OUTSOURCING IN THE OPERATION OF FMCG COMPANIES

Transcription

1 330.44:338.2: OUTSOURCING IN THE OPERATION OF FMCG COMPANIES Dr S AWOMIR JARKA, PhD Warsaw University of Life Sciences (WULS),..,.,,,. In the age of the information technology revolution there is a constant pressure of companies on increasing efficiency of operation through decreasing costs, which gives larger possibilities of development. In this context, a role of information technologies grows. They have achieved a strategic status, which stressed a place of the information technology in firms. According to Dariusz Dziuba thanks to information technologies "there occurred possibilities of different quality in access to information, which changed conditions of taking up economic decisions and led to a phenomena called shortening of economic time. Shortening of economic time enables to significant acceleration of economic processes. Economic decisions can be taken up in a very short time without human participation. A rate of processes' realization indicates considerable decrease of costs [Dziuba 2003]. Tendencies for changes in companies operation determined a significant role taken by strategic outsourcing, directed on long-term cooperation with external suppliers. The information revolution affected directly companies if they wanted to compete on more and more aggressive markets, they had to invest in information systems. However, it occurred that companies managed successfully with development of their key competencies and providing services resulting from them, but there was a problem in lack of competencies for own implementation of the suitable information system. According to the theory of Hamel and Prahalad on core competencies of firms, where a key role is played by conscious forming of competencies, concentration on creation of new products gives possibilities of own demand creation, which brings advantages of a synergy character for a firm [Prahalad, Hamel 1990]. From the one point of view, selection of an activity is determined by an ability of usage of own resources, on the other side by attractiveness of target segments of the market. Such presentation of a vision of development should be a base for verification and development of suitable competencies in a company [Marsza ek 2006]. One of the ways of gaining competencies is a market solution: instead of creation competencies in a firm, which is a long-term process and also useless in some cases, a firm can buy competencies from other firm in a form of services, in the 1 S awomir Jarka, 2010

2 way of a strategic partnership of firms. A determined type of cooperation of companies in order to achieve mutual advantages is called outsourcing. The paper presents results of an analysis of information outsourcing in the context of strategic choices of a firm. There were presented basic kinds of outsourcing and determinants of its development. Results of the analysis in the firm Poolon S.A. was presented on the background on research on the market of information technology outsourcing in Poland and on the world. There were also presented assumptions of an economic analysis of an outsourcing project, which gave reasons for selection of a supplier of the IT system after taking into account advantages and disadvantages of such solution. Use of outsourcing in companies operation. The term of outsourcing comes from English and is the abbreviation for the expression: outside-resourceusing, which means use of external resources. The most popular definition of outsourcing is an operation which consists of separation of functions from an organizational structure of a parent company and passing them for realization by other economic entities [Trocki 2001]. It is a long-term activity, oriented for positive results, directed to the whole business operation of the firm. So outsourcing means redefinition of firms' contacts with the external partner of desirable qualifications, which aims at setting up a long-term agreement. The firm, which orders fulfilling functions by other entities, aims at focusing its operation on core competences in order to increase productivity and a business value. Outsourcing should be perceived as a strategic instrument of firm management. Attention should be focused on long-term consequences of decisions on its use. Interchangeable use of terms: outsourcing, offshoring, offshore outsourcing can be found in the literature. If operation of the outsourcing firm takes place in other country, the term offshore outsourcing is more proper. However, offshoring means transfer of organizational functions abroad regardless of a fact if this function stays in particular firm or not. Taking into account a type of separated functions, there can be distinguished outsourcing of supporting, managerial or core functions. A range of separated functions can be different because functions' structure is hierarchical. It can be a wide range of operation connected with a higher level function or a narrow range connected with elementary functions. Trocki distinguished also a division of outsourcing according to the levels of activities being separated: individual activities, functional processes and activities. Individual activities were determined as partial functions of a lower level, which operate within an individual job position. On the other side, processes are complex functions of a higher level consisting of partial functions connected with each other. Functional activities were determined as the most complex functions, which needs special knowledge to be realized. The next division regards a range of functions' separation. There can be done complete outsourcing, which causes elimination of all connections with a parent company, or partial outsourcing, where some links with the firm's structure are maintained. Realization of function by the independent entity but with use of resources owned by the parent company can be an example of partial outsourcing. Internal separation takes place when it does not consist of elimination of legal connections between the supplier and the firm.

