Performance Objectives in Outsourcing Decision Making – A Case Study of Costa Coffee

Introduction

Established in 1971 by Bruno & Sergio Costa, Costa Coffee started as a wholesale operation supplying roasted coffee to caterers and specialist Italian coffee shops with an exciting coffee, slow roasted the Italian way. The business opened the first Costa espresso bar in Vauxhall Bridge Road in London in 1978. Having been acquired by Whitbread in 1995, the business has grown to over 2,800 stores across 30 countries (Liang & Wu, 2011). Costa is the top 1 of chain coffee shops, by franchises, with over 1,300 coffee shops in the UK with close competition from Starbucks and Cafe Nero. It should be noted that about 10% of the loyal customers of Costa make over 50% of the visiting (Liang & Wu, 2011). Costa has in the recent past developed new products such as lower caffeine and calories drinks in a bid to keep existing customers and attract new customers. It is imperative that coffee shops need to come up with various ranges of quality products, excellent service in a bid to increase customers’ loyalty as well as enhance the relationship with customers. Consequently, there is need for Costa to explore outsourcing options as a popular method of achieving their performance improvement.

Although outsourcing has become an increasingly popular method of achieving performance improvement, the results have been mixed. There are a number of organizations that have not achieved the projected and desired benefits associated with outsourcing. There is need therefore to focus on the performance measurement in the outsourcing process, both at the corporate strategy and at the process level. In addition, it is vital to develop an outsourcing decision framework in a bid to overcome the major drawbacks and weaknesses of outsourcing (Perunovic & Pedersen, 2007). This paper assesses the issues of performance measurement in the outsourcing decision by focusing on the performance objectives of Costa coffee. The paper seeks to provide guidelines on decision whether outsourcing is appropriate for Costa, and how the outsourcing should be managed with an aim of improving performance.

A Recapitulate of Performance Objectives

It is important to understand the broad stakeholder objectives, majorly because different or conflicting priorities between stakeholder groups invariably provide the backdrop to outsourcing strategy decision making. Outsourcing operation calls for a more tightly defined set of objectives. The five performance objectives are; quality, speed, dependability, flexibility, and cost (Slack & Lewis, 2011). Quality refers to the specification of a product, normally implying high specification. Product or service specification involves two concepts which are; the level of the product or services specification, and the degree to which an operation achieves conformance to the specification. This consequently implies two types of quality namely; specification quality, and conformance quality (Nazeria et al., 2012).

Speed as a performance objective indicates the time between the onset of an operation process and its end. As far as outsourcing is concerned, speed is considered to be the elapsed time from the time the customer requests a product or service, to the time when the customer receives it. Dependability is considered to mean the keeping of delivery promises while honoring the delivery time given to the customer. Dependability is one half of the delivery performance along with delivery speed. Another performance objective is flexibility. In operations strategies, such as in outsourcing, flexibility implies the ability to different states, taking up different positions as well as different things. An outsourcing operation is thus flexible than another if it can exhibit a wide spectrum of abilities (Slack & Lewis, 2011). Flexibility can fall into various categories including product or service flexibility, mix flexibility, volume flexibility, and delivery flexibility. Cost is considered to be the most important performance objective. The lower the cost of producing a product or service, the lower the price transferred to the customers (Nazeri et al., 2012). Cost is thus considered to be any financial input to the operation in the outsourcing process. The cost can come in three different categories namely; operating expenditure, working capital, and capital expenditure (Slack & Lewis, 2011).

Outsourcing Decision Making Model

Outsourcing encapsulates the utilization of external resources whereby the execution of tasks, functions and processes that were conducted in-house are commissioned to an external provider who specializes in a particular area subject to long-term cooperation. It is the operation of shifting previously executed internally to an external supplier through a long-term contract involving the transfer of staff to the vendor company. Outsourcing would aid Costa as an enterprise to concentrate on its strategic goals and tasks in a bid to minimize expenses on functions that are necessary but unrelated to the company’s basic functions of coffee shops. The primary reasons that would drive Costa to outsourcing are; the need to reduce cost or internal headcount, insufficient performance of internal manufacturing or service, and constrained internal capacity due to increasing market demand. Other factors that would necessitate outsourcing include strategic sourcing process, underutilized internal capacity, and regulatory and legal requirements (Perunovic & Pedersen, 2007). For Costa, strategic sourcing process would be the major driver to outsourcing which presents a best practice for risk management.

