2014Cambridge Conference Business & EconomicsISBN : 9780974211428
“Outsourcing - To – Outsourcing” In Employment Service Industry: Lithuanian Experience
Ligita Gaspareniene
Department of Economics and International Trade
Faculty of Economics and Management, Kaunas University of Technology, Kaunas, Lithuana
Rita Remeikiene
Department of Economics and International Trade
Faculty of Economics and Management, Kaunas University of Technology, Kaunas, Lithuana
Vaidas Gaidelys
Department of Economics and International Trade
Faculty of Economics and Management, Kaunas University of Technology, Kaunas, Lithuana
Abstract
The article is aimed at the establishment of the factors of outsourcing for performance of non-core activities in public and private employment service sectors. According to the research carried out by the authors of this article, the number of the research of thiskind is limited due to the specificity of the topic and lack of the data in such transition economies as Lithuania. With reference to the results of the empirical research, it has been established that the main factors determining the choice of outsourcing or having a positive impact on it differ in public and private sectors in Lithuania. Public employment service companies link the positive effects of outsourcing with cost saving while private employment service companies treat positive effects of outsourcing as lower time costs. Poor service quality, interrupted service provision, loss of intellectual property rights and confidentiality flows are the main factors that have negative impact on outsourcing in both sectors. Also, it has been established that employment services are treated as core activities by both private and public companies. Thus, outsourcing of employment services in this case is not practiced or practised very occasionally.
Keywords“outsourcing – to - outsourcing”, outsourcing, supply chain, employment services, private and public sectors.
Introduction
Problem topicality.Recently, the phenomenon of outsourcing has become an inseparable part of the activities in numerous companies. Development and implementation of new technologies, increasing customers‘ needs, thread of rising costs, declining profits, constantly changing business environment conditions and other factors determine companies’ concentration on their core activities while the services related to non-core activities are bought from outside. Concentration on core activities as well as the use of outsourcing for specific operations enable companies to become more competitive in global markets.
Numerous studies (Aubert, et. al., 2004; Barton, 2006; Jain, Natarajan, 2011; Juma’h, Wood, 2000; Moschuris, Kondylis, 2006;Ok, 2011) found that application of outsourcing, first of all, is efficient due to cost reduction. Beyond cost reduction, there are other not less important factors that influence outsourcing decision: lack of competence in particular sphere, lack of skilled specialists, use of innovations, time saving, an increasing wish to respond to customers’ needs and so forth. Nevertheless, the opponents (McIvor, 2000) statethat organisations are not achieving the desired benefits from outsourcing. Each company in particular stage of its supply chain has to make the decision on outsourcing application. The decision is not easy since it requires specific knowledge selecting an outsourcing provider; managers have to consider not only outsourcing costs but also they have to realise that particular functions and responsibilities will be transferred. The feeling of uncertainty due to the complete loss of the control of transferred functions is one of the reasons making thoroughly consider the necessity of outsourcing in the company (Gunasekaran, et. al. 2007).
In many cases, outsourcing providers seeking for the efficiency of their activities also use outsourcing services. One of the examples of “outsourcing – to – outsourcing”is employment service market. The practice shows that core activities of employment service companies are personnel search and selection and personnel rent while other services, for instance, cleaning, security, bookkeeping, office supply delivery, maintenance and others, without which companies would face difficulties to remain competitive, are bought from outside providers. Scientific literature lacks of the research on the outsourcing of employment service companies, but increasing number of such companies (with reference to the data of Lithuanian Department of Statistics, the number of employment service companies increased 4.3 times from 2005 to 2010) determines the need to research the motives of employment service companies working in public and private sectors to buy outsourcing services and so ensure the functioning of their non-core activities. The choice of private and public sectors has been determined by the public opinion that state-owned enterprises are too big, inefficient and unable to react to environmental changes while private sector is more flexible, able to absorb innovations and more inclined to respond to customers’ needs. According to Barton (2006), the size of state-owned enterprises should be decreased by privatizing them, and the rest of public services should be provided applying outsourcing from private business sector. Consequently, the following scientific problem can be formulated: what factors are important to employment service companies while making the outsourcing decision and whether these factors are identical in private and public employment sectors?
The aim of the research is to identify the factors determining the use of outsourcing in employment service companies for the performance of their non-core activities.
The following objectives have been raised to fulfil the aim of the research:
- To analyse the models which reflect outsourcing decisions in company’s supply chain;
- To present the methodology of the research;
- Using the method of expert evaluation, to identify the factors that determine outsourcing of non-core activities in the companies operating in Lithuanian public and private employment services sectors.
The methods of the research includelogic, systematic analysis of the scientific literature based on comparative and summary methods andthe method of expert evaluation.
In order to fulfil the aim of the research, the managers of private (employment service companies “Noriupersonnel decision group”;“Noriu darbo”; public institution “Sopa”; company of limited liability “Opus Verslas” and others) and public (Lithuanian Labour Exchange, Kaunas University of Technology Career Centre) employment service companies that use outsourcing services were included. Different sectors have been selected purposefully seeking to compare the factors that determine the outsourcing of employment services.
