Executive Summary
This report presents a business case for outsourcing the cleaning services of Abu Dhabi National Oil Company (ADNOC), which is a leading energy conglomerate based in Abu Dhabi. Founded in the 1970s, the firm primarily operates in the exploitation, refinement, and distribution of petroleum products on behalf of the Abu Dhabi Government. Based on the rising cost of doing business and the increased pressure to enhance the company’s performance, ADNOC is struggling to get vital services, while at the same time reducing its overheads. Cleaning is an essential service and there is no clear understanding regarding whether to provide it in-house or through outsourcing. This report presents a business case for outsourcing this service, from a procurement and supply perspective.
Key sections of this report show that a well-designed procurement plan would help ADNOC to minimize the cost of cleaning by identifying the right third parties to provide this service. It would also help the organization to develop the best supply chain policies to follow in the outsourcing plan and assist the company’s managers to identify the right type of relationship to be developed between the company and its outsourcing partners. The importance of outsourcing cleaning services is also discussed, including the impact that such a strategy would have on the firm.
In the last section of this report, recommendations are made to develop long-term relationships with partners who have the same vision for the organization and respect the three bottom-line factors guiding procurement processes – people, environment, and price. ADNOC is also encouraged to design the outsourcing process by carefully balancing the needs of the organization and those of the cleaning service providers. These recommendations broadly underscore the need for the conglomerate to have a well-functioning procurement department to oversee the outsourcing plan.
Outsourcing Abu Dhabi National Oil Company’s Activities from a Procurement Perspective
Introduction
Abu Dhabi National Oil Company (ADNOC) is a conglomerate of energy firms located in the United Arab Emirates (UAE). The state-owned corporation is listed as an energy company, which comprises 17 entities (Abu Dhabi National Oil Company Inc., 2017). The firm is in the oil exploitation business and has interests in the entire hydrocarbon value chain (Abu Dhabi National Oil Company Inc., 2017). In line with this market positioning, the conglomerate has a network of fully integrated enterprises that span across a selection of business spheres, which include “exploration, production, storage, refining, distribution, and development of a wide range of petrochemical products” (Abu Dhabi National Oil Company Inc., 2017, p. 1). Currently, ADNOC is looking for new and innovative ways of reducing its overheads but at the same time maintaining vital operations, such as cleaning services. Underpinning this goal is a quest by the company to be more efficient to meet the demands of a dynamic, volatile, and robust energy industry through outsourcing.
This document outlines key parts of the company’s outsourcing plan for cleaning services with a special focus on explaining why the model is important to the company’s operations. The scope of this report includes an investigation of the potential impact of the business process outsourcing plan on the organization’s operations and an examination of the role of procurement and supply chain management in supporting the outsourcing process through efforts to reduce associated costs of cleaning services.
In this review, information about outsourcing and ADNOC’s internal processes will be reviewed to understand how the strategy would help it to improve its efficiency. To support this position, the company’s database will provide information, which will be used to understand the benefits of outsourcing, as opposed to an in-house cleaning program. Comparatively, the findings will be linked to both current academic and professional reviews surrounding the topic of investigation by identifying the strengths and potential limitations of outsourcing.
This report excludes aspects of the company’s operations that do not relate to procurement processes. A key assumption of the study is that the findings of this review will help ADNOC to harness existing opportunities associated with outsourcing. However, before delving into the details of this analysis, it is essential to understand the importance and impact of outsourcing to ADNOC.
Importance and Impact of Outsourcing to ADNOC
According to the APICS Supply Chain Council (2016), outsourcing refers to the engagement of a third party to provide specific services to a business. The adoption of prudent procurement and supply chain management processes at ADNOC could help in managing the price and cost of outsourcing cleaning services by reviewing suppliers’ financial information to make sure that they have adequate resources to do the work. Such a requirement minimizes the risk of insolvency when an outsourcing arrangement fails (Khushlani, 2017). Procurement and supply processes, if implemented well by ADNOC, could also lower the risks and costs associated with confidentiality breaches because the cleaning staff at ADNOC is usually granted access to “secure” areas within the company.
