Evaluation of the effect of outsourcing on capital structure of Igara Growers Tea Factory (IGTF)
Atuhire Madinah, Turyamushanga Labson and Bateyo Asuman
ABSTRACT
This study examined the effect of outsourcing on capital structures of Igara Growers Tea Factory (IGTF). A conceptual framework was developed about outsourcing functions. The findings of this research will be useful to the government agencies, private sector foundations for example Uganda National Chamber of Commerce among others to evaluate the roles of outsourcing on Tea factories. The findings will also help business stakeholders on how to manage their financial performances on the decision to outsource and finally the study will also help future researchers as a reference on similar studies. Simple random and purposive sampling techniques were used to select the respondents. Cross sectional and descriptive research designs were used in the study to collect data from the field. Qualitative and quantitative approaches were also used. The results from this research showed that the organization outsources quality resources with high efficiency level; the outsourced human resource, machinery and other inputs help to improve productivity and improves service delivery a prerequisite for capital development. 99% of the respondents agreed that outsourcing helps an organization to improve and create more capital for the factory. The researchers found out that Igara Growers Tea Factory outsources from members when they buy shares. These shares form “owners’ equity” and they greatly improve the capital structure of the business. On the same issue 98% of the respondents agreed that outsourcing helps to increase owner’s equity of the factory. The researchers found out that Igara Grower’s Tea Factory cannot provide / produce all the required resources to effect production. However, when they outsource, they are able to contract external suppliers and service providers to improve and sustain production. Through the interviews with some respondents, the researchers found out that outsourcing is a strategic management skill where non-core functions but which functions are vital in the production process are outsourced from specialized and reliable service providers so that organizations perform best. For example the researcher found out that procurement of firewood, computer and general equipment repair and servicing in Igara Grower’s Tea Factory is outsourced from external sources to improve performance and service delivery. It was found out that outsourcing has reduced overhead costs in Igara Growers’ Tea Factory because it is cost effective and certain costs like depreciation maintenance of equipment and machinery among others are then met by contractors / external service providers while Igara Growers Tea Factory concentrates on core production areas. The results showed that outsourcing increased the capital structure of the factory of IGTF. In conclusion, the results from this research showed that outsourcing improved the capital structure of the factory of IGTF.
Keywords: Outsourcing, capital, structure, Igara, Growers and Tea Factory.
INTRODUCTION
The history of outsourcing is deeply embedded in the history of the growth of the Modern Business Enterprise, which sprang up in the latter half of the 19th Century [1]. The changes in modern business practices led to trends that took place over a century ago and these changes had different ways of approaching business operations and outsourcing was one of these business approaches [2]. “After World War II, certain developments made business more global and this involved outsourcing. The first use of outsourcing in recent history was in the 1950s with time sharing among organizations” Globally, outsourcing usage grew to 35 percent in 1997 and the total market for outsourced services was expected to increase to $200 billion by the year 2001. A recent study was conducted by Yankelovih Partners indicated that two-thirds of companies world-wide already outsourced at least one business process to an external third party. “This practice appears to be most common in the U.S., Canada, and Australia, where 72 percent of outsourcing is being sought”[3]. Outsourcing has become an important part of today’s business as many organizations rely on out sourcing to organize their production models. In 2002 US manufacturers were outsourcing more that 70% of their products [4] and in the UK a survey realized in 2000 showed that 68% of the organizations outsource their activities including manpower in a survey of outsourcing in Australia, Beaumont and Sohal (2004) found a further impediment to outsourcing was formulating and quantifying requirements and many researchers have not gone a step ahead to find out how outsourcing does formulation and quantifying organizational requirements [5].
Outsourcing is not a new concept. Firms already started outsourcing in the 1970s, with a major wave of outsourcing starting in the early 1990s However, the nature of the functions being outsourced is changing radically. Traditionally, outsourcing was restricted to activities like distribution and manufacturing, and support activities, like payroll services, human resources, and information technology provision. Today, firms are increasingly outsourcing strategic functions that are relatively more crucial to their businesses such as new product development and front-end processes like customer support [6]. [7], stated that facilities management as an area is just evolving in Nigeria through janitorial services which is the best development component has been around for nearly (5) five decades. Security services are in the stage of development. [8], stated that “outsourcing has played many roles in Nigeria which include better focus, economies of scale in purchasing and specialization”.
