The Impact of Outsourcing Strategies in Oil and Gas Industries-A Study of Selected Oil Firms in Nigeria

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CHAPTER ONE

INTRODUCTION

 1.1  Background to the Study

According to Adeleke, Olajide and Bolanle (2014), outsourcing jobs in Nigeria have become a subject of great concern as more employees continue to groan under the ˜policy of wages reduction’ by the employers of labour without compromising the quality of services provided. In almost all the sectors of economy of Nigeria, outsourcing of staff has become the order of the day as the employers find the system ˜the best for their businesses’ and are no longer looking for permanent staff again.

Human Resource outsourcing is ˜a process of replacement of in-house provided activities by subcontracting it out to external agents’(Irefin, Olateju, and Hammed, 2012).It is a system whereby organizations give out some of its services to outside services providers to handle on their behalf. Outsourcing of human resources has come a long way in history, and has continued to be more acceptable in Nigeria and other developing nations of the World.

Most of the organizations engaging in outsourcing are situated in the city where population is densely concentrated with easy availability of competent hands to outsource. Outsourcing helps in cutting down on staff maintenance costs; thus, organization save a lot of money through contracting jobs to outsourced staff. The organization thereby relieves itself of complications involved in maintaining internal Human Resources. As a result, while organizations and businesses are thriving, vital tools (Human Resources) that are responsible for the success of the businesses are not well taken care of.

According to the Campaign for Democratic and Workers’ Rights in Nigeria, cited in Alawiye (2013), 45 per cent of Nigeria’s labour force is made up of casual workers. There is no doubt the percentage will continue to increase with the number of graduates trooping out of Nigeria’s institutions of higher learning every year.

Outsourcing of staff is a contravention of Section 7 (1) of the Labour Act, Cap 198, Laws of the Federation of Nigeria, 1990 which stipulates that, Not later than three months after the beginning of a worker’s period of employment with an employer, the employer shall give to the worker a written statement specifying the terms and conditions of employment, which include the nature of the employment and if the contract is for a fixed term, the date when the contract expires.

According to Çiçek and Özer(2011),with the increasing globalization, outsourcing has become an important business approach, and a competitive advantage may be gained as products or services are produced more effectively and efficiently by outside suppliers. The need to respond to market changes on a daily basis and the difficulty of predicting the direction of such changes mean that organizations must focus on their core competences and capabilities. Traditionally, outsourcing is an abbreviation for outside resource using. Outside means to create value from without, not within, the company. Outsourcing allows firms to focus on their own core competences by relocating limited resources to strengthen their core product or service and to strategically use outside vendors to perform service activities that traditionally have been internal functions. Outsourcing can also involve the transfer of both people and physical assets to the supplier.

The traditional outsourcing emphasis on tactical benefits like cost reduction (for example, cheaper labour cost in low-cost countries), have more recently been replaced by productivity, flexibility, speed and innovation in developing business applications, and access to new technologies and skills.

According to Matejun (2011), outsourcing focuses on the reduction of operations performed by internal company services based on employment and hierarchical relationships and entrusting the tasks to external service providers based on formalized contractual or capital relationships. The rationale behind the development of outsourcing was largely affected by such theoretical concepts as the economies of scale, the economies of transactional costs, the resource approach in the business entity management, changes related to the manufacturing processes and creation of business relationships. Development of outsourcing leads to the separation of business processes, strategic involvement of partners in transformation of the applied solutions or the use of external services involving advanced technologies and knowledge services; it provides new possibilities for using this concept in creating the intellectual capital of enterprises.

According to Nyangau, Mburu and Ogullah (2014), organizations are facing turbulent times due to changes in economic conditions, globalization and rapidly advancing technological advances. To cope with these changes, organizations are seeking solutions and one of the most publicized strategies in recent times is outsourcing. Outsourcing is a complex term as it embodies several descriptions and generally refers to the relocation of jobs. Essentially, outsourcing is the transfer of services or functions previously performed within the organization to a provider outside of the organization and are increasingly key components in many business strategies. 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 companies have adopted its principles to help them expand into other markets. Strategic management of outsourcing is perhaps the most powerful tool in management, and outsourcing of innovation is its frontier (Quinn, 2010).