3 Outsourcing can have a strategic or operational character. Strategic separation of functions is connected with a development strategy of the parent company. Tactical outsourcing means separation which is not connected with strategic aims of the firm, is realized in shorter periods and does not concern core functions. Separated functions should be dependent on achieving common economic goals; however it means giving up organizational dependence and choosing other form of dependence. There is also a possibility of capital and contract dependence apart from an organizational one. Capital outsourcing takes place when there is separation of functions and an economic entity, which fulfils this function, is in capital dependence on the parent company. The most popular solution in this situation is to set up subsidiaries, which stay under the control of the parent company. In the second case, separated functions are realized by an independent entity whereas dependence on the parent company is determined in a contract [K os 2009]. In the literature there is also a common division of outsourcing according to separated departments: information technology, human resources, logistic. Information technology outsourcing consists of separation of functions connected with information technologies. It can have two forms: facility management, when the external firm takes responsibility for right operation of information technology equipment and software in the firm. The second form is application solution providing professional applications are owned by the external firm and are installed in its office. In this case employees connect through the Internet working on a separated platform and an appropriately protected database. Human resources outsourcing consists of ordering particular tasks for independent external suppliers or professional firms operating in services or sale in a form of permanent cooperation as well as fulfilling tasks in a field of a human resources function. There can be divided three basic types of this kind of outsourcing: complete human resources outsourcing, partial human resources outsourcing and outsourcing of personnel of employee services. Logistic outsourcing occurs usually as complete outsourcing of logistic tasks of the firm. It is also possible to take over a warehouse of a mandator by a forwarder or direct management of a warehouse by a mandator and passing deliveries to a forwarder's system [Szymaniak 2008]. Outsourcing is a quite new phenomenon so it has been undergoing continuous changes. Above mentioned fields of outsourcing can be divided or become more specialized. It is conditioned by a continuous technological progress, setting up new branches in the economy as well as globalization of the contemporary world economy, accompanied by global competitiveness. It forces to permanent improvement of companies as well as looking for competitive advantages. Despite of many existing forms of outsourcing, the current market is dominated still by its two forms: outsourcing of business processes and IT outsourcing. Methods of evaluation of information technology projects. Every decision on outsourcing has to be preceded by an internal analysis of profitability conducted by a decision maker. During such analysis, transaction costs (i.e. selection of suppliers, conducting negotiations, coordination and monitoring of cooperation) should be taken into account. Problems with management of

4 information technology costs are connected with a fact, that most of them are generated outside an IT department. Current information technology systems are built on the base of technologies, which hinder costs identification and estimation. In a situation of taking up the decision on outsourcing it is helpful to know the model of Total Cost of Ownership (TCO) by the Gartner, which was prepared to measure, manage and rationalize costs in order to improve efficiency of information technology investments. The next instrument is Economic Value Added (EVA), which is used to determine efficiency of firm's value management. The paper presents results of TCO model use. TCO determines total costs of ownership of a process and helps to separate and understand division of information technology costs connected directly and indirectly with a firm's user. It is a sum of costs connected with purchase, installation, and management of environment of information technology infrastructure. The model is used for evaluation of current as well as future expenditures on information technology infrastructure. Majority of TCO models is based on a standard life cycle connected with equipment and software in the firm. It can be characterized by five phases, whereas each of them is connected with different costs spent by IT: purchase, planning and development of the technology, physical management, support, elimination. The TCO model by Gartner consists of the following elements [Bujak 2010]: a system of costs classification including a list of cost categories with both direct as well as indirect costs, a statistical database on costs of information technology infrastructure for many branches; it is used for comparison of costs in particular firm with average costs in particular branch, methodology of costs analysis and planning, a set of recommendations which can lead to rationalization of costs in use of information technology, a set of programming tools enabling to automate control and planning as well as implementation of TCO improvements. The model of costs connected with information technology infrastructure in the firm is the most important part of the TCO model. These costs are divided into two groups: direct costs and indirect costs. Direct costs concerns for example labour force, capital expenditures, designing of applications, telephone connections, access to the Internet. On the other hand, indirect costs are not traditionally included in budgets connected with use of information technology systems. These costs measure efficiency of information technology systems in providing services of particular quality for final users [Sobi ska 2008]. The firm's profile and market. The researched firm Poolon SA is one of the largest on the Polish market in the sector of FMCG products sale. The firm runs a gourmet chain with goods directed for demanding customers. The firm operates on the retail market of food commodities. People with income higher than an average are a target group of costumers for Poolon. Its offer is perfectly suited for the image of the chain as a special kind of shops where costumers can

