Outsourcing Practices in Bulgarian Companies

Introduction. In a highly competitive environment every company aims at maintaining high quality standards on the one hand and on the other, to minimize expenditure. One possible business strategy to accomplish these goals is outsourcing. Today, facing a financial-economic crisis, when companies need to decrease expenditure and do their best to keep up with the competition, the outsourcing issue is especially vital.
Generally speaking outsourcing is the long term transfer of functions/processes that previously had been carried out by the company itself to outside organizations, specialized in performing those functions/processes (service providers). The practical realization of outsourcing is beneficial for both parties (customer and supplier) since each side is able to focus attention, effort and resources in the expansion of the things they do best and from which they profit most. Eventually this benefits the consumer since they receive a better and cheaper product/service.
The fact that the term “outsourcing” popped up not earlier than in the late 1980s and that companies took a great advantage of its application does not mean that it is a new business idea. That concept and the mechanisms of its realization have long been known – since the dawn of the division of labor. Today however, global competition and the massive application of information technologies in business make way for more and more business opportunities and outsourcing constantly expands and takes new dimensions.



I.
The widely spread outsourcing practices at the end of the twentieth and the early twenty first centuries justifies the increased researchers’ interest in the area. In Bulgaria too, a great deal of publications have occurred where various theoretical-methodological aspects of outsourcing have been discussed. However there is no tangible data from the business practices of Bulgarian companies. This is the fact that provoked the initiation of the current research study. It has been carried out among 117 Bulgarian companies varying in size, business activities, length of existence, etc. The main goal has been to establish the business’s attitude toward outsourcing, the areas and the degree of its application, as well as the main motives (reasons) for its application (or rejection).
The companies subject to the study have been divided into two groups: the first group includes companies, which make material goods (machinery and metal works, timber production and processing, chemical industry, furniture production, textile and clothing industry, construction, food processing, etc.); the second group comprises companies that provide various services (aftermarket, restaurant and hotel business, accounting and auditing, tax preparation and consultation, realty, shipping, storage and expedition , transportation services, insurance, fast food, etc.).
A little over one fourth of the companies (26%) respond that they do not outsource and do not intend to outsource in the near future. They name certain reasons for their decision (table 1). Some of them argue (35%) that they lack outsourceable processes. 13 % of the companies fear of possibly becoming totally dependent on the service provider. This threat is actually being underestimated since with the export of a certain process, the customer actually “exports” its management. Besides, specialized outsourcing companies with their loads of experience often manipulate their customers. In times of harsh financial-economic crisis and growing inter-company debt (around 200 billion BGN!), one cannot rule out the danger of the service provider to suffer financially and even go bankrupt.
Table 1.
Reasons for outsourcing rejection

¹ Reasons %
1. Control loss over the outsourceable processes 39
2. Company information leaks 32
3. Poor results in other companies 6
4. Poor knowledge of the strategy 13
5. Dependence on the outsourcing partner 13
6. Pressure due to personnel layoffs 10
7. Lack of outsorceable activities/processes 26
8. Product/services expenditure increase 35
9. Lowering the quality of products/services 6

Relatively small part of the companies (6%) point out the poor results other companies have achieved by having attempted outsourcing. There is an abundance of successful outsourcing projects examples in literature but in reality a lot of companies suffer disappointment and lack satisfaction. Outsourcing, as our study shows, constantly expands its applicable areas and the number of examples of outsourcing projects failures will undoubtedly grow. Some companies fear company information leaks. Indeed, if such information is of strategic value such leaks could inflict significant damages. This is the reason why almost a third of the companies (32%) do not appreciate the idea of transferring certain functions or processes to an outside performer. The potential of information leakage is however overrated since it is much easier to gain information by an insider than from and outsourcing company. Despite that expenditure decrease is being pointed out as the most commonly achieved outsourcing effects, 35 % of the poll participants consider outsourcing to actually increase expenditure. This is not completely groundless. According to some studies outsourcing would cost a company 20 % more on average than a well managed internal process. This is explained by the suppliers’ drive to increase profit, covering the risks and compensating bidding costs. Compass Management Consulting data reveal that the increase of value of the outsourced service leaps from 30 % to 45 % than that of the internal process for the last years of the outsourcing contract. A solid reason for outsourcing rejection is the possible loss of control on the exported processes (39%). This matters especially for key company processes that provide competitive advantages and eventual loss of control over those could cause catastrophic consequences for the company. Part of the companies (13 %) admit that they are unfamiliar with this business practice, its mechanisms, advantages and drawbacks.
74 % of the companies take advantage of outsourcing in some way or another and to variable extent. Some of them (mainly small businesses) transfer only one or several unrelated functions to an outside contractor (i.e. office cleaning, security, accounting, etc.), and others outsource a number of related functions/processes and enter partnerships with more than on provider. The outsourcing applicability is directly related to the size of the company. Larger companies would use it more readily than smaller-size companies. This is so because of the larger number of operations and activities that go occur in large companies. Small businesses have limited resources and at the very start they contract unspecific activities and operations to outside agents, i.e. they have never financed those activities and therefore they cannot be outsourced.










