Steering an outsourced handling agent at Lufthansa Cargo AG/ Miami, USA

Diploma Thesis, 2005

102 Pages, Grade: 1,7



Index of Figures

Index of Tables

List of Abbreviations

1. Introduction
1.1. Background and Aims
1.2. Construction of the Paper

2. Basic Knowledge
2.1. Introduction into the Airfreight Business
2.1.1. Differentiation
2.1.2. The Transportation Chain and its Relevant Parties
2.1.3. Cargo Ground Handling
2.1.4. General Varieties of Stations and Operations at Lufthansa Cargo AG
2.2. Involved Companies
2.2.1. Lufthansa Cargo AG
2.2.2. GlobeGround Inc
2.3. Market overview
2.3.1. Miami as an International Air-Cargo Hub
2.3.2. The Station Miami (MIAFH/A)

3. Theory to Outsourcing and its Management
3.1. Terminology
3.1.1. Steering
3.1.2. Outsourcing
3.2. Reasons for Outsourcing
3.2.1. Overall Aim in Outsourcing – Strengthen the Competitiveness
3.2.2. Cost Aspects
3.2.3. Strengthen the Core-Competencies
3.2.4. Service Improvement
3.3. Outsourcing – Lifecycle
3.3.1. Overview
3.3.2. Determine Sourcing Strategy
3.3.3. Define the Operational Model
3.3.4. Provider Selection
3.3.5. Contract Development and Negotiation
3.3.6. Transition to the Provider
3.3.7. Operating an Outsourcing – Cooperation Managing the Provider’s Performance Monitoring
3.3.8. Backsourcing
3.4. Critical Success Factors
3.4.1. Critical Hard Factors
3.4.2. Critical Soft Factors
3.5. Steering an Outsourcing – Cooperation
3.6. Incentive Systems and Motivation Assurance
3.7 Risks and Negative Impacts from Outsourcing

4. Actual Analysis at Miafh/a
4.1. Course of Action
4.2. Initial Situation – Foundation of Steering Mechanisms at MIAFH/A
4.2.1. History of the Cooperation LCAG and GG at MIA
4.2.2. The Contract Responsibility and Quality Assurance in the contract Pricing and Cost Structure The Service Level Agreement and Escalation Procedures
4.2.3. Layout of the LCAG-Station (GCHS) at Miami International Airport
4.2.4. Authorities and Interfaces between LCAG and GG
4.3. Hard factors
4.3.1. Contractual Service Standards
4.3.2. Non-Contractual Performance Indicators
4.4. Soft Factors
4.4.1. The Evaluation Process
4.4.2. Results of the Questionnaire
4.4.3. Results of the Interviews General Results and Basic Issues The General Problem – Lack of Discipline Cultural and Language Barriers
4.4.4. Meetings and Communication Meetings Communication
4.5. Summarization and Criticism

5. Recommendations
5.1. Overall Recommendations
5.2. New Layout of MIAFH/A
5.3. Improvement of the Reporting-system at MIAFH/A
5.3.1. Daily Monitoring at Supervisory Level
5.3.2. The MIAFH/A – Scorecard
5.4. Improve Interactions
5.5. Audit

6. Conclusion




Ehrenwörtliche Erklärung

Index of Figures

Fig. 1: Delimitation of Airfreight Carriers

Fig. 2: Air Transportation Chain

Fig. 3: Main Processes in Cargo Ground Handling

Fig. 4: Structure of LCAG

Fig. 5: Organization of GCHS

Fig. 6: Structure of MIAFH and MIAFH/A

Fig. 7: Organizational Chart of Penauille Polyservices

Fig. 8: Organizational Structure of GlobeGround Worldcargo

Fig. 9: Organization of GG/MIA

Fig. 10: Client and Provider

Fig. 11: Determine Sourcing Strategy

Fig. 12: Fields of Outsourcing – Management

Fig. 13: Course of Action

Fig. 14: MIAFH/A Operation with Concerning BJ (ground floor)

Fig. 15: MIA Station with Concerning BJ (first floor)

Fig. 16: MIAFH/A – Organization and Interfaces

Fig. 17: Cumulated NWS at MIAFH/A (Sep 2000 – Sep 2004)

Fig. 18: PCR at MIAFH/A (Sep 2000 – Sep 2004)

Fig. 19: PCI at MIAFH/A (Sep 2000 – Sep 2004)

Fig. 20: Telephone Accessibility Import/Export at MIAFH/A (Sep 2000 – Sep 2004)