5 find diversified, often exotic commodities. Poolon SA has about 40 thousand of goods on sale. The model of business implemented by Poolon seems to be more resistant to the economic crisis than other segments of the market thanks to the offer connected with the segment of luxurious commodities [Kowalczyk 2009]. The analysed unit uses a unique standard of costumers service, which results in costumers loyalty formed for example by supporting programmes. Costumers' advantages depend on a value of turnovers made by them. The strategy of the firm aims at growing wealth of the community which is connected with a higher level of costumers' education. Offering a very wide range of commodities, including luxurious ones, as well as a price policy of the company, which is not aimed at price competition, causes that Poolon SA has a recognizable brand. The company does not firm own brand when it opens new shops as it is done by so called cheap supermarkets. It allows focusing on the image of the firm as a luxurious shop chain. Poolon includes marketing activities aiming at further promotion and brand's positioning in the development strategy. Investment in the best possible localizations is investment in brand development and its recognizability. Quality of trade environment influences on opinions on products, whereas shops and signs are in this case a natural and efficient marketing message. Shops' localization is an important element in the business model in the company. Shopping centres and galleries as well as areas of new housing estates are a conscious choice allowing to access of a particular group of costumers to the offer. What is more, a considerable number of shops are rented, which is also a distinctive feature. It allows maximizing concentration on the basic operational activity and allotting the whole capital on better development of the shop chain. Analysis of potential profits and costs of outsourcing on the base of the TCO method. The TCO analysis in the case of outsourcing of information technology infrastructure should be started with estimation of costs in the project. In the group of IT costs there are: improvements of equipment and software, contracts on supporting and maintenance, wages for management of servers, wages for management of a net, wages for management of protection, wages for management of facilities and IT administration, IT trainings, facilities. The group of strategic business costs consist of: accessibility of servers in a case of planned or unplanned stoppages, accessibility and capacity of applications in a case of planned or unplanned stoppages. The table presents a comparison of costs generated both in the IT department as well as outside it. There were compared costs of the X solution, where the firm manages its own information technology environment with the Y solution, where management of information technology infrastructure was entrusted to the external firm. As a result of outsourcing there is a visible improvement of IT costs in all categories which were outsourced. The largest difference was noticed in the case of wages for management of servers decrease by about 48%. There was also decrease in costs by more than 20% in the category of equipment improvements and software.

