 6.1 Introduction Initiation of the outsourcing decision Decisions to outsource made in the context of a long term strategic agenda Decisions to outsource made in an ad hoc, reactionary, manner Examination of TCE, agency and labour process theories Transaction Cost Economics Appraisal of the frequency attribute Frequency and Food and Beverage activities Frequency and Administrative and Professional services Frequency and Cleaning and Maintenance services Observations countering TCE s frequency theory Extending TCE s frequency theory Appraisal of the uncertainty attribute Uncertainty and F&B activities Uncertainty and non-f&b activities Observation countering the uncertainty TCE theory Appraisal of the asset specificity attribute Site specificity Site specificity and dedicated asset specificity vi

7 Dedicated asset specificity Temporal asset specificity Human asset specificity Human asset specificity and dedicated asset specificity Brand capital Conclusion to asset specificity analysis Labour process theory Agency theory Conclusion CHAPTER 7: INTERVIEW FINDINGS - PART B: DESIGN OF OUTSOURCING MANAGEMENT SYSTEMS AND GENERAL ISSUES MOTIVATING OUTSOURCING 7.1 Introduction General issues affecting the decision to insource or outsource Core / Non-core activities Profitability Implications of owner / management head office involvement General issues affecting the decision to outsource Existence of specialist suppliers Services offered by sister or competing hotels Availability of a choice of suppliers Creating supplier competition General issues affecting the decision to insource Avoiding over-dependency on a single supplier Avoiding loss of control Employee morale and commitment issues Outsourcing management systems Accounting involvement in the outsourcing decision Sophistication of the accounting analysis Formalisation of the outsourcing decision making process Financial analysis General issues relating to financial analysis Significance of the nature of the activity Significance of the finance department and financial controller s style Potential for applying a long term financial analysis Contractual arrangements Housekeeping Restaurants Other activities Trust Conclusion vii

8 CHAPTER 8: PROPOSITION DEVELOPMENT AND QUESTIONNAIRE DESIGN 8.1 Introduction Proposition development Model 1: Independent variables and a hotel s general level of outsourcing Transaction cost economics Agency theory Contingency theory variables Strategy Competition intensity Other factors Quality Proximity to large city Factors to be controlled for in Model Model 2: Independent variables and outsourcing of specific hotel activities Transaction cost economics Agency theory Contingency theory variables Other factors Factors to be controlled for in Model Model 3 - Independent variables and degree of outsourcing management system sophistication Contingency theory variables Strategy Competition intensity Size Other factors Degree of outsourcing Quality level of hotel Professional qualification of the financial controller Factors to be controlled for in Model Questionnaire design General issues in questionnaire design Questionnaire piloting General manager questionnaire Quality level of hotel Proximity to a large city Section A - Degree of outsourcing Section B - Factors affecting outsourcing Core/Non-core Asset specificity - temporal specificity Uncertainty Environmental uncertainty Behavioural uncertainty Asset specificity generally Asset specificity - Brand capital General TCE construct Frequency viii

9 Views on factors causing a hotel to outsource Views on factors causing a hotel not to outsource Section C - Background and organisational level contingency factors Organisation size Market segment Ownership structure Competition intensity Performance Strategy Risk aversity Financial Controller questionnaire Section A: Outsourcing information Section B: Background information Section C: Outsourcing management system information Degree of accounting involvement in outsourcing Degree of sophisticated outsourcing management systems Degree of outsourcing accounting system sophistication Qualified accountant Conclusion CHAPTER 9: QUESTIONNAIRE SURVEYS - ADMINISTRATION, DATA SCREENING AND DESCRIPTION OF KEY VARIABLES 9.1 Introduction Sampling procedures Data screening Reliability of data Missing data Description of outsourcing levels prior to further data screening Normality, homoscedasticity and linearity Normality Homoscedasticity and linearity Nonresponse bias Conclusion CHAPTER 10: STATISTICAL ANALYSIS AND HYPOTHESIS TESTING GENERAL MANAGER QUESTIONNAIRE SURVEY 10.1 Introduction Testing of Model Variable measures Measurement of dependant variable Measurement of independent variables Environmental uncertainty Frequency Competition intensity Performance Market segment Dichotomous independent variables ix