Procurement outsourcing is the transfer of specified key procurement activities relating to sourcing and supplier management to a third party perhaps to reduce overall costs or maybe to tighten the company’s focus on its core competencies. Procurement performance in outsourcing constitutes a growing dimension of corporate procurement strategy. Outsourcing allows firms to focus on their own core competences by relocating limited resources to strengthen their core product or service and to strategically use outside vendors to perform service activities that traditionally have been internal functions. Several studies on outsourcing (Densai, Thompson, Hayes & Baiye, 2012) have all confirmed that outsourcing is a business strategy in which one or more of a company’s business process is contracted out to an outside service provider with the intention of reducing operating cost and focusing on core competencies of the firm.  In today’s business environment it is important for most organizations to identify their core business competencies and focus on these for their procurement performance. This can assist organizations in outsourcing services to achieve the desired objectives of the organization. However, the view of Butler (2011) indicates that outsourcing is the shifting of a function either in whole or in part from a main organization to a third party.

 1.2       Statement of the Problem

Like any restructuring exercise and management decision making in business, there are risks associated with outsourcing that procurement managers or top management need to consider carefully. These may be; the possibility of over depending on or leveraged by suppliers which make switching costs to other suppliers in future prohibitively expensive. Over a long time, a supplier of outsourced service may become complacent or make itself indispensable for that organization to the extent that he progress of that organization may only be tied to that supplier. Different school of thoughts have different perception about outsourcing. Some favourable and other not too favourable. However, most studies fail to emphasizes what organizations can fully realized as benefit of outsourcing. For example, they are persistent complaints from the public regarding services and production activities of oil firms in the Niger Delta, such as poor service delivery, environmental pollution, destruction of source of livelihood supply, delayed restoration of service, unreliable service, poor network quality, low coverage levels among others (Tusubira, 2009).If the dissatisfaction is not addressed, firm will loose its customers to their competitors and will close down. There has been no major study on effects of outsourcing on cost efficiency, productivity and profitability Others are confidentiality links of company’s matters to the supplier and in some instances loss of intellectual property rights. High prices may even be imposed by suppliers due to increasing trends in outsourcing, and high demand for outsourcing services. This later increases the costs despite the fact that a reason for outsourcing is cost reduction.

1.3       Aim and Objectives of the Study.

The aim of the study is concerned with assessing the effect of outsourcing strategies on the performance of oil companies in Nigeria. The specific objectives are to:

1. Identify the activities that are being outsourced by the organization
2. Find out how outsourcing had beneficial to the organization
3. Identify the challenges encountered by the organization when outsourcing it activities
4. Determine the impact of outsourcing on the performance of the organization.

1.4   Relevant Research Questions

The research questions to be used for this research work are:

1. What are the organizational activities that are outsourced by the organization?
2. How has outsourcing strategies been beneficial to the organization?
3. What are the challenges encountered by the organization when outsourcing it activities?
4. What is the impact of outsourcing strategies on the performance of the organization?
5. Relevant Research Hypothesis

H_o:  There is no significant relationship between outsourcing strategies and organizational performance.

H₁:  There is a significant relationship between outsourcing strategies and organizational performance.

1.6  Scope of the Study

The study focuses on the procurement department of selected oil firms in Nigeria. It establishes the impact of outsourcing on organizational performance and the study covers the procurement staff, user department and providers of different services. The study looks at the outsourced activities, benefits of outsourcing and the challenges in connection with the organizational performance.

 1.7       Significance of the Study

The significance of the current study first of all contributes to outsourcing theory. It will reduce the gap in previous literature about how outsourcing affects performance of oil companies in Nigeria. Furthermore, it will give a different perspective into the possible correlation between outsourcing and performance. Finally, this research work will serve as a reference point for scholars and accounting students in the area of budgeting.

The study will help business managers to minimize losses through minimizing costs and creating value for money. It will also help organizations to know under which situation to outsource, benefits of outsourcing and the steps to take in order to achieve competitive advantage.

1.8       Definition of Terms

Employees’ Attitudes: This shows employee predisposition or a tendency to respond positively or negatively towards a certain idea, object, person, or situation especially in the work environment

Human Resources: Human Resources is the personnel of a business or organization, regarded as a significant asset in terms of skills and abilities.

Oil Company: A business entity that engages in the exploration, production, refinement and distribution of oil and gas.

Outsourcing: A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.

Organizational performance: Organizational performance comprises the actual output or results of an organization as measured against its intended outputs (or goals and objectives).

Organizational culture: Organizational culture is a system of shared assumptions, values, and beliefs, which governs how people behave in organizations. These shared values have a strong influence on the people in the organization and dictate how they dress, act, and perform their jobs.

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