In line with the above aim, outsourcing ADNOC’s cleaning services would help to improve the company’s efficiency by minimizing its operating costs and maximizing its effectiveness. In the context of this analysis, outsourcing would help the company to utilize category management techniques to promote inter-firm value creation through the integration of third-party cleaning services into the company’s value chain. Relying on third-party vendors to provide cleaning services would help the company to accomplish more goals within a shorter period and with fewer resources. For example, at an inter-firm level, ADNOC’s managers rarely dedicate enough time to improve the cost-effectiveness of the company’s cleaning services. Consequently, there are instances of incompetence associated with in-house cleaning services. Outsourcing a professional cleaning service company to do the job would instill the seriousness needed for the job. Therefore, management could divert more resources into other aspects of operational performance.
Outsourcing should make the firm more efficient and capable of meeting its shareholders’ needs. Stated differently, outsourcing is a tool for serving its customers’ needs and generating enough cost savings to not only meet its operational requirements but also support its growth. Broadly, the potential benefits of procurement, if effectively adopted, could help ADNOC to meet its shareholders’ needs through the triple-bottom-line approach practiced in procurement, which emphasizes the need for companies to be mindful of people, the planet, and profits. Figure 1 below represents it.
It is important to understand how outsourcing ADNOC’s cleaning services could improve its efficiency because several researchers have demonstrated its efficiency in improving corporate operations (Chartered Institute of Procurement and Supply 2014; Spiller, 2015). The potential benefits of outsourcing cleaning services come from a paradigm shift in procurement and supply chain management. Professor Richard Lamming defines the change as a willingness to rethink procurement as an important part of a wider organizational ecosystem (Spiller, 2015). In other words, suppliers are not only an offshoot of the organization but integral parts of it. However, the decision regarding whether to outsource the firm’s cleaning services or provide them in-house depends on a few selected considerations. For example, there should be a proper understanding of the core importance of cleaning services to ADNOC’s managers and a good comprehension of whether there are enough contractors with the competence to carry them out, relative to the size and scope of the firm’s operations. The matrix outlined in figure 2 below could be an assessment tool for understanding these considerations.
As highlighted above, the decision regarding whether to outsource ADNOC’s cleaning operations or provide them in-house requires a careful balance between promoting the core importance of the organization’s operations and merging it with the competence of a contractor. Similarly, as highlighted in figure 2 above, when the core importance of the cleaning services to be outsourced is high and there is a low competence of contractors to provide the same service, the outsourcing process should occur in-house. At the same time, the model suggests that outsourcing should occur if cleaning is not an essential service and existing contractors have a high competence to provide it.
Based on the above analysis, the decision regarding whether ADNOC should outsource its cleaning services depends on its ability to determine the importance of its cleaning services and to understand whether there are enough contractors with the competence to provide them without compromising on quality. If these considerations are assessed in the matrix mentioned above, ADNOC’s outsourcing plan falls in the “outsource/buy-in” category. This decision is premised on the fact that cleaning services are non-core in nature and there is a high competence of contractors who can provide them. The matrix highlighted above also suggests that non-core activities, which competent contractors can provide, should be outsourced. Based on these findings, ADNOC needs to recognize that the process of achieving a perfect balance between its core competencies and maintaining the importance of the activities to be outsourced requires an appreciation of the role of procurement and supply chain management in its processes.
Role of Procurement and Supply Chain Management in ADNOC’s Operations
Although outsourcing is the current focus for ADNOC, associated risks, such as cost overruns and compromised quality standards, are linked with the strategy. ADNOC’s outsourcing proposal is susceptible to such areas of vulnerability because the company’s operations are vast. Therefore, low-quality cleaning standards could negatively affect its image. For example, on one occasion, the company suffered reputational damage after a journalist who was interviewing one of the employees took photos of dirty equipment in one of the company’s warehouses. The incident forced the managers to fire the floor supervisor for incompetence.
The initial stages of outsourcing come with various costs, such as those associated with choosing a vendor, relationship building, overcoming cultural differences, eliminating productivity lags, improving internal processes, and managing outsourcing relationships (Spiller, 2015). These expenses are often unavoidable because outsourcing will make ADNOC dependent on the quality of third-party relationships, thereby increasing its exposure to the operational weaknesses of vendors.
The above-mentioned issues often exist because of movements in market forces. These forces are in two categories: microeconomic and macroeconomic groups. Macroeconomic forces are those that are outside of the company’s control but still affect its productivity. Comparatively, microeconomic forces are those within the company’s locus of control and affect its productivity as well. These two forces have the potential to influence the success of ADNOC’s outsourcing plan. Notably, they could impact the price and cost of the strategy (Spiller, 2015). The purchasing environment, which is described in figure 3 below influences this price and cost model.
