Why Waste Time & Money On Outsourcing?

Outsourcing is a business practice where companies outsource selected or part of their business operations to other companies that specialize in those operations in order to lower cost and improve efficiency. But is always the case?!!

Gulf Air, the national airline of the Kingdom of Bahrain, has gone through a series of outsourcing some of its core business function to independent organizations. The first ever outsourcing done by Gulf Air was in 1977 when it helped to setup and form a new company called “Bahrain Airport Services (BAS)”, which gulf air owns 30% shares. Gulf Air ceased to perform ground handling operations and instead purchased it as a service from BAS. Then in 1987, Abu Dhabi-based Gulf Aircraft Maintenance Company (GAMCO) was formed as a joint venture between Gulf Air and Abu Dhabi government. Gulf Air outsourced its heavy maintenance operations of its aircraft maintenance department to GAMCO the same year. In 2010, Gulf Air disbanded its Training Department in an effort to reduce staff and cut cost and outsourced the training services to a new company called Gulf Aviation Academy (GAA), which took over Gulf Air state of the art aircraft simulators and training buildings. The same year another company formed “Gulf Technics” owned by government which also when it will be ready building their facility will handle the whole Engineering Department services which Gulf Air intend to outsource. Latest news on the sales side at Gulf Air is that they are likely to outsource most of their sales activities to a General Sales Agent (GSA).

With all of these outsourcing deals, was it a right move by Gulf Air or it was not a wised decision by the carrier? Recently Gulf Air is seeking a $1.762 billion from the government to help the company stay in business otherwise it will be forced to close. Gulf Air is losing nearly $1 million each day. Although the airline outsourced some of the core operations in order to cut costs and reduce their staff, but it failed to do so. So, what went wrongly? Obviously, the airline outsourced the business units that actually brings money and could help generating added revenues to the company. BAS is taking care of all the foreign airliners that land at Bahrain International Airport and provide full ground handling support to them. Now, GAMCO known as (ADAT) is fully owned by Abu Dhabi and is doing multi million projects with regional airlines. GAA is also making money and gulf Air accounted for less than 35% of their revenue. Also, the airline would pay so much commission to the GSA instead of bringing the business in-house. Overall, outsourcing did not alleviate the airline rather puts more responsibility on the airline for monitoring the service provider continuous performance.

So, do you think that it is the right time for Gulf Air to reverse their previous decisions and brings back their core business functions and put them under Gulf Air umbrella?

9 thoughts on “Why Waste Time & Money On Outsourcing?

  1. Your blog post was an interesting read as it introduced a completely new perspective on outsourcing. Outsourcing involves an organization contracting a business function/process to another outside organization so it is no longer performed internally. One of the most common reasons a company decides to outsource a function is cost-cutting. Outsourcing allows the organization to focus on its primary functions and improve its efficiency in that field – for the overall benefit of the company.

    I feel the problem that occured in the case of Gulf Air is not a failure of outsourcing but maybe a failure to understand WHAT section of the company should have been outsourced. At its core, outsourcing occurs when the costs of an organizational function surpasses its revenue-generating capacity so that it becomes beneficial to hand it over to an independent organization rather than handling internally. I feel that if Gulf Air profits started plummeting after outsourcing began, it is because the decision-makers did not accurately conduct a cost-benefit analysis of the functions they planned to outsource. In most situations and with many organizations, outsourcing is generally advantageous to the company.

  2. You put a very strong argument Mohammed and I totally agree on the fact that outsourcing should be only in the best interest of the company and that is if it will cut costs or if the function is business necessity the company cannot do without. I would argue that acquiring the formed companies would be the right move but that will be much easier said than done. I can only imagine the level of funds that Gulf Air would need to come up with after the formed companies have been established and grow substantially since their inception.
    The current CEO of Gulf Air Samer Al Majali was hand-picked sort of speak to head Gulf Air simply because he managed to turn Royal Jordanian airlines into profitability under his management between 2002 to 2009. Gulf Air’s case was a bit more complicated then Royal Jordanian and with the restructuring of some of its destinations and the current liabilities and obligations the company has acquiring anything might be not feasible.