The rest of the paper is organized as follows: section 2 systematizes the models of the decision-making on outsourcing in the context of supply chain; section 3 describes the methodology and data; section 4 presents the results and section 5 concludes.
Models for Decision-Making on Outsourcing in the Context of Supply Chain
Outsourcing is a modern management strategy the main point of which is that non-core activity spheres are transferred to an outside partner. This enables a company to focus on the resources and funds that are necessary for core activities performing which a company gains competitive advantage. Numerous studies (Dekkers, 2000; Hwang, Rau, 2008; Li, Wan, 2013; McIvor, 2000 and etc.) stressed the importance of outsourcing in the process of supply chain. Consequently, the models for identification of the criterions and factors that determine the choice of outsourcing have been designed (see Table 1).
Table 1: Outsourcing selection models for supply chain management
Author, year / Supply chain stages in which an outsourcing decision is made / The principle of model operation / SectorMcIvor, 2000 / 1.Defining the core activities of the business;
2.Evaluate the relevant value chain activities:
2.1Evaluation of the relevant value chain activities
2.2Total costs analysis of the core activities
3.Total cost analysis of core activities
4.Relationship analysis / The model included the main supply chain elements: core competency thinking and supply base influences into the decision-making process. The process of outsourcing decision making should be company’s strategic step during which activities are classified in core and non-core. Consequently, it enables deeper insight into customers’ needs in particular markets which, in turn, has the impact on company’s competitiveness. / Applicable in any sector
Dekkers, 2000 /
- Defining manufacturing strategy and strategic decision making on outsourcing;
- Tactical decision making on outsourcing in pre-design, design, engineering, manufacturing engineering stages
Li, Wan, 2013 /
- IT demand, application status, and department performance evaluation
- IT development and programming
- Outsourcing strategy
- Contract object design and outsourcing provider selection
- Contract negotiation
- Implementation and supervision
- Project approval.
Hwang, Rau, 2008 /
- Market segmentation phase
- Sub-market analyze phase
- Choosing target market phase
- Select a new outsourcing company and build up the objective phase
- Value adding phase
- Performance evaluating phase
- Profit sharing and risk pooling phase.
Hsiao, et. al. 2010 /
- Identification of the main factors: asset specificity, core closeness and supply chain complexity; measuring uncertainty; logistics strategy
- Distinguished levels of logistics outsourcing (1st level – transportation, warehousing; 2nd level – value added activities; 3rd level – inventory management, transportation management)
- Performance.
(source: prepared by the authors)
As it can be seen from the models presented above, scientists focus on outsourcing decision making in particular stages of a supply chain in private sector. The authors of the article are of the opinion that outsourcing is applied in the supply chain of each company, no matter in what sector it operates. Of course, it depends not only on external business environment but also on internal situation and the motives which are different in private and public sectors. After systematisation of the information introduced in Table 1, we present a recommended simplified process of decision-making on outsourcing (see Figure 1).
Figure 1: Process of making a decision on an outsourcing
The principle of the designed model’s operation should be interpreted as follows: in the first stage of the decision on whether to include an outsourcing company in its supply chain, the company has to identify its core and non-core activities. Then, the company should estimate the costs of the two alternatives and make the decision. If it decides to hire an outsourcing company for non-core activities, selection of the most suitable outsourcing service provider should be made. Scientists specify the criterions which should be followed selecting an outsourcing provider. According to Choy, Lee (2003), the provider selection process should consider not only the price, but also a wide range factors such as quality, organization and culture with a view to decision making by considering the whole provider’s capability. Other criterions of an outsourcing provider are as follows: flexibility, efficiency, expertise and willingnessto provide the desired result, financial stability, previous customers’ recommendations, financial and human resources, responsibility (Hwang, Rau, 2008).In the second stage, the company should choose between outsourcing and internal human resources for the performance of non-core activities. In the final stage, the company assesses whether it was able to achieve the results: to save costs and time, manage the company more efficiently, focus on responding to customers’ needs, share the risk with another company, prevent personnel lack, get technical assistance and so forth (Rajabzadeh,et. al. 2008; Jain, Natarajan 2011; Gonzalez, et. al. 2012; Lonsdale, Cox 2000).
Methodology and Data
Substantiation of the selected research method
Development of the employment services industry is one of the indicators reflecting the situation in the labour market because the companies providing the services of personnel search/rent faster than others feel the changes of demand and supply.
Collection of the information about outsourcing in employment industry was difficult not only because of the specificity of the topic, but also due to the lack of detailed information in statistical databases. This determined the choice of expert evaluation method which enabled to collect the data about the necessity of outsourcing in public and private employment services sectors, outsourcing service types, internal factors that determine the efficiency of employment services in public and private sectors and so forth.