Based on the model described above, ADNOC’s purchasing function could affect its microenvironment. Similarly, it could influence the company’s purchasing activities. All these factors should be contextualized within the larger framework of the macro-environment. At the same time, they need to be reviewed within the broader procurement framework that most organizations follow when trying to achieve their goals. Doing so requires a careful understanding of the procurement lifecycle, which typically guides firms through their outsourcing plans.
The first step in the procurement lifecycle involves an understanding of the company’s outsourcing needs and the development of a high-level specification to undertake its outsourcing functions (Chartered Institute of Procurement and Supply, 2014). Broadly, there are 13 stages in the procurement lifecycle, which could characterize the process of outsourcing ADNOC’s cleaning services. At the center of the procurement process is the integration or use of e-commerce systems, stakeholder engagement processes, sustainability reports, risk assessment and mitigation processes, continuous improvement activities, people, and skills needed to achieve procurement goals (Chartered Institute of Procurement and Supply, 2014). Sustainability and continuous improvement are key processes that have been supported by the company’s new management in light of growing global concerns about the impact of the energy industry on the environment and the role that technology could play in addressing this problem.
Impact of Markets in Securing Cost Savings
In line with the above views, experts suggest that companies should analyze to understand the segmentation of variables, which affect the outsourcing process (APICS Supply Chain Council, 2016). Relative to this suggestion, their recommendations highlight the need to understand situational factors, demographic variables, operating variables, and purchasing organization variables affecting company processes (APICS Supply Chain Council, 2016). These factors need to be taken into consideration because market forces are not the only ones that could affect outsourcing; national and global forces have the same impact. This analogy points to the need for a comprehensive analysis of factors that would influence ADNOC’s outsourcing plan in the end. These influences can be analyzed using the SWOT analysis below.
Strengths
Outsourcing ADNOC’s cleaning services would allow the company to better focus on the economic, social, and political development of Abu Dhabi and the wider UAE region (Abu Dhabi National Oil Company Inc., 2017). Its economic contribution to the emirate is profound because it has played an instrumental role in exploiting and preserving its hydrocarbon reserves on behalf of the Abu Dhabi government. By outsourcing a non-core function, such as cleaning, the company would better achieve this goal by redirecting its resources to its core functions.
Weaknesses
Although the importance of outsourcing to ADNOC is clear, the company has to meet the needs of different stakeholders, including the local community, its neighbors, customers, and the environment (Abu Dhabi National Oil Company Inc., 2017). In other words, the company has to balance the interests of all these stakeholders. These interests are enshrined in the company’s vision, which is to create a diverse, knowledge-based economy in the UAE and improving the quality of life for local and international stakeholders (Abu Dhabi National Oil Company Inc., 2017). Through these insights, it is difficult to be successful if the interests of all stakeholders are unaddressed.
Opportunities
Outsourcing provides an opportunity for ADNOC to align its operational processes with its five key values, which are progression, collaboration, respect, responsibility, and efficiency (Abu Dhabi National Oil Company Inc., 2017). Therefore, the recruitment of third-party vendors in the company’s operational process would make sure that its managers only partner with service providers who share the same vision as the company.
ADNOC should also focus on understanding purchasing organization variables, regardless of whether they fall in the market, national, or global categories. At the same time, the procurement function of ADNOC should follow a centralized structure because the company intends to leverage its group positioning to get optimum value from the outsourcing process. If the managers select a decentralized structure, it would be difficult to realize the full benefits of outsourcing because the organization would be unable to leverage its group competencies, as each subdivision of the conglomerate would be outsourcing its functions. The impact of such a strategy is that the third-party vendor in the outsourcing plan should provide cleaning services to all of the company’s subsidiaries.
Threats
Since ADNOC engages in the exploitation, production, refinement, and distribution of energy products, it can be reasonably assumed that the firm and third-party vendors would incur costs related to production overheads and setting up the outsourcing relationship in the first place. Prime costs may involve direct expenses, materials, and labor costs, while production overheads may include indirect expenses (such as administrative costs), materials, and labor costs. Collectively, these expenses amount to the overall production overheads for setting up the outsourcing relationship between ADNOC and companies that could potentially provide cleaning services. Prudent procurement and supply chain management could help to manage such risks. Table 1 below summarizes the findings of the SWOT analysis.