Table 2.
Motivation for outsourcing

¹ Motivation %
1. Increase of company’s competitiveness 64
2. Personnel reduction 57
3. Quality improvement of goods/products 79
4. Expenditure reduction 62
5. Minimizing of financial risks 47
6. Resource allocation to crucial segments 62
7. Improvement of company’s investment attractiveness 24
8. Access to suppliers specific knowledge and experience 54
9. Because its fashionable and others do it 2

Outsourcing motivation reasons that companies enumerate vary (table 2). 79 % of the companies transfer an activity/process to an outside contractor expecting higher quality of the received services/products. Another motive for outsourcing is the improvement of company competitiveness (64 %). In actuality every company aims at constantly improving its competitive standing, otherwise market would throw it out. A great deal of the companies (62 %) are lead by the outsourcing main principle, “Leave to yourself only the thing(s) you are best at and transfer to an outside contractor that which they can do better than the others.” Those companies export unspecific, “distractive” activities to outside firms, which can do those activities better and/or cheaper, and concentrate their efforts and resources on the company’s key activities for which they possess the necessary competence, tradition and experience. One should bear in mind that outsourcing gains popularity namely as a cost-reduction strategy – 62 % of the polled companies name as a motive for outsourcing cost reduction. 57 % motivate their outsourcing decision as an opportunity to optimize personnel. It is true that the exportation of some insignificant and secondary operations/activities leads to an optimized company structure, to elimination of some of the company’s units and departments and this certainly results in personnel reduction. A serious motive represents the opportunity for the company to gain access to the specific knowledge database and experience of the supplier during the implementation of the outsourcing contract (54 %). This allows the company to learn from the supplier as well as to grasp the right potential it will have in the future development of a certain function or activity.

II.
The steady trend of expansion of informational technologies in every sphere of activity of modern companies defines the rapid development of informational technologies outsourcing (ITO). It is not without reason that a number of researchers consider that ITO sets the foundations for the practical outsourcing. Acting independently it often serves as the basis for the development of other forms of outsourcing. ITO means a complete or partial transfer to a specialized outside contractor of the informational support functionality of the company. In other words, the company can transfer to an outside agent a specified service (i.e. hardware support) or to transfer the whole service bundle that encompasses the complete IT management of the firm. The development of computer technologies leads to a constant widening of the scope of services that specialized outsourcing companies offer.
Bulgarian businesses actively use the services of outside IT providers. Almost 60 % of these businesses outsource or intend to outsource at least a single function related to informational technologies. To a certain extent this is due to structural scope of Bulgarian economy. The design, support and exploitation of one’s own informational systems that would ensure the company’s competitiveness at the required level is a laborious, responsible, and expensive enterprise. This would involve significant investment for equipment, software support, hiring of professionals, etc. The majority of Bulgarian micro, small and middle-size businesses lack the needed resources by default that would allow them to support and develop their own IT-units to take care of the company’s IT needs. Besides, due to the rapid hi-tech development it is beyond most companies’ means to keep updated on the emergence of new technological products and to apply them at the right time without the employment of a significant number of highly qualified professionals. In the end it turns out that it would be more advantageous for companies to contract experienced IT providers than building and developing their own IT-units. This is especially true for the companies in the service sector. Industrial businesses however are not really excited about ITO – 40 % do not intend to apply it and 2 % have even terminated it. This partially can be explained by the greater complexity of the business processes that require integrated decision-making as well as with the ability of these businesses to support their own IT departments.

