Evaluation of Risk factors in Outsourcing FM services in Shopping Malls

Evaluation of Risk factors in Outsourcing FM services in Shopping Malls in Lagos.

Background to the Study

In today’s world of ever increasing competition, Organizations are forced to look for new ways to generate value. The world has embraced the phenomenon of outsourcing and several establishments have adopted its principles to help them expand into other markets. Outsourcing is a type of make or buys decision that has gained prominence in the 1990s. It is one of the fastest growing concepts in the business world. The concept of outsourcing may be dated as early as 1776, when in “the Wealth of nations”, Adam Smith wrote “If a foreign country can supply us with a commodity or service cheaper than we can ourselves make or provide it.” (Smith, 2007).

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David Ricardo, a British economist building on Smith’s idea, in his Principle of Competitive Advantage emphasized that each nation should specialize in what it does best and trade with others in order to best meet their needs, (Richardo, 2004).

The concept of outsourcing Facilities Management (FM) services have been embraced by many as performance improvement strategy for organizational efficiency. It has become a significant facet of modern shopping mall management (Musa & Pitt, 2009).

Shopping malls are of different kinds ranging from the traditional retail shopping malls (anchored and non-anchored), service malls, leisure malls to stand-alone outlets. The International Council of Shopping Centres (2004) defined a shopping centre as a group of retail and other commercial establishment that is planned, developed, owned and managed, as a single property with on-site parking provided. Delisle (2007) shows that over the years, shopping centre format have taken a confusing array of identities with names that include such descriptors as centres, malls, complexes, plazas and outlets. However, for the purpose of this study the descriptors shopping centre and mall are used interchangeably.

Outsourcing of FM services have become a common practice due to globalization. Many large establishments including shopping malls have outsourced some or all of their FM functions. Factors like lower cost, improved productivity, higher quality of service, customer satisfaction and ability to focus on core areas are some of the benefits of outsourcing. Howbeit, there are many challenges and risk associated with outsourcing FM services. While IT outsourcing has profound benefits, it equally expose firms to serious risks. Beasley, Bradford and Pagach (2004) summarized severity of outsourcing risk as follows: “the mere occurrence of one incident, such as an IT shutdown, can exponentially increase the enterprise’s risk.  Beasley et al. (2004) suggested that outsourcing poses multitudes of risks to a number of firm’s functions. In Kenya, there is significant rise in outsourcing activities in the banking sector. Surprisingly, in a survey conducted by the Central Bank of Kenya, a number of financial institutions have no risk management frameworks (Central Bank of Kenya, 2005). Kremic, Tukel and Rom (2006) developed a survey of risk factors for IT outsourcing. Whitmore (2006) developed a set of risks for FM outsourcing and grouped them under vendor risk, third party risk and esoteric risks. Whitmore opined that it is imperative for manager to ensure adequate management of the risks as they are unavoidable owing to the fact that services can be outsourced but the risks associated with their provision cannot. According to Ang And Toh (1998), the greatest risk of outsourcing is the loss of control. Lacity (2002) identified cost overruns, declining service levels and lack of innovation as risk of outsourcing in an empirical study. Adeleye et al, (2004) put their focus on the contractual phase by referencing deadline overrun and deficient change over.  Jurison (1998) identified 13 individual risks associated with outsourcing, considering  risks not mentioned within other sources, like lack of trust. Several other existing studies on risk of FM services outsourcing exists. Faremi, John, Adennya and Akinbode (2014) assessed the risks inherent in the three procurement routes which are outsourcing, in sourcing and the hybrid. Nair (2013) drawing on previous studies and combing the relevance of risk factors in the context of tourism grouped them into five factors. Caelli et al. (1991), Barki et al., (2001), Allen et al., (2006), Ramos (2007) all focused on factors which need to be considered during risk assessment.  Gewald et al. (2006) on the impact of risk on outsourcing in the banking and finance industry discovered that the financial risk factor is the major risk factor exerting pressure on banks in Germany. Redding (2007) gathered that risk factors common to outsourcing of FM services include amongst others; call-out charges for labour, financial underformance etc.