10 Dependant and independent variable descriptive statistics Proposition testing: Model Testing of Model Variable measures Measurement of dependant variables Food and Beverage (F&B) measure Measurement of independent variables Asset specificity Uncertainty Environmental uncertainty Behavioural uncertainty Frequency Size Core activity Market segment Descriptive statistics of the DVs and IVs for Model Model 2 proposition testing: Food and Beverage Regression results Model 2 proposition testing: laundry Regression analysis Model 2 proposition testing: general maintenance Regression analysis Model 2 proposition testing: housekeeping Variable measures Measurement of independent variables Behavioural uncertainty Market Segment Results of logit analysis Views of factors causing a hotel to outsource or insource Conclusion CHAPTER 11: STATISTICAL ANALYSIS AND HYPOTHESIS TESTING - FINANCIAL CONTROLLER QUESTIONNAIRE SURVEY 11.1 Introduction Testing of Model Variable measures Measurement of dependant variables Degree of accounting involvement Degree of general management sophistication Accounting system sophistication in outsourcing management Measurement of independent variables Competition intensity Degree of outsourcing Performance Dichotomous independent variables Size and hotel quality level Descriptive statistics of the DVs and Ivs Correlation between IVs and the four DVs: Model Multiple regression results: Dependant variables One and Two x

11 Multiple regression results: Dependant variable One: Degree of accounting involvement Multiple regression results: Dependant variable Two: Degree of general management sophistication Multiple regression results: Dependant variables Three and Four Results of multiple regression - Dependant variable Three: Degree of accounting system sophistication Results of multiple regression - Dependant variable Four: Degree of long term investment sophistication Conclusion CHAPTER 12: DISCUSSION AND CONCLUSIONS 12.1 Introduction Synthesis and discussion of main findings Objective 1: Appraising the extent of outsourcing in large Australian hotels Objective 2: Describing the nature of hotel outsourcing management systems Objective 3: Appraising TCE theory in the context of hotel outsourcing Frequency Uncertainty Asset specificity TCE in general Objective 4: Appraising alternate theories in the context of hotel outsourcing Objective 5: Appraising other factors motivating the outsourcing decision Objective 6: Investigating contingent factors affecting outsourcing Objective 7: Investigating contingent factors relating to the sophistication of outsourcing management systems Limitations of the study Implications of findings Implications of findings on theory development Implications of findings on practice Suggestions for further study Conclusion xi

12 LIST OF TABLES 1.1 Overview of research objectives Top ten reasons to outsource A summary of the benefits of contracting Major outsourcing surveys worldwide Approximate estimates of Contract Catering s market penetration Contract Caterers market penetration in Europe Advantages and disadvantages of F&B outsourcing Reasons for outsourcing F&B F&B outsourcing A summary of research findings Overview of outsourcing activities List of Hotel Interviewees Revising TCE s frequency theory Probabilities associated with outsourcing outcomes Background of individuals who piloted the General Manager Questionnaire Background of individuals who piloted the Financial Controller Questionnaire Summary of survey replies Checklist for data screening Appraisal of variable reliability (GM responses compared to FC responses) Appraisal of variable reliability after eliminating data with large variances Elimination of data with large variances between the GM and FC answers Degree of outsourcing in large Australian hotels a Normality of data - FC Questionnaire b Normality of data - GM Questionnaire Star Rating Hotel Size T-test to compare population with sample data: Number of Rooms Goodness of Fit Test: Star Rating - Population versus Sample data Transformation to normality - General Outsourcing Composite Index Appraisal of variable reliability: Outsourcing index correlated with question 3 (outsourcing in general relative to other hotels) xii

13 10.3 Pearson product moment correlation coefficients and Factor Loadings for environmental uncertainty Pearson product moment correlation coefficients and Factor Loadings for Competition Intensity Matrix of Pearson product moment correlation coefficients and Factor Loadings for Performance Pearson product moment correlation coefficients for market segment and dependant variables Model 1: Descriptive statistics for dependant and independent variables Matrix of Pearson product moment correlation coefficients for dependant and independent variables: Model Results of Multiple Regression Analysis - Model 1 Dependant Variable: Outsourcing in General Summary of findings for Model Matrix of Pearson product moment correlation coefficients for five food and beverage activities Matrix of Spearman correlation coefficients for five food and beverage activities Principal Component and Factor Analysis for five food and beverage activities Transformation to normality - Food and Beverage Item Pearson product moment correlation coefficients for market segment and dependant variables Model 2: Dependant and independent variable descriptive statistics Pearson product moment correlation coefficients between F&B outsourcing and independent variables a Results of multiple regression analysis - Model 2 Dependant Variable: Food and Beverage outsourcing b Summary of significant findings for Model 2 - F&B outsourcing Pearson product moment correlation coefficients between laundry outsourcing and independent variables Matrix of Pearson product moment correlation coefficients for significant independent variables and Laundry outsourcing a Results of multiple regression analysis - Model 2 dependant variable: Laundry Outsourcing b Summary of significant findings for Model 2 - Laundry outsourcing Pearson correlation coefficients between general maintenance outsourcing and independent variables xiii