  3. I wonder why Gulf Air is losing the last couple of years; outsourcing can be less efficient and costly.I think they lose business because of outsourcing their core business functions which might be more efficient if they did it under Gulf Air umbrella. If you want to gain profit then do the core business by your self, it was a poor decision to outsource their sales activities to a General Sales Agent (GSA). In my opinion it is the right time for Gulf Air to reverse their previous decisions.

  4. With the current situation Gulf Air is in, I do not think that they should invest again in these new business lines. Although as you explained many of them generate a lot of revenues, I am sure that they would also require a large capital expenditure over the years in order to grow and keep up with new business models and technologies. However, I do agree that at the time when Gulf Air outsourced some of its business functions it might not have been the right decision, but you have to consider that during the 1980s and early 1990s Gulf Air was a joint venture between the Governments of Bahrain, Abu Dhabi, Qatar and Oman. Furthermore, when Qatar, Abu Dhabi and Oman created their own airlline companies, Gulf Air had to adapt to the new market dynamics that was created by having a large number of airline companies. Therefore, in order for it to compete it had to drastically lower its cost base, since it lost a lot of its revenues generated from the hubs it used to operate. I believe that was one of the main reason for outsourcing some of its business lines, and focus on its core competency.

  5. I believe that it will cost Gulf Air a fortune to bring back their profitable core businesses which they outsourced years ago. As you mentioned Mohamed, BAS is handling all airlines landing at Bahrain International Airport and became much bigger then when it was first created by Gulf Air.

    Gulf Air will have to make several critical decisions and proper forecasting before spending extra money. Surely there is a plan of where and how to spend the new government loan, but lets hope they are heading toward the right destination this time!

  6. Most of the airlines in the region including the big three in Middle East operate under a group of companies which generates high revenue. Therefore, even if the airline by itself generated marginal revenues or even losses, the other supporting companies in the group will outweigh the losses and thus records a profit. Those business units that were once part of Gulf Air were generating money actually before it were disbanded and formed as a separate company. The reason why Gulf Air decided to separate them is because they intended to reduce cost and reduce staff. When Qatar government pulled out, Gulf Air brought their own simulator to Bahrain. Gulf Air Training Center used to train their staff and other airlines staff as well and allowing them to use their simulator. Now the company has to pay for the training of their pilots, engineers, flight attendant and other employees, which is sometimes difficult to arrange due to limited class rooms and simulator slots. What’s more, aircraft reliability and performance were at the top during the 70’s and early 80’s when Gulf Air used to have their own heavy maintenance facilities. Gulf Air now is losing more money after they outsourced these business units. In my opinion, these business units can bring Gulf Air back in line to compete directly with other airlines in the region and generating more revenues.

  7. Gulf Air is a well-known airline worldwide and has been in this industry long enough to know what to in this situation, outsourcing is not always the best option especially for Gulf Air. Given that it’s a good time to cut costs instead of increasing them.

    Unless they are %100 sure that outsourcing will bring the company back on track they should not take such step, on the other hand I think the Gov’t will need to back up the company one more time given its huge brand name that you would not want to lose especially after all these years of work.

  8. I agree with you that Gulf Air can generate a lot of revenue if all the business units returned under its umbrella instead of outsourcing all of it because Gulf Air will be well diversified as result reducing its business and financial risk. However, the question that should be asked is will Gulf Air return to profitability if all the business units returned to it? Will it be profitable if it reduced its outsourcing activities? Maybe yes and maybe not.. I think Gulf Air’s main problem is the weak corporate governance and the weak management which led to both the financial and administrative corruption. This is the main reason the Parliament of Bahrain refused Gulf Air’s fund request of BD 664 million( US$ 1.76 billion).

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