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Based on the above background, it is pertinent to give attention to risk factors associated with outsourcing of FM services in public access facilities like the shopping malls.  It is on this platform that the present study deemed it necessary to evaluate risk factors inherent in outsourcing FM services in shopping malls in Lagos.

 Statement of the Problem

Outsourcing has been identified as being a risky business (Auber et al., 2002), but a situation where a client organization  has to deal with several outsourcing service providers in search  for best value leads to even more serious risks. Presently, what is obtainable in Nigeria is that different firms provide single components of FM services and this has led to the use of several service provider firms in outsourcing FM services in shopping malls in Lagos, unlike in the UK and US where total facilities management is being practiced. The oldest and perhaps the biggest component of FM in Nigeria is the Janitorial services and it has been around for almost five decades (Alaofin, 2003).

Due to the existence of several contractual agreements in outsourcing FM services between a client organization, which in this case is the shopping mall, and different service provider firms employed, which is complicated further by the way in which there are often several levels of subcontract agreement; that is when organization outsources their FM functions to third party companies, these third party companies often subcontract part of these operations to another company which in turn may rely on other subcontractors to perform the service. This may lead to increased total operating cost (as there would be some hidden cost associated with multi vendor agreements), disputes and litigation, delayed delivery of services, and unexpected outcomes which may affect the level of satisfaction with end products or services. In response to this problem, it is pertinent to evaluate risk factors in outsourcing FM services in shopping malls which are public access facilities. This is to note critical risk areas when outsourcing to different service provider firms as outsourcing in Nigeria is still seen to be evolving and not being backed by adequate research (Ikediashi, Ogunlana, Bowles & Mbamali, 2012) .It also lacks a guiding framework for managers to follow (Adeleye et al, 2004; Hoecht & Trott, 2006; Londale, 2002). The increasingly use of outsourcing arrangements as well as the unfamiliar complexity associated with it especially in the developing countries suggests the need to probe further about how to effectively utilize this strategy and manage the risks inherent in it.

Despite the growth of FM service outsourcing in the real world, review of the literatures revealed a virtual absence of academic publications on outsourcing in shopping malls in Nigeria. There have been studies on risk factors in outsourcing of FM services in commercial properties like banks, office buildings, and institutional facilities like schools and hospitals (Gewald et al., 2006; Barako & Gatere, 2008; Ikediashi et al., 2012, Federal Reserve Bank of Newyork,1999). One can say that findings from these studies may not be applicable in shopping malls or other establishments since each organization will have different needs even within the same sector. There is also a dearth of studies on FM in shopping mall in Nigeria and a paucity of theoretical and empirical knowledge on FM outsourcing risks in the retail sector in general. These gaps is what this study intends to fill.

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Aim and Objectives of the Study

The aim of this research is to evaluate the risk factors in outsourcing Facilities Management services in shopping malls with a view to developing a comprehensive approach for the management of risk associated with outsourcing FM services in the study area. In order to achieve the aim, the following objectives were pursued.

  1. To identify the classification of FM service in shopping malls
  2. To examine the factors that influence the occurrence of risks in outsourcing FM services
  3. To identify the various risk factors inherent in outsourcing FM services in shopping malls.
  4. To evaluate the impact of the risk factors in outsourcing FM services in shopping malls  
  5. To articulate a comprehensive approach to managing the risks in outsourcing FM services in shopping malls  

Research Questions

  • What are the classes of FM services in shopping malls?
  • What are the factors that influence the occurrence of risk in FM outsourcing?
  • What are the various risk factors inherent in outsourcing FM services in shopping malls?
  • How do these risk factors affect outsourcing of FM Services in shopping malls?
  • What approach can be used to manage the risks in outsourcing FM services in shopping malls?

 Research hypothesis

H01 Risk factors do not have any significant impact on effective outsourcing of FM services

 Significance of the study

The importance of this research cannot be over emphasized as the purpose is beneficial to client organizations, owners and investors, property/facilities managers, scholars and students alike.