Outsourcing in Uganda has improved because economic and competitive pressures have made it imperative for Organizations of all sizes to focus on their core competencies and turn to third-parties to assume responsibility for other secondary corporate functions. Leveraging third-party alternatives has reduced costs and improved operating efficiencies of business organizations. Many organizations in Uganda have outsourced business functions such as cleaning services, medical services, auditing services and security services [9]. The management of Igara Tea Factory like all other smallholder tea factories in Uganda is by Uganda Tea Growers Corporation (UTGC), a government parastatal established in 1966. The Board hires the Management services of Uganda Tea Development Agency Ltd (UTDAL), a subsidiary company owned by the two small holder factories of Igara Growers Tea Factory and Kayonza Tea Factory. Some Organisations perform well financially while others struggle to perform well even though they are operating in the same environment. A glance at business journals, or cable news channels reveals corporations struggling to perform well, and often failing, becoming bankrupt [10]. In such tough times, knowing how to perform well financially is more critical, and one thing organisations can do is to outsource, given its associated benefits such as improved product quality, increased product range, creating new markets, reduction in labour costs and materials needed, reduction in energy consumption, conformance to regulations as well as improved production process [11].
Igara Growers Tea Factory has outsourced some of its business activities and services such as information technology, Engineering, Marketing, Administration, Manufacturing, Procurement, Financial Management, and Agricultural Extension as way of up scaling their financial performance. However, It has not fully realized the benefit of outsourcing because it’s financial performance has been reported to be low making very little sales, sometimes getting losses, having a small market share, yielding little earning per share to shareholders, low sustained growth, and poor employee stewardship which have put the financial performance of the Factory operating at risk [12].
DISCUSSION
The findings of the study show that 55% are males and 45% are females. This implies that the study tried to have almost a balanced representation of respondents by gender to participate in the study and enabled to capture issues that could rise because of gender. This agrees with [13] who stated that more males are involved in outsourcing than females. This is because if an organization is to outsource, it should hire strong people with a lot of energy and competence to perform a specific task that cannot be internally performed by internal personnel of the organization. This implies that the study was able to capture views from all respondents. That is those who were married, single and divorced. [14] stated that financial performance of an organization can improve if it employs psychologically and mentally up right personnel without family and marriage problem especially legally and happily married personnel” This agrees with the findings of the study because many respondents were found to be married (53%).The results of the study agree with [15] who pointed out that the work force between 30 to 40 years are engaged more in outsourcing contracts that any other age bracket. This indicates that this is a working age bracket; it is composed of strong and young people with skills and competences necessary for good financial performance of Igara Growers Factory Tea. The results of the study indicated that this implies that Igara Growers Tea Factory is a heterogeneous organization and it employs all levels of education. However, data from the respondents in the sample indicate that the most employed education level is certificate. Other higher levels have less number of employees and this is based on the nature of work done. For example tea plucking has the biggest number of workers and most of them have certificate education level or even below.