14 10.23 Matrix of Pearson product moment correlation coefficients for significant independent variables and the dependant variable: Outsourcing of General Maintenance a Results of multiple regression analysis - Model 2 Dependant Variable: Outsourcing of General Maintenance b Summary of significant findings for Model 2 - General Maintenance outsourcing GM Questionnaire - Housekeeping questions Spearman rank order correlation coefficients for market segment and the dependant variables: Housekeeping Spearman rank correlation coefficients between dependant and independent variables: Model Spearman Rank Order correlation coefficients for significant IVs and the Dependant Variable: Outsourcing of Housekeeping a Results of Logit Analysis - Model 2 Dependant Variable: Outsourcing of Housekeeping b Summary of significant findings for Model 2 - Housekeeping outsourcing Classification Table for Logit Analysis Model 2: Outsourcing of Housekeeping Descriptive Statistics: Views on factors causing a hotel to outsource or insource Pearson product moment correlation coefficients and Factor Loadings for Dependant Variable: Degree of Accounting Involvement Pearson product moment correlation coefficients and Factor Loadings for Dependant Variable: Degree of General management sophistication Pearson product moment correlation coefficients and Factor Loadings for Dependant Variable: Accounting system sophistication in outsourcing Matrix of Pearson product moment correlation coefficients and Factor Loadings for Competition Intensity Transformation to Normality General outsourcing composite index Appraisal of variable reliability: Outsourcing composite index correlated with question 2 (outsourcing in general relative to other hotels) Matrix of Pearson product moment correlation coefficients and Factor Loadings for Performance Descriptive Statistics for Model 3 s dependant variables Descriptive Statistics for Model 3 s independent and control variables xiv

15 11.10 Pearson product moment correlation coefficients between dependant and independent variables: Model Transformation to Normality: Performance Variable Pearson product moment correlation coefficients between transformed IV Performance and dependant variables: Model a Results of multiple regression analysis - Model 3 Dependant Variable: Degree of accounting involvement b Summary of significant findings for Model 3 - Degree of accounting involvement a Results of multiple regression analysis - Model 3 Dependant Variable: Degree of general management sophistication b Summary of significant findings for Model 3 - Degree of general management sophistication a Results of multiple regression analysis - Model 3 Dependant Variable: Degree of accounting system sophistication b Summary of significant findings for Model 3 - Degree of accounting system sophistication a Results of multiple regression analysis - Model 3 Dependant Variable: Degree of long term investment sophistication b Summary of significant findings for Model 3 - Degree of long term investment sophistication Overview of findings: Model 1and Model 2 Significant relationships between independent variables and the five dependant variables Overview of findings: Model 3 Significant relationships between independent variables and the four dependent variables xv

16 LIST OF FIGURES 1.1 Thesis Overview Model 1: Independent variables and general level of hotel outsourcing Model 2: Independent variables and outsourcing of specific hotel activities Model 3: Independent variables and degree of outsourcing management system sophistication LIST OF APPENDICES 1 Interview questionnaire A General Manager survey questionnaire B General Manager covering letter C General Manager reminder letter A Financial Controller survey questionnaire B Financial Controller covering letter C Financial Controller reminder letter References xvi

17 STATEMENT OF ORIGINALITY This work has not previously been submitted for a degree or diploma in any university. To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made in the thesis itself. Dawne Lamminmaki xvii

18 ACKNOWLEDGEMENT Undertaking a PhD while working full time, caring for two young children and trying to maintain a balanced family and work life could not have been achieved without the support of others. I would especially like to thank Zahirul Hoque, my principal supervisor for his extensive support and conscientiousness in providing me with timely and considered feedback throughout the course of my study. I would also like to thank Richard Morey, Dave Kennedy and Bev Sparks, who have all acted as associate supervisors at various stages of my study. In addition, I thank Mark Manning for his statistical support and Tabachnick and Fidell, the authors of Using Multivariate Statistics (1996, 2001), for providing a well-structured and accessible text that became my bible when undertaking the statistical phase of the study. My husband, Tiff, has provided significant support, acting as a valuable sounding board, particularly in the initial phases of the study. When embarking on a large study such as this, the route ahead can feel unmanageable and ill-defined due to the limitless directions that can be taken. To the unknowing fledgling researcher many well-intended suggestions by fellow academics can leave one mystified and frustrated due to the fact that they are frequently not consistent with one another. It is only with hindsight that one realises the degree to which the study path taken can be so influenced by one s academic circle, in addition to one s own philosophical and ontological view. I believe this realisation has represented an important learning aspect for me, so I thank the many who have provided a range of perspectives on my study. I am also especially appreciative of the support and comradeship provided by my fellow PhD students. Without doubt they have enriched this long journey s experience. Finally, I would like to thank Griffith University for awarding me a semester without teaching in Working full time and pursuing the study part time resulted in many frustrating stop-starts during semesters, especially those when I was teaching a new subject. Provision of a block of time to focus exclusively on the study not only facilitated my progress, it also made the experience much more rewarding. xviii