The broadest ITO applicability bear those functions that have to do with programming, software support and services. These comprise 43 %of the total number of the outsourced IT activities and are applied by 72 % of the polled businesses. Other types of functions related to the usage of informational technologies by companies that are often outsourced are the activities related to IT-infrastructure repair and support. They too represent a significant share (40 %) within the general ITO structure. Only 28 % of the polled companies use the outsourcing of functions that are related to system administration and databases. Two thirds of those however do not intend to use it in the future and 2 % have terminated it completely.

During recent years the IT-sector market has endured some qualitative deviations. The interest in “comprehensive supplies” of these kinds of services by a single partner has grown significantly. That kind of interest in “comprehensive supplies” of IT services by a single partner has been facilitated by the companies’ urge to make best use of the hi-tech potential and by the identification of innovations as an important factor for business development. This trend in the development and use of IT services will logically bring the necessity of the expansion of the outsourcing partnership with specialized firms. At the same time it is necessary to pay attention to the possible mistakes that ITO may involve. The outsourcing project budget needs to be analyzed carefully since it is possible that it might turn out to exceed the cost of maintaining a company’s own IT unit. A special attention has to be paid to the long term ITO contracts, which may possibly deepen the effect of economic changes significantly. The achievement of competitive advantages through ITO depends on the correct evaluation of the functions that will be contracted to an outside firm, the choice of an outsourcer, and the type of contract so that the contracting party preserves its control over the information security.
IT outsourcing gradually leaves its framework because the outsourcing companies constantly expand the spectrum of services, most frequently carrying out services that are secondary for the customer and do not have a decisive role upon their competitiveness (i.e. accounting, human resources management, advertising, etc.). This is how the development and the expansion of outsourcing shapes into a more comprehensive practice and reveals itself as strategic outsourcing. The transfer of whole segments of economic activity to outside firms is termed as of business processes outsourcing or BPO.
BPO includes a wide variety of business processes of a certain enterprise. Most often it involves activities related to accounting, marketing, advertising, payroll, legal services, supplies and sales management, project management, customer relations management, and sometimes even the whole financial management of the business. The extent of practical applicability varies. The study reveals that the most commonly outsourced activities are legal services, accounting and advertising. This makes sense because the above business processes demand specific assets and highly qualified personnel which are not available to most companies, especially micro companies and small-size companies. It needs to be noted that the more complex the business processes and the stronger their relation to the major company activity, the less often they are outsourced. For example, the percentage of sales management among the polled companies is only 10%, the supplies management and project management percentage is 6 %, the customer service percentage is 5 %, and the financial management of the business is as little as 3 % within the structure of the outsourced processes. Around the world and especially in huge corporations, the above mentioned business processes have a significantly larger share in the total outsourcing volume where customer service and project management represent the greatest percentages.
One of the fastest growing areas of outsourcing is the transfer of accounting. This is valid mainly for micro and small-size companies where the volume of economic activity varies and depends on a number of outside factors. Regardless of the hours worked, the costs for accounting payroll are constant, i.e. from the entrepreneur’s point of view money are wasted on “stolen” company time. On the other hand, when there is a rapid surge in the workload, the accounting staff often lags behind. When one outsources accounting they save from payroll and health insurance, equipment and office consumables, software support, training, subscription to specialized editions, telephone bills, etc. At the same time the outsourcer becomes responsible for timely accounting reports and errors, which may lead to fines or other sanctions. This is why common sense dictates such activities to be outsourced to accounting firms who offer highly qualified professional services and have a long experience working with customers. In times of economic crisis, the accounting outsourcing takes a special place among Bulgarian companies since it allows the company’s management to focus on business development and the search of new markets while transferring the routine activities to professionals. This is what our study has proved. 80 % and above of the companies in the servicing sector, which are mostly micro and small-size, outsource or intend to outsource accounting services. The industrial sector picture looks different though – 48 % of the companies there do not intend to apply this kind of outsourcing and 2 % have terminated it.