In determining what should be outsourced, Costa Coffee needs to consider the following aspects;

The company’s core competencies
Quality of coffee products and services
Cost of internal supply relative to external supply
The need for specialized capability in the coffee shops industry

The cost of internal verses the external supply should be a major consideration for Costa in making the decision to outsource. Using cost as a performance objective, the company needs to identify the actual tasks performed by the functions intended to be outsourced. The total costs which include interdependencies need to be defined in a bid to identify any indirect costs related to the outsourced function (Perunovic & Pedersen, 2007). In determining the relation between internal and external supply will aid the Costa management in achieving other strategic goals such as management of risks due to constrained capacity, and market share expansion.

The need for specialized capability from a supplier is crucial in helping Costa management to appreciate that outsourcing decision should be directly linked to their corporate strategy as well as their core competencies. Third party supplies, such as IT service providers, can be instrumental in enhancing performance of the entire value chain (Nazeria et al., 2012). This key driver to outsourcing, coupled with Costa core competencies, will help achieve the performance objective of quality, dependability, as well as flexibility of product and service delivery.

Costa can outsource It services, concierge, business centers, as well as restaurants. For business centers, for instance, Costa can high a company that specializes in running business centers for places such as malls, conventional centers, airports, and hotels. Another area that Costa can outsource is the employment aspect. While they may retain a small human resource department, the company can hire human resource consultants and recruitment agencies to deal with their employment aspect of the business. It is imperative that outsourcing will allow Costa to focus on its core, value-enhancing activities without the distraction of running support services such as concierge and IT services. Some of these support services can soak up both financial and management time resources thus dissuading a company not to use its resources fully in gaining competitive advantages. Furthermore, outsourcing allows access to cutting edge talent and expertise thus outsourcing to specialist companies allow access to latest and innovative technologies. Other areas that Costa can outsource include; accounting services, document handling, and fleet management.

Potential Disadvantages of Outsourcing

One of the major drawbacks of outsourcing is unexpected costs. While most costs are more predictable owing to the fact that the supplier carefully defines what the costs cover, there is a likelihood of substantial additional charges for anything extra. The process of outsourcing is difficult to reverse. This implies that once a process has been outsourced it is difficult to bring it back in-house when the internal knowledge is gone. In the event that the outsourced company does not perform effectively, there is the risk of damaging the reputation of the outsourcing company. The success of the company is highly dependent on another company’s performance. This indicates that outsourcing shifts more responsibility for success to a third party (Smith, 2012).

Outsourcing Risk Analysis and Mitigation

Organizations seeking to outsource need to develop strategies and plans for the assessment and management of risk. Proactive and effective outsourcing process risk management can aid in predicting and preventing major implementation risks and problems. One of the risks associated with outsourcing is the decline in delivery performance as well as end customer satisfaction levels due to delays of the outsourced company. This risk is caused by various factors that are out of the outsourcing company’s control. Service or product quality may also suffer from outsourcing which in turn affects the customer satisfaction. There is need for outsourcing companies to carefully select, qualify, and contract with their outsourcing partners in a bid to ensure that quality and delivery time are not compromised. This calls for adequate transition periods together with cross-training between the two companies. When the suppliers are not financially viable, there arises the problem of exposing the outsourcing company to supply interruption risk. The outsourcing company therefore needs to ascertain the financial capability of their external suppliers (Smith, 2012).

Risk analysis needs to be a point-in-time assessment which should be performed prior to the selection of the company to be outsourced. However, risk analysis should be used as a periodical tool to reassess the supplier’s risk over the contract time. Risk management on the other hand is to be taken as an ongoing process that should involve; supplier and contract management, billing accuracy, and service level agreement. It is paramount for Costa to identify the outsourcing contracts with the highest level of risk as well as importance. After successful identification of various risks, it is important to classify the contracts as high, medium, and low risk in a bid to ensure effective management (Perunovic & Pedersen, 2007).

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