Table 1. SWOT Analysis (Source: Developed by Author).
Conclusion and Recommendations
Conclusion
This document demonstrates that outsourcing is a function that combines different aspects of ADNOC’s performance and operations. At the firm level, the outsourcing process involves complexities that revolve around logistics planning, investing in third-party relationships and contract management. These factors emerge at a time that the organization is seeking to improve its efficiency by seeking the services of third-party vendors to provide cleaning services. Based on the insights highlighted in this document, the organization must outsource its cleaning services because it could enjoy immense benefits from implementing them.
Doing so would make it possible for ADNOC to send invitations to bidders or outsourcing partners who meet their specifications. Those who pass the pre-qualification or shortlisting process should be formally considered as partners in the outsourcing model, based on the tender specification criteria. Using best practice tendering processes, the best contractor should also be identified and engaged in a post-tender notification meeting. Here, discussions may address several issues, but matters relating to contract terms, key performance indicators (KPIs), and service level agreements need to be prioritized. Subject to the successful completion of these deliberations, the best applicant should be awarded the contract. Thereafter, a working relationship could be established with the chosen supplier.
Overall, if ADNOC properly implements its outsourcing function, it would not only improve the outcomes of the company’s cleaning services but also meet the needs of all its shareholders. This view is in line with the triple-bottom-line approach in procurement management, which emphasizes the need for companies to be mindful of people, the planet, and profits. This model would also improve the odds of the firm getting maximum cost savings from its outsourcing operations because the savings made from the plan could finance core activities. Such financial gains could also translate to increased profitability for ADNOC because outsourcing its cleaning services would mean that the company gets the service at a lower cost than it would have otherwise paid for. In line with this goal, the subsection below recommends ways in which the firm should implement this strategy.
Recommendations
Understand All Variables That Would Affect the Outsourcing Plan
ADNOC should conduct a feasibility study that generates materials for developing a case for outsourcing cleaning services. Here, a cross-functional team could be developed to understand the impact of integrating a third-party vendor on the company’s value chain process. Doing so could help in developing a requirements list describing the performance or technical expertise needed to gain approval to provide cleaning services. Draft contracts, key performance indicators could also be identified in the same manner and so is the process of developing a statement of resource requirements (SRR), which could be instrumental in-market testing.
Develop Purchasing Policies
Employing prudent purchasing and supply chain management techniques would also help ADNOC to select the right kind of purchasing policies to follow in the outsourcing plan. By deciding which procedures to follow, the firm will be in a powerful position to determine whether to collaborate with cleaning companies that prefer long-term contracts, or those that only provide short-term services. Similarly, by doing so, it would be easy for the conglomerate to choose whether to partner with companies that have a flexible working relationship or a rigid one. The decision should be anchored on a succinct understanding of ADNOC’s business processes. This way, it would be easier to establish the criteria for seeking outsourcing partnerships based on an assessment of whether the company is seeking quality, availability, or low price when choosing to outsource its cleaning services.
Select the Most Qualified Supplier
ADNOC should establish a rigorous supplier selection process to make sure that the right vendors are singled out. Relative to this need, Khushlani (2017) says it is important for organizations to solicit bids from a variety of potential third-party planners and choose one whose products and requirements align with those of the organization. The selection process could involve different stages, such as reference call selection and on-site presentation (among others). Potential suppliers that could be integrated into the organization’s outsourcing plan could also be chosen from those who responded to the SRR. Appraisal and prequalification could also be done using dialogue, reference checking, and site visits (among other techniques).
Reference List
Abu Dhabi National Oil Company Inc. (2017) About UsAbu Dhabi, United Arab Emirates. Web.
APICS Supply Chain Council (2016) Creating Value through Procurement and Sourcing Efforts in Integrated Supply Chains Chicago, Illinois. Web.
Chartered Institute of Procurement and Supply (2014) Procurement and Supply CycleLondon, United Kingdom. Web.
Khushlani, A. (2017) Business Process Outsourcing and the Role of Procurement Bombay, India. Web.
Spiller, P. (2015) Creating Value through Procurement Outsourcing New York City, New York. Web.
Egol, J. (2016) Top Benefits of Outsourcing Procurement New York City, New York. Web.
Walters, R. (2018) Benefits of Outsourcing London, United Kingdom. Web.
WOU (2009) Procurement’s Role in Outsourcing New York City, New York. Web.