Expert selection and characteristics
Since Lithuanian Labour Exchange centrally manages ten territorial labour exchanges, Lithuanian Labour Exchange deputy director, the heads of the departments of labour resources, personnel and administration and public procurement, holding the positions not shorter than three years, having enough (at least three years) experience buying outsourcing services in employment sector were selected as experts. The head of the Career Centre in Kaunas University of Technology was also selected as an expert since the centre provides employment, practice and mediation with employers services acting in public sector.
In private sector, the managers of such employment agencies as “Noriu personnel decision group“, “Noriu darbo”; public institution “Sopa”, the company of limited liability “Opus Verslas”, “Personnel decisions”were included in the survey. With reference to Augustinaitis et. al. (2009), in order to retain the reliability and accuracy of expert evaluation, it is recommended to include not less than five experts.
Aim and process of the research
The aim of the research is to establish experts’ attitude towards the factors that would encourage (discourage) to apply outsourcing in public and private employment institutions. The expert evaluation was performed in three stages:
- Questionnaire formation;
- Survey of the experts;
- Analysis and summarising of the survey results.
With references to the analysis of the scientific literature, in the first stage of the research, the questionnaire for the expert survey was formed. The questionnaire consisted of two parts. The first part “The spread of outsourcing in public and private employment service sector” included a few questions of closed type with possible answer alternatives. The first question “Do you use outsourcing services?” was aimed at the establishment whether public and private employment companies working in Lithuania are inclined to use outsourcing. Further question “What outsourcing services do you use (used)?” was aimed at the establishment of the nature of outsourcing services used. The second part “Internal factors of outsourcing that have the impact on the efficiency of public and private employment sectors” included the questions with Likert evaluation scale, where 1 means that a factor or a criterion does not have any impact, and 5 – it has very significant impact on the efficiency of public and private employment services. For the evaluation of the efficiency, the factors that can have positive and negative impact on the choice of outsourcing for non-core activities and the criterions following which an outsourcing service provider can be selected have been introduced in the questionnaire.
The expert survey was carried out via e-mail and telephone. It lasted from September 25 to October 9, 2013. The data of the survey was processed using the Microsoft Office Excel and SSPS software packages.
Limitations
Performance of the empirical research was difficult due to several reasons: firstly, most managers of employment service companies did not know the term of outsourcing, so the authors of the article had to introduce the managers with the terminology and, secondly, only Lithuanian Labour Exchange is responsible for outsourcing service buying in public sector since it centrally manages ten territorial labour exchanges operating in different regions in Lithuania. Due this reason, optional number of the experts decreased which limited the sample of the survey.
Results
The empirical research included calculations of Cronbach’s alpha coefficients (α public sector= 0.730, α private sector = 0.830) which showed that formulated questions adequately reflect the targeted size. Experts’ answers are statistically reliable because value p is lower than 0.05. 100 per cent of the research participants pointed that their institutions use and buy services from outside. Comparing public and private sector, it was established that the assortment of the services bought by private sector is much wider than that of public sector. Private employment agencies buy rent, IT, juridical, cleaning, security, office supply, maintenance, water/food supply services while public companies buy procurement, refresher courses, training, cleaning, security and water supply services. The differences between outside services used by public and private sectors are caused by Lithuanian political-legal environment which determines procurement requirements for public companies. What is more, public companies exceed private employment service companies by their size, so IT, juridical, maintenance services are performed by the employed professionals. Having processed the data of the expert evaluation, it can be concluded that employment services are bought neither by private nor by public employment service companies, and the motive is that employment services are their core activity and their interest.
Rank and average methods used to calculate the data of the experts’ answers enabled to identify the motivating factors that have the biggest and lowest impact on outsourcing in Lithuanian employment service companies (see Table 2).
Table 2:Outsourcing motivating factors in Lithuanian employment service companies
Outsourcing motivating factors in public sector employment service companies / Mean Rank / Outsourcing motivating factors in private sector employment service companies / Mean rankCost saving / 7.80 / Time costs / 9.5
Concentration on more efficient management / 7.80 / Concentration on more efficient management / 8.7
Time costs / 7.20 / Process reorganisation efficiency / 8.0
Technical assistance / 6.70 / Meeting customers’ needs / 6.9
Saving on personnel training costs / 6.60 / Costs of the control of expenses / 6.8
Internal resources which could be used for other aims / 6.50 / Concentration on core activities / 6.7
Process reorganisation efficiency / 6.20 / Technical assistance / 6.3
Meeting customers‘ needs / 6.20 / Cost saving / 5.9
Concentration on core activities / 5.90 / Saving on personnel training costs / 5.9
Costs of the control of expenses / 5.90 / Lack of personnel / 5.8
Lack of personnel / 5.70 / Internal resources which could be used for other aims / 4.8
Risk sharing with another company / 5.50 / Risk sharing with another company / 2.7
(prepared by the authors with reference to the data of calculations)