Fig. 21: Customer Satisfaction Index at the Station MIA – Transport Management

Fig. 22: Waiting time – Export at MIAFH/A (Aug 2004 – Nov 2004)

Fig. 23: DHL Monitoring (July 2004 – Nov 2004)

Fig. 24: Overall Satisfaction with GG

Fig. 25: Results of the Questionnaire

Fig. 26: Cultural Barriers at MIAFH/A

Fig. 27: New Layout of the Import/ Export Office

Fig. 28: Scorecard for MIAFH/A

Fig. 29: Governance Model for the Cooperation in the Americas

Index of Tables

Table 1: Examples for Business-Models in ATL F/H3

Table 2: Outsourcing – Lifecycle

Table 3: Contract and Service Level Agreement

Table 4: Success Factors in a Relationship

Table 5: Charges per Month

Table 6: Costs and Revenues at MIAFH/A – Final Results 2003

Table 7: Strengths and Weaknesses of GG

Table 8: MIAFH/A Handling Meeting

List of Abbreviations

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“If an enterprise does not get the best people at the bottom of its management pyramid then some years down the line it is not going to find them at the top, no matter how much outsourcing it might be doing.” (Chorafas, D. N. (2003), p. 97)

1. Introduction

1.1. Background and Aims

This diploma thesis will analyze the outsourcing partnership between Lufthansa Cargo AG (LCAG) and GlobeGround Inc. (GG) at the station Miami/ USA. The paper will represent the current situation, detect sensible subjects and will give recommendations to the local- (MIAFH/A) and the regional- (MIAFH) Handling-Management at LCAG in Miami.

The main business of an airline is to offer transport services from Airport A to Airport B. The transported object can either be passengers, cargo or mail. In the 1990’s airlines followed the strategy to integrate more pre- and after-flight related services into their part of the value chain. Enormous pressures lead to changes in strategies. These pressures are mainly caused by the events of 9-11, SARS, the global recession, the Iraqi war, the latest oil-price trend and not to forget the current exchange rate of the US$1.2 The yield per kg is also decreasing as there are more competitors on the market and even forwarders started to charter own equipment for flying goods around the globe.3 But, even if there are some break points in growth; several studies forecast an annual growth of air cargo of about 6% worldwide during the next years.4

Outsourcing non-core businesses is one attempt to reduce overhead costs and to versatile the business for being more competitive. It often seems as the easy available medicine to cure suffering businesses. The possible loss of know-how, control and quality of services is often neglected. Steering an outsourcing relationship is therefore one of the main tasks in such a cooperation and require, besides costs and time, also the according knowledge.

LCAG has decided to outsource all processes regarding freight handling in Miami to GG in June 2000. At this time, GG was affiliated with Lufthansa AG (LH). The background to outsource this segment is the cancellation of the freighter service (Boeing 747 F) in 1999, which served Miami (MIA) 4 times a week (4/7). In the outsourcing process the staff of LCAG remained at its organization, were dismissed or retired, or they were transferred to the handling agent GG.

1.2. Construction of the Paper

After a short introduction into the branch there will be a brief description of Lufthansa Cargo AG and GlobeGround Inc. This includes appending surroundings and businesses. The market situation at the location Miami will be briefly shown, followed by a summary to the theory of outsourcing in businesses. The outsourcing lifecycle will be described with a focus on managing an outsourced business unit. Afterwards the actual analysis will provide information about the current situation between LCAG and GG at MIAFH/A. This will lead into the subsequent proposals and will finalize with the conclusion to the topic.

2. Basic Knowledge

2.1. Introduction into the Airfreight Business

2.1.1. Differentiation

Delimitation of Participants in the Airfreight Business

The airfreight logistic chain is an intermodal and broken transportation chain, as there are more pre- and after- processes implemented. The carriers in the airfreight business can be subdivided into pure freight carriers, combi-carriers and integrators.

The pure freight operators act in charter or regular service. They operate often as subcontractors5 of other carriers or forwarders. Main carriers in this field are for instance Cargolux and Atlas Air.

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Fig. 1: Delimitation of Airfreight Carriers

Source: Cf. Albers S. (2000), p. 22.