Not surprisingly advertising takes a remarkable place in the choice of outsourcing. 73 % of all businesses use the services of specialized advertising companies and 10 % more intend to use them in the future. The same orientation is observed to legal services – 80 % of the companies use the services of law firms. This is easily explained since both advertising and legal services are mostly incidental. Marketing is another attractive segment for outsourcing. The study has revealed that the larger companies have their own marketing departments, while small-size and especially micro companies almost lack such functionality. As a result as little as 30 % of the polled companies indicate that they use the services of specialized marketing companies. One can still expect that marketing services outsourcing will grow in the future since 25 % on average of the businesses intend to use it. This trend is stronger in the service sector, where the scope of outsourcing is expected to grow by 34 % against the 19 % in production.
Some functions as payroll and the whole process of work compensation management are not vital and do not generate profit for the company but at the same time demand special skills, quality and adaptive software to ensure up-to-date and completeness of procedure in accordance with regulations as well as many other expenses, which are hardly justifiable in a business. In cases like these the advantages of outsourcing are self-evident. Which is why the fact that merely 12 % of the polled companies outsource payroll seems puzzling.
Effective coordination of sales and distribution channels is especially important for a company. The majority of the polled companies consider the outsourcing of such coordination unacceptable – only 10 % outsource sales and 75 % do not intend to use it at all. What is more, the negative attitude to this type of outsourcing is almost the same in both sectors – production and services. Its practical applicability is still higher in the service sector (22 %) and as little as 4 % in production. There is not much difference in the outsourcing patterns regarding supplies. A great percentage of the polled companies (70 %) do not intend to export certain logistical operations to specialized logistics companies that have the experience and resources and a well-maintained infrastructure to facilitate the successful performance of all operations.
Bulgarian companies’ attitude to Back Office Outsourcing (BOO) is amazing. Only 10 % of the polled companies use it. The main back office activities that are most often outsourced are paperwork processing (12 % of the businesses), preparation and updating of offers and presentations (8 %), bookkeeping and archiving ( 11 %), registry keeping (12 %), preparation and processing of information and mail (4 %).


Business Services Outsourcing, BSO is a peculiar subdivision of BOO. BSO allows companies to receive faster and cheaper services and save precious time and resources. This kind of outsourcing is beneficial for small –size and middle-size companies where investing in the organizing and maintaining of various services is unjustifiable. The scope of services that can be exported outside of the company is quite wide and differs among businesses. These include functions as security, office cleaning, landscaping and building maintenance, personnel meals, etc.

The outsourcing of such services should be widely spread since they are markedly secondary in nature, and can be exported to an outside firm relatively easily. Besides, this sector is well developed and highly competitive in Bulgaria. The study however did not confirm these expectations. Only 35 % of the companies think that this type of outsourcing is beneficial for them. BSO lacks popularity especially among industrial businesses. This may be due to the fact that they enjoy bigger resources, which allows them to perform the above services themselves but does not explain their lack of interest in the benefits this type of outsourcing could offer. Besides there is no solid evidence about BSO’s ineffectiveness since only 4 % of the companies that had used it have terminated it or intend to terminate it. At the same time as little as 4 % of the companies intend to apply it in the future.
The most commonly outsourced activity is security (60 % of the companies). This makes sense since in Bulgaria there is a great number of security firms that have trained personnel with experience in the area. The outsourcing of services related to building, office, industrial premises and other spaces maintenance and cleaning is highly polarized among the two groups of polled companies. 50 % of the service sector companies are currently using this type of outsourcing and 9 more percent intend to apply it. The situation in the industrial sector is reverse, where 50 % do not intend to outsource this type of activity and 2 % have terminated their contractual relations with the service providers. Only 20 % of industrial businesses use outsourcing of activities that are related to hygiene and premise cleaning. These businesses demonstrate almost identical attitude to landscaping outsourcing. Only 17 % use outside firms to perform these services and 44 % do not consider the necessity of outsourcing. The small percentage of service sector companies (13 %) can be explained with the specificity of their business scope and lack of land to be landscaped. The smallest extent of outsourcing is that of catering. Only 12 % of businesses use outside catering provider.
The outsourcing of functions related to human resources management becomes an important segment for businesses because of the distribution of sophisticated technologies for staff management. The outsourcing of functions as recruitment, training, and attestation of personnel, career planning, development of motivational programs, etc. allows a significant cost reduction for maintaining the respective structural units on the one hand, and improving personnel management quality as well as the overall level of corporative culture on the other. More than half of Bulgarian companies apply or intend to apply outsourcing of human resources management (HRM), (54 %). Structurally the distribution of the outsourced activities includes the recruitment of personnel (12 %), training and qualification improvement (22 %), safety system management (18%), administrative activities when terminating contractual labor relations (12 %), etc.



