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14 July 2005

Contemporary hotel chain City Inn last year gave its Manager of the Year award to Anne Modin, head of housekeeping at its hotel in London's Westminster. But there was something unusual about the choice of recipient. At the time, Modin didn't work directly for the City Inn chain, but was employed by Foremost Services, a company that offers housekeeping services to the hotel industry.

Modin's award is an example of just how much the hospitality sector is now reliant on external contractors for the running of their operations. According to Foremost's director of operations Alan Butcher, it's the way the industry is going.

From a standing start 11 years ago, Foremost is now contracted to do work in Travel Inn, Hilton and Thistle properties and has staff placed in more than 60 hotels from Brighton to Manchester. "It's far more cost-effective for hotels to run their housekeeping this way," says Butcher. "They pay only for the staff required to service the number of occupied rooms, and we manage the peaks and troughs on their behalf."

Housekeeping is just one function an increasing number of businesses in the hospitality sector are contracting out to third-party service providers. The same business model is also being applied to areas such as laundry services, catering operations, accounting services, and IT and energy management. In fact, according to Ian Graham, managing director at consultancy Hotel Solutions Partnership: "In today's world, there's nothing that can't be bought from an outside provider."

So why do businesses outsource, and how do they choose which processes to put out to tender? In the case of City Inn, reducing overhead costs through staff flexibility is a major reason for outsourcing and it pays Foremost on a per-room-filled basis. Other reasons for bringing in an outside contractor for certain roles include a desire to free up in-house staff to focus on priority areas and to get access to specialist skills. City Inn, for example, also outsources its IT operations. As chief executive David Orr readily admits: "Not every business has expertise in every area."

Orr's sentiments are echoed by David Cook, chief executive at Choice Hotels Europe, which employs external contractors for housekeeping and laundry services, and until recently contracted catering services provider Sodexho to purchase raw food materials and devise the chain's restaurant menus. As Cook puts it: "If you can get a better product and offering from outsourcing, that's what you should do."

According to Cook, outsourcing support processes such as IT and housekeeping allows the hotel staff to concentrate on the customer-facing facets of the operation and other areas that bring real value to the business.

Reducing costs
Bob Lillis, lecturer in service operations at Cranfield School of Management, says reducing costs shouldn't be the sole criterion for outsourcing. He says businesses should look at the processes that make up their business and divide them into three groups.

First, there's the differentiating competencies that make a hotel or hospitality business stand out from the competition. Companies should keep control of these, he says, as they're core to the business. City Inn, for example is keen to develop its restaurant operation and make it into a defining feature of its brand. "It's the heart and soul of our business - we absolutely have to have it in house," says Orr.

Second, says Lillis, there are essential competencies, such as marketing, that a business can outsource but may decide it can do better in house.

Third, there are what Lillis labels "plain competencies". These, he says, are best outsourced to an outside company which can bring specialist expertise and economies of scale to bear. This was what Oriel Leisure, a hotel management company that operates eight Express by Holiday Inn properties, had in mind when it chose financial services company Artaius to run its accounts. As Barrie Dunn, Oriel's financial director, puts it: "They have high levels of experience and a vast base of skills we can draw on."

However, businesses that use outsourcing companies mustn't fall into the trap of thinking that out of sight is out of mind, warns Lillis.

By handing over responsibility for certain jobs to an outsourcer, it doesn't mean you can wash your hands of any involvement. In the brave new world of outsourcing, businesses are being forced to learn new skills such as managing service providers and drawing up and reviewing contracts. It's essential that any company entering into an outsourcing agreement takes time and care when drawing up a contract. This will provide the framework for the working relationship and save a lot of pain in the long run if there are disputes over roles and responsibilities.

IT outsourcing contracts, for example, should detail the level of service expected. In the case of City Inn, its IT partner, 1Com, is contracted to ensure that systems are back up and running within four hours of any breakdown.

Staff care
Issues of staff care also need to be covered. In some cases, a services company will take on staff employed by the company outsourcing the work. In these cases, TUPE (Transfer of Undertakings Protection of Employment]) Regulations, ensuring employees are transferred with the same pay and conditions, must be adhered to.

Regardless of who employs staff members, there are other care issues that need ironing out. David Battersby, managing director at the Best Practice Forum, says consideration must be given to who is responsible for staff training, what happens if a staff member is injured at work and, in the case of an outsourced catering operation, which company is liable if a customer goes down with food poisoning.

Incentives also need to be built into some outsourcing contracts, says Peter Broome, a hospitality consultant at PricewaterhouseCoopers. After all, if a contract requires only a certain level of service, where is the inducement for the contractor to help develop the business or grow revenues? For example, at Chardon Management, a company that provides accounting and HR and training services to the hotel industry, managing director Robert Crook says his contracts "have a basic fee tied to the top line and an incentive fee tied to the bottom line".

But a contract can go only so far in assuring success. Once the i's are dotted and the t's are crossed, the most important factor in any outsourcing agreement is a mutual understanding of what you want to achieve with your business. "If companies need to refer to their contracts every five minutes then the relationship is obviously not working," says Orr. "The only way it can truly work is through an open and honest partnership where there's mutual trust and respect."

Types of outsourcing contracts

According to the Best Practice Forum, many types of outsourcing can be set up.

Here are a few:

  • Commericial contract When a third party structures it products selling prices to cover all costs and produces a profit which may/may not be shared with the client company.

  • Management fee The client pays all costs, net of customer contribution, if any, and the contractor charges a management fee

  • Fixed-cost guarantee Can either be totally fixed bottom line cost to client or certain elements, eg, gross profit percentage on food sales. Labour cost is guaranteed or acceptable within certain limits

Best practice

What to outsource?

  • Keep control of what's core to your business.

  • Reducing costs shouldn't be the only criterion for outsourcing

  • Can an outsourcing partner offer specialist skills and do the job more efficiently?

The contract

  • Draw up service level agreements for delivery.

  • Include clear "what if?" procedures.

  • Try and build in an incentive element to the contract.

  • Review and revise the contract on a regular basis.

  • If contracts aren't being upheld - agree on a time frame for improvement.

  • Staff care and liability issues must also be included in any contract.

  • Ensure the outsourcing company shares your vision of where the business is going.

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Jacobs Media Group is honoured to be the recipient of the 2020 Queen's Award for Enterprise.

The highest official awards for UK businesses since being established by royal warrant in 1965. Read more.

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