  • Client organization: This study is of benefit to client organizations because it will help them analyze risks in order to balance potential gains against potential losses and avoid expensive mistakes. The essence of this study gives them a preventive stance rather than a reactive stance to the consequences of risk. It will help them design and implement risk management solutions and bring risk reward perspective to strategic decision making and day-to-day operations. It will also help them identify the outsourcing contracts that have the highest risk and importance to them.
  • Investors/owners: The study will help investors and owners understand risk factors in outsourcing so as to enable them deal effectively with risk especially when they are managing the business themselves. It will help them to protect their return on investment and help them determine the type of investments to select for their investment portfolio.
  • Facilities/property Managers: It will help them attempt to add value to the property they manage and mitigate management risk. It will help them in making best decisions as to FM services delivery in the property or business they manage since they understand the impact of outsourcing risk. Since they understand the potential risk and reasons for transferring FM functions to third party companies through this study, it will help them make better decisions by adequately analyzing the risk inherent in outsourcing of various services to decide on what services to outsource and the ones to retain in-house so as to avoid risk. It will help them consider the business implication of their actions before outsourcing FM services.
  • Scholars/students: This study provides the background information to other researchers and scholars who may want to carry out further research in this area. This study facilitates individual researcher to identify gaps in the current research and carryout research in those areas. This research will also be used by students who will want to study a similar area and to come up with comprehensive conclusion and reasoning as regards risk in outsourcing. This study also enhances the understanding of the current outsourcing trends in shopping malls in Nigeria.

 

Scope of the Study

There have been quite a number of studies that have identified risk factor in outsourcing FM services (Atkins & Brooks, 2009; Ikediashi et al. 2012; Londale & Cox, 1998; Redding 2007; Whitmore, 2006). This study dwells on risk factors developed by Ikediashi et al.,  (2012) where risk variables identified in various studies were analyzed and grouped into five categories namely client related risk, vender related risk, contract risk, relationship risk and general risk. This was used because the risk factors were developed in a more recent study in Nigeria and it captured risk variable identified in previous studies.

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The factors that influence risk considered in this study are Human factors, political/legal/social factors, environmental factors, financial/economic factors and technological factors. The study also captured risk management processes namely, risk identification, risk assessment and risk treatment procedures. This study was limited to risk treatment which noted the different approaches to managing outsourcing risks.

The aim of this study was to evaluate risk factors in outsourcing FM services so as to develop a comprehensive approach to managing such risks. This made the study to focus on key identified areas that were addressed under each specific objectives.

The researcher undertook activities within the scope of the issues that were addressed by the research objectives to ensure that all the study findings contribute towards the achievement of the aim of the study.

 

 Study Area

The Investigation took place in Lagos. The study area can arguably be regarded as the centre for economic activities in Nigeria, and indeed West Africa. Lagos lies on latitude 6.27oN and longitude 3.28oE. Its metropolitan district occupies the Lagos Island and part of the mainland. It is a small state with a population of over 16million (National Population Commission, 2009) on a land area of 3,577sq.km making it the sixth populous in the world and the second largest city in Nigeria and one of the most populous cities in Africa. Being the industrial as well as commercial nerve centre of the country, the city has a high population density and abundant economic opportunities, which in turn has lead to the birth of several shopping malls which was brought about by the spending culture of the occupants of Lagos.

Lagos the seat of Nigeria’s government until 1986, remains the nation’s commercial capital, contributing more to its economic growth than any other city. Despite the movement of the federal capital to Abuja in 1986, Lagos has remained the country’s dominant economic, social and financial centre as well as the hub of national and international communications, accounting for 32 percent of national GDP.

Lagos houses several shopping malls and other smaller retail outlets. This was brought about by the changing household shopping culture, strong purchasing power and consumer spend coming from the upper and emerging middle class occupants of the city.

In 2014, Lagos witnessed an unprecedented increase in the number of shopping malls constructed in the city. The presence of these modern shopping malls with state-of-the-art facilities in the city signaled a boom in the retail segment of the real estate market.

The palms shopping centre in Victoria Island, the city mall in Ikeja and the Adeniran Ogunsanya shopping mall in Surulere are all modern day sophisticated malls in Lagos. As the only city in Nigeria that has three of these modern malls, including other smaller retail outlets, this necessitated it to be the choice area for this research.

Evaluation of Risk factors in Outsourcing FM services in Shopping Malls in Lagos.

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