6 Cumulated value of TCO in the period of 5 years Comparison of costs of own IT resources with outsourcing costs X solution: own resources Y solution: outsourcing Difference in euro (A - B) Difference in % IT costs % Strategic business costs % Total costs % Source: Author. Small decrease in costs took place in the case of support and maintenance. The difference on the level of more than 8 % can be noticed in costs of IT trainings for employees. Total IT costs decreased almost by 11 % as a result of outsourcing. In the case of costs generated outside the IT department strategic business costs comparable change takes place in all three analysed categories. Conclusions. Many contemporary firms achieved significant increase in so called organisational culture through consistent implementation of a strategy of reorganization. However, boards look for new organizational solutions in order to compete with other entities on the market, reduce costs and increase efficiency. The information technology revolution gave firms many new possibilities, breaking barriers of owning material means of production. Considerable development of technology and popularization of information technology systems caused that these aspects became parts of operation of majority of firms. Outsourcing of information technology services has been becoming more and more popular solution in these circumstances, which decreases costs of operations and leads to optimization of functioning of information technology systems. Many firms do not consider the outsourcing solution regarding that this kind of cooperation concerns only large and rich firms, which cannot fulfil their duties on their own. In reality, outsourcing is a very flexible solution, which can bring advantages for each firm operating inefficiently so far. Outsourcing of information technology services is a suitable solution for firms which are conscious of their strategy, position on particular markets, decided on focusing their attention on basic operation and separation of the IT department outside their structures. IT outsourcing is something more important than only a service for management of information technology resources and services in the firm. It is a modern way for a professional and optimal service adjusted to business needs. The presented case study confirms a research hypothesis that outsourcing causes costs reduction. Advantages resulting from outsourcing are the first argument in favour of it the supplier has lower unit costs connected with maintenance of the whole infrastructure, which is used by many clients, so a cost of its maintenance is shared. Lower costs of the supplier lead to lower costs for the firm which uses such a service. The next argument is connected with a fact that the firm, which plans to use outsourcing in the described example, will decrease costs generated by the IT department by 11 % and business (indirect) costs by 3 %. If the firm did not decide on the outsourcing solution, it would have

7 to decrease expenditures for example for development in order to achieve similar effects, which could finished with decrease in quality of services. Firms, which take into account use of the outsourcing solution, have to be aware of risk connected with this decision. The risk related to the outsourcing solution, in opposite to expected advantages, means mainly the risk of an agreement made on the market: unreliability, lack of competences, and lack of professional attitude of the supplier. Each of these risks can lead to significant financial losses, even loss of market position and reputation. Each firm should carry out the analysis of advantages and estimated risk and afterwards choose a solution with a majority of positive effects. Increasing role of information technology in a company requires engagement in current maintenance and development of the environment, which is more complicated and complex as it increases, and costs more time and efforts from firm's employees. The right solution in this situation is to use services of the professional firm, which has knowledge and experience in implementation and management of information technology systems, invests in a wide range of professional knowledge of its workers. Apart from that, the cost of the service of the external firm should be lower than the own cost in the firm. Using services of highly qualified employees of the external firm allows focusing on the basic business operation, which will enable to strengthen its strategic position and let to further development. A decision on outsourcing has the strategic character for the whole company and should be included into the strategy, aims and particular tasks of the firm. It requires the analysis of advantages and risk of such decision so these kinds of decisions should be taken by the board of the firm, which will take into account influence of outsourcing on the whole company as an integrated system. Outsourcing is a way for limiting costs, improvement of quality as well as optimization of operation because it reduces costs connected with maintenance of own information technology resources. Based on an agreement consisting of a set of elements, it gives the firm large confidence or even a guarantee of achieving positive results and planned effects.

8 Bibliography 1. Bujak B. Praktyczne aspekty stosowania TCO, Business Excellence Institute, Dziuba D. Sektor informacyjny w nowej gospodarce, Wyd. Nowy Dziennik, Warszawa, Kowalczyk S. Agrobiznes i kryzys, Kwartalnik Nauk o Przedsi biorstwie, nr 4/2009, Wyd. SGH, Warszawa, Marsza ek A. Model kluczowych kompetencji jako instrument rozwoju firmy, Zeszyty Naukowe nr 700 Akademii Ekonomicznej w Krakowie, Kraków Prahalad C.K. The Core Competence of the Corporation, "Harvard Business Review" / Prahalad C.K., Hamel G., May-June Sobi ska M. Analiza finansowa outsourcingu informatycznego, Akademia Ekonomiczna we Wroc awiu Szymaniak A. Globalizacja us ug. Outsourcing, offshoring i shared services centers, Wydawnictwa Akademickie i Profesjonalne, Warszawa 2008.,..,.,,,. Every decision on outsourcing has to be preceded by an internal analysis of profitability conducted by a decision maker. During such analysis, transaction costs should be taken into account. Problems with management of information technology costs are connected with a fact, that most of them are generated outside an IT department. Outsourcing is a way for limiting costs, improvement of quality as well as optimization of operation because it reduces costs connected with maintenance of own information technology resources.