With the department which employs most workers, the researcher found out that the production department is the biggest employer of human resource. This is due to the fact that Igara Growers Tea Factory is a primary processing factory where much of the work is done by people tea plucking, processing and marketing employ a lot of people. The findings of the study agree with [16] who stated that outsourcing of services and products is mainly involved in production processing and marketing service providers. This indicates that outsourcing has various advantages and therefore is a strategy for capital development in Igara Growers’ Tea Factory. The researcher found out that Igara Grower’s Tea Factory cannot produce enough tea for sustainable production. It therefore outsources from out growers to increase and sustain its productivity. The researcher found out that outsourcing impact on the capital structure in organizations. From the respondent point of view, outsourcing has encouraged Igara Growers Tea Factory to increase its capital structure because it makes savings as part of its earnings. Because with outsourcing, Igara Growers’ Tea Factors soloists more resources to promote production and profitability. Factory because of the high figures of respondents who strongly agreed and those who agreed. This implies that the level of profitability has improved due to out sourcing reducing on operational and costs and expenses and generally out sourcing has lead to improved service financial performance of Igara Grower’s Tea Factory. This is because increase in value of products, increased sales, improved competitive position, cost reduction, investment innovative performance, are all positive and significant which led outsourcing to have a significant relationship on financial performance of an organization. However there was no significant relationship between outsourcing and financial performance the results indicated that though not significant, Increase in sales and outsourcing are positively related (r value=0.039). The implication of this is that outsourcing may increase on the volume of sales of an organization and if the volume of sales increases, the financial performance of the organization is most likely to improve. The researcher found out that Igara Growers Tea Factory outsources from members when they buy shares. These shares form “owners’ equity” and they greatly improve the capital structure of the business. From the respondents’ views, the researcher observed that usually the organization outsources quality resources with high efficiency level; the outsourced human resource, machinery and other inputs help to improve productivity and improves service delivery a prerequisites for capital development. This Rhymes with [17], that if when outsourcing firms employ more high value-added employees; these optimally invest in firms’ specific human capital and increase the capital structure of the firm. The researcher found out that Igara Grower’s Tea Factory cannot provide / produce all the required resources to effect production. However, when they outsource, they are able to contract external suppliers and service providers to improve and sustain production. The same observation was made by [18], that when companies do outsourcing, they look for best service provider and suppliers to boost production and capital structure development. Like [19], state, the researcher found out that out sourcing is a strategic management skill where non core functions but which functions are vital in the production process are out sourced from specialized and reliable service providers so that organizations perform best. For example the researcher found out that procurement of firewood, computer and general equipment repair and servicing in Igara Grower’s Tea Factory is outsourced from external sources to improve performance and service delivery. It was found out that outsourcing has reduced over head costs in Igara Growers’ Tea Factory because it is cost effective and certain costs like depreciation maintenance of equipment and machinery among others are then met by contractors / external service providers while Igara Growers Tea Factory concentrates on core production areas. The results agree with [20] who believed that maximizing profits is by outsourcing because outsourcing reduces risk and is management friendly. After all, “no man is an island” there ought to be some interdependence which calls for outsourcing so that the organization concentrates on those core areas where it has comparative advantage and contracts / out sources what it feels is not core and the external community is capable and competent to provide at a cost effective level to promote the capital structure of the organization.
CONCLUSION
From the study, on the effect of outsourcing on capital structure, the researcher concluded that outsourcing helps in improving the organization’s capital structure. This conclusion is based on the fact that when an organization outsources resources, these resources are of good quality, they are delivered in time and production and service delivery are improved. It is vital to note that the decision to “buy and not to buy” that leads to outsourcing is done carefully and the cost benefit analysis is carried out before the decision to outsource is made. What results therefore is a strategy that is more profitable to develop / strengthen the capital structure of the organization.
RECOMMENDATION
From the study findings and conclusions, the researcher recommends the following;
On the effect of outsourcing on capital structure the researcher recommends that;
- Before the decision to outsource is taken, the organization should make a comprehensive analysis of the cost benefit ratio of the outsourced service so that the organization knows the associated costs and benefits related to the decision made.
- Then careful selection of the suppliers should follow and contracts awarded to such suppliers /service providers should be so comprehensive to cater for any divergences that can hinder effective service delivery and profitability.
- The factory should constantly measure and review the outsourcing function in order manage their unexpected costs and utilizing their assets efficiently.
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Atuhire Madinah, Turyamushanga Labson and Bateyo Asuman (2023). Evaluation of the effect of outsourcing on capital structure of Igara Growers Tea Factory (IGTF). IDOSR JOURNAL OF BANKING, ECONOMICS AND SOCIAL SCIENCES 8(1): 17-33 https://doi.org/10.59298/JBESS/2023/10.3.1000