When, Why and How to Outsource
Many airlines outsource parts of their business to any number of third-party vendors for numerous reasons. When building an outsourcing strategy in any area of its operations, an airline, in addition to calculating the possible financial rewards or cost savings, must account for several factors that can potentially impact the customer experience, such as service levels and product offerings.
Airlines are continuously evaluating ways to obtain operational and organizational efficiencies while simultaneously achieving some form of cost reduction.
Outsourcing, the process of assigning a company’s business processes to an external agency to enhance its service quality, drive innovation and lower labor costs, may allow airlines to more effectively achieve their strategic objectives by transferring some or all of their functions to a third party.
Given the high fixed costs associated with running an airline, in particular full-service long-established carriers, keeping expenses to a minimum is even more critical in comparison with other industries. Outsourcing, if used effectively, can afford airlines economic benefits by potentially lowering operating costs such as employee compensation and benefits, as well as recruiting and training expenses.
There are many reasons an airline may consider outsourcing. The most obvious is to reduce costs by transferring an operation to a third party that can more efficiently handle the operation based on its economies of scale and lower labor costs. Other benefits have been identified, such as tighter control of budget through predictable costs and greater access to innovation and thought leadership. An airline may also need to outsource due to the lack or unavailability of in-house resources.
In the past, virtually all of an airline’s operations were considered “core,” since they were performed in-house. Airlines in the 1940s expanded from the ground up, and the option to outsource did not exist.
The level of outsourcing has increased in the airline industry since deregulation, coupled with the fact that airlines’ operating costs have increased significantly over time.
Outsourcing requires an airline to determine its core operations and turn non-core functions over to a third party. However, an airline may have difficulty separating core and non-core operations. Further compounding the issue is that different airlines often have differing views of what they consider to be core operations. Numerous carriers, such as American Airlines and United Airlines, have outsourced their reservations functions, deeming these non-core operations. However, Frontier Airlines considers its reservations call center a core operation.
When considering whether to outsource, an airline must decide if the operation under consideration would be better off, in terms of efficiency, costs and expertise, being managed by a third party. If a third party is able to perform the operation at a superior level and at a lower cost than the airline could do in-house, then there is likely justification for outsourcing the operation.
Call centers, airport services, aircraft maintenance and ground handling are the functions most commonly outsourced to companies specializing in these types of services. Cost savings are primarily achieved through the use of cheaper contracted labor rather than an airline’s own employees. In most instances, airlines must pay not only employee salaries but ancillary benefits such as travel privileges, health benefits and retirement plans. The key consideration for an airline is to ensure its service levels are maintained given the high volume of customer contact that occurs in many of these operations, such as passenger check-in.
Impact Of Outsourcing
Outsourcing is primarily used to enable companies to generate greater revenue recognition and provide an added competitive differentiator. No matter the reason it is undertaken, outsourcing can impact the quality of products and services, either positively or negatively.
For example, call center response times may either increase or decrease. If an outsourced call center does not operate 24 hours a day, for instance, the result would be slower response times overall, an undesirable impact. In addition, outsourcing can also improve or worsen customer service.
Advantages And Disadvantages
To better understand the potential impact of outsourcing on an organization, it is essential to evaluate the pros and cons of doing so.
The pros of outsourcing may include:
- Greater revenue realization and enhanced return on investment,
- Lower labor costs and increased economies of scale,
- Broader knowledge base for better innovation,
- Greater focus on core competencies rather than routine activities,
- Increased speed and improved quality of product/service delivery,
- Reduced cash outflow for an airline and optimized resource utilization,
- The ability to offer customers access to call-center agents or customer-service representatives 24 hours a day, regardless of their geographic location.
Several examples highlight how some airlines benefit from their outsourcing strategies.
For instance, a British Airways subsidiary in India employs 1,200 workers to handle back-office operations for its parent company, as well as for nine airlines outside of its organization. These operations include maintaining frequent flyer programs, managing ticket processing and handling revenue accounting. The subsidiary is saving the company almost US$25 million a year in direct costs and has expanded its services to include ticketing work for the other airlines.
Qatar Airways outsourced one of its non-core activities, revenue accounting, to further focus on its core function, flying. It opted to work with a service vendor that provided revenue-accounting software as well as processing services. By outsourcing its revenue-accounting function, Qatar Airways has improved profitability and overall efficiency. The airline benefits from well-defined service-level agreements; high-quality processing software; thorough documentation of its business processes; regular steering group meetings and communications; and access to detailed data for analysis.
Internal Costs Of Outsourcing
When considering outsourcing options for airline maintenance, airlines should consider the financial side from an internal perspective. For example, in-house staff will need to oversee outsourcing contracts. This often involves investment of time, as well as equipment and travel expenses.
Of course before any decision on outsourcing is made, an airline should consider the possible disadvantages as well:
- Possible loss of control over a non-core business process,
- Problems related to product/service quality,
- Sluggish response times coupled with slow issue resolution,
- Shortcomings in performance versus the airline’s expectations,
- Lower than expected realization of benefits and results,
- Issues pertaining to language barriers,
- Dissatisfied customers coupled with enraged employee unions.
Because of the risks associated with outsourcing, some airlines choose to keep both core and non-core operations in-house. For example, Frontier Airlines maintains its call centers with its own staff. According to an article written by Network World’s Dan Twing, the airline prefers its operations involving customer contact not be outsourced. In fact, its leaders believe outsourcing often has negative financial repercussions.
“Customer service is better when an employee with a stake in the game is interacting with customers,” said a Frontier spokesperson. “Such personalized attention can make a big difference in customer experience, which will translate into revenue and goodwill.”