A business’s productive processes can be divided into major (business defining) and secondary. Major processes are those whose final product is intended for use by outside customers, i.e. service/product consumption. Secondary services/products are intended for internal company use – production units, departments or single individuals. There is a widely spread opinion that a company’s major processes and especially those based on the company’s knowledge database and traditions ought not be ‘exported’ outside the company since this would lead to a weakening of its competitiveness. Sometimes however there are situations in business when the outsourcing of major processes or segments of such processes is not only beneficial for the company but is also necessary. For example when the firm lags behind its competitors, it could transfer part of its major activity to an outsider in order to acquire the needed knowledge and know-how. Besides if a company emerges on a new and rapidly developing market, it might not posses enough resources and the necessary technological abilities. In such cases the company could partner with firms that have already established themselves on that market and have been competitors up to that point.
The study has revealed that Bulgarian businesses do not hesitate to outsource major productive processes or segments of those. 48 % of the polled companies respond that they have outsourced at least one major process or a segment of it and other 7 % intend to apply productive outsourcing in the future. Of course the answers have been defined by the business area – industrial businesses enjoy greater outsourcing perspectives than these in the service sector. Structurally the greatest share is that of the outsourced manufactured product components (24 %) and the outsourcing of whole production operations (23 %).
It has to be noted that a relatively high degree of outsourcing usage has been expected in the area of production preparation and namely, in designing of technological processes. This expectation rested on the fact that process design which is applied when one implements new and sophisticated products requires specific assets and highly qualified professionals that are available at design organizations. The study has revealed however that the outsourcing of this activity is only 6 % of all other activities involved in the major production, which is offered to an outsider. More than 70 % of the companies do not intend to outsource the design of technological processes. The most logical explanation of this fact is that the extent of implementing new products and/or new technologies at these companies (mainly micro and small-size) is relatively low and they do not need specialized design services.
Production outsourcing reflects on the secondary production as well, which supplies the major production with power, equipment and tools, transportation, repairs support, etc. Often the in-company secondary units do not operate effectively since they are not exposed to the impact of direct competition – their products/services are used by other units of the same company. Apart from that these days in many segments of industrial production there is a cyclic recurrence that significantly reduces the effectiveness of secondary units. At the same time specialized outsourcing companies possess convincing advantages than the in-company units because these activities are their core business. They work with a wide variety of customers, apply more effective methodology, use up-to-date technologies, etc. Their specialization in a certain area allows them to perform smoothly and provide first class services for the outsourced functions and due to the performance of similar operations for a variety of customers they can maintain competitive prices for their services. At the same time for the company-customer the performance of secondary functions is not of primary significance by default. All this along with the financial crisis forces companies to outsource part of their secondary production. The reduction of company units, responsible for the performing functionality of secondary production releases the company from involvement in unspecific activities and leads to a cost reduction while transforming these costs from permanent to variable; it also helps the company to concentrate effort and resources to its major area of activity as well as the development of strategically important business directions. Companies’ attitude towards secondary processes outsourcing is contradictory. 48 % have outsourced or intend to outsource at least one secondary activity, the same percentage haven’t outsourced or do not intend to outsource such processes. Structurally repair services outsourcing comprises the greatest share (63 %). Equipment, transportation and storage services are being outsourced by 55 % and 36 % of the companies respectively. There is a relatively low level of power supply outsourcing – 32 %.
Conclusion. The study has revealed that outsourcing has a good standing in Bulgarian business. A great deal of the companies has realized that they cannot survive and be successful on the market relying solely on their own resources and they have gradually started applying outsourcing. The financial-economic crisis has turned to be an additional catalyst for the usage of this managerial tool– the need to cut costs forced many businesses to outsource some of their business activities. Frankly speaking not all companies will taste the ‘honey’ of outsourcing. Many will be painfully stung by it. But their mistakes will make them wiser and stronger. As for the profitability of the outsourcing strategy, time will show.

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