Cathay Pacific also retains its own staff at the airports it serves in Australia and New Zealand. The carrier believes that the quality and service standards set by the company can only be effectively offered and maintained by its own staff. This is achieved through the ongoing training of employees regarding the airline’s operational and service standards. Cathay Pacific sees the crucial role customer-client interface plays and believes outsourcing this role would compromise service levels, leading to potential customer dissatisfaction.
In addition, there are often significant challenges for airlines that outsource operations to companies in foreign countries. Differences in local cultures and customs, as well as language barriers, may not be evident until an airline tries to interact with a third party outside its home country.
Data security is also a concern. Airline bookings contain a substantial amount of personal data, including passport details and personal contacts, which could potentially be used to commit crimes such as identity theft. For instance, critics of outsourcing offshore call centers to countries in Asia argue that there is the potential for misuse of personal data, thereby compromising one’s privacy and destroying financial credibility.
Outsourcing, with its many aspects and implications, is a challenge for any organization. Airlines that outsource customer-service operations, in particular, must continually evaluate contracted third-parties to ensure they monitor and maintain agreed upon service standards.
Third-party staff should be thoroughly trained in all aspects of outsourced operations, including key business processes, to become proficient in all areas. This minimizes the potential for service-level inconsistencies from a consumer perspective.
The basic airline product itself — transportation and accompanying services provided from point A to point B — is highly perishable. For example, once a seat has flown empty on a specified date at a specified time, it can never be recovered. It is, therefore, critical that careful planning be part of the proposed outsourcing of any service involving client contact. If a customer experiences what he or she perceives as substandard service, an airline may lose the customer to a competitor that appears to provide a consistently higher level of service.
In certain instances, the benefits of outsourcing are not conclusive, meaning they can’t be measured. However, it is still critical for an airline to continually assess the success of its outsourcing strategies. While financial considerations are often given top priority, an airline should carefully evaluate whether there is a strong business case to outsource. The airline needs to keep in mind that outsourcing may have a negative impact on both operational and organizational levels. Therefore, an outsourcing strategy should span well beyond financial considerations.
“Outsourcing is increasingly pursued by organizations as a quick-fix, cost-cutting maneuver rather than an investment designed to enhance capabilities, expand globally, increase agility and profitability, or bolster competitive advantage,” said Stephanie Overby, senior editor of CIO Magazine.
Outsourcing shouldn’t be viewed as a quick fix to a symptom of a deeper problem. Rather, it should be seen as an investment that positions an airline for future growth and success.
A carefully devised outsourcing strategy allows airlines to meet operational, financial and organizational objectives more effectively. Developing a sound strategy requires a cost-benefit analysis that considers financial expenditures, quality expectations and relationship risks. The steps for developing an outsourcing strategy include:
1: Define Organizational Objectives
The goal may be to get a start-up off the ground. Alternatively, an airline may be well-established and focused on reducing operating costs and improving profitability. Regardless of the business model or intention, defining organizational objectives sets the foundation for the overall outsourcing strategy.
2. Pinpoint Reasons For Outsourcing
Accessing tools and skills not available in-house, reducing operational costs and accelerating organizational change are just a few reasons why an airline may choose to outsource a portion of its operation. Building a business case is the foundation of an outsourcing strategy. The business case should help validate the need for third-party resources and provide direction to the airline regarding the most beneficial types of partnerships.
3. Evaluate Quality Needs
Establish quality standards by talking with customers and holding internal meetings to develop a list of customer expectations and necessary qualities.
4. Outline A Plan For Achieving Organizational Goals
An airline may be in the process of offering new services to existing customers or expanding its range of services to attract new customers. The detailed strategy it develops might include hiring outside consultants or third-party vendors or training in-house personnel to effectively deliver these services.
5. Contact Vendors And Service Providers
Finding the right partner takes a great deal of time and research, so an airline should contact specific qualified vendors and service providers early in the process to help narrow down prospective outsourcing partners. Three areas of particular importance include:
- Cost estimates — Gather cost estimates early in the process to aid in conducting cost-benefit analyses and competitive pricing studies.
- References — Thoroughly check references to ensure the quality and consistency of services provided. Airlines should speak to other organizations that have partnered with the vendor or service provider.
- Distribute quality requirements — Outside vendors and consultants should receive a clear explanation of an airline’s expectations, both verbally and in writing.
6. Calculate The Financial Impact
As with any business decision, the critical step of weighing financial implications is imperative. For example, contract maintenance costs need to be considered. In-house personnel must oversee outsourcing contracts, which may involve an investment of time, equipment and travel expenses.
7. Explore Legal Implications
An airline’s lawyers, whether on retainer or in-house, need to examine tax laws, contract language, data-protection responsibilities and other factors relevant to the industry and workplace before an outsourcing agreement is signed.
8. Examine Relationship Risks
Current relationships between an airline and its employees, customers and other third-party vendors may be impacted when a decision is made and the transition undertaken to outsource specific operations. Airlines should take care to nurture these relationships to ensure wise decisions are made and morale does not plummet.
- Internal relationships — Outsourcing any portion of the responsibilities of the airline’s in-house staff should always be accompanied by an explanation. Communicate openly with employees to avoid misunderstandings and boost employee morale. Clearly outline the impact of the transition to employees and their anticipated roles as a result of the outsourcing agreement.
- Customer relationships — Evaluate relationships with customers to determine how they will be affected by the outsourcing plans. Once these details have been worked out, communicate changes with customers, as necessary, to ensure a smooth transition.
When researched and executed correctly, an airline’s transition to and utilization of outsourcing can significantly contribute to its bottom line and drive brand value and recognition.