Combi-carriers offer passenger- as well as cargo- transportation. Besides managing only the belly capacity as by-product in the passenger airplanes,6 some airlines operate freighter airplanes as subsidiaries; similar to LH with its affiliate LCAG. The customers are mostly forwarders, with emphasize on a few like Kühne & Nagel, Schenker or Exel. The decisive part for air transportation is the shipper, who gives the pre-demand for this kind of transport. Other customers of combi-carriers can also be other airlines (OAL),7 which can also affect the demand on specified routes. Fig. 1: sdaflasjd

Integrators offer door to door solutions as a package. These special cargo carriers operate only by air as it is the fastest mean of transportation. The business is extremely customer oriented. The suppliers are mainly DHL, Fedex or UPS. They concentrate8 on standardized packages up to 50.-kg. The entire organization is accomplished to guarantee 24h services to most business centers in the world. Flexibility would therefore result in an increased transport time. The core competencies are the optimal organization and realization of logistic-chains.9 This thesis does not contain a further description of integrators as it concentrates on Kombi-carriers.

Passenger- and Cargo- Transport

The payload is differentiated into passengers and cargo/mail. These different objects have different demands. Passengers normally book a return trip and cargo is usually a one-way business. Cargo has heterogeneous demands in service; it depends on the transported goods. The different shipments need different space, temperature and handling. Passengers on the other hand have mostly homogenous requirements.

Another significant difference is the activity of passengers compared to the passivity of cargo. Cargo can only be moved with devices like forklifts and personnel. On the informational part, an airway bill (AWB) contains more information than a ticket in the passenger segment. The preference for or against air transportation from A to B increase with larger distance in passenger transportation; this does not happen in cargo transportation. The routing in cargo can be chosen by the concerning airline, as long as the shipment is at the specified time at the specified destination. Passengers, on the other hand, prefer direct connections.10

2.1.2. The Transportation Chain and its Relevant Parties

The transportation chain in airfreight is multi layered, as there is a change in the mean of transportation. In addition, the goods handled at the airport must be built up on plane specific palettes (Unit Load Devices – ULD). However, there is not only the part of physical handling, but also the concerning information flow to assure safe and secure transportation. Airfreight is bound to national and international regulations and has to follow the specified laws.

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Fig. 2: Air Transportation Chain

Source: Own representation in dependence on Albers, S. (2000), p. 24.

Figure 2 shows the air transportation chain. The relevant parties in this transportation chain are the shippers, the forwarders, the airlines and the airport companies. The average transportation time from the shipper to the consignee is 6 days, needs up to 16 various documents and can include 15 different service providers.11

The shipper initiates the transport. The motives for this kind of transportation are reduction of transport time and the reduction of risk and stock costs compared to alternative means of transportation. Forwarders organize, plan, steer and control the transportation chain. They ensure an efficient interface-management between the concerning parties. They consolidate shipments of several shippers to use weight digressions in cargo tariffs.12 The airline is acting as subcontractor the forwarders. The product consists of the transport from outbound airport (A) to inbound airport (B), which can be realized by truck (RFS) or by plane. This part can be classified as homogenous. On the other side there is the heterogeneous service on the ground, caused by the different conditions of the shipments.13 These processes start with the acceptance of goods and followed by warehousing and build up of ULDs.14

Airlines which do not have the critical size for own handling, use the airport operators or ground- and cargo- handling agents as service providers. The airport is often the only supplier of ground handling services, due to still existing governmental regulations in a lot of countries. The major part of the transportation time is spent on the ground. The reasons for this are customs- or security- reasons, missing infrastructure and the diversity of participants in handling the goods at the interface truck-plane.15

2.1.3. Cargo Ground Handling

Ground Handling (GH) “covers a complex series of processes that are required to separate an aircraft from its load (passengers, baggage, cargo and mail) on arrival and combine it with its load prior to departure”16. This system is subdivided into airside and groundside handling. Airside ground handling consists mostly of services at the plane and the transport from the warehouse to the plane. Whereas the groundside air cargo handling takes place between truck doors and apron doors in the warehouse. The physical interface to the forwarders is at the door to the trucks and on the other side of the warehouse to the airside handling. There are several parties involved to keep the system running and to secure ground times of less than 60 min for the planes. The following figure shows the main processes. Whereas attachment A shows the groundside handling-processes inside the warehouse.

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Fig. 3: Main Processes in Cargo Ground Handling

Source: Own representation in dependence on Beisel, R., Schröter, I. (2004), p. 2.

The worldwide GH market is to 59 % controlled by airlines, 24% by independent entities and 17% by airport operators. The airside is mostly dominated by monopolies, caused by still existing regulations from governments. But more independent companies expanded at the groundside in the past three years. Cost reduction is the major reason for airlines like BMI, KL, LH and Swiss to divest and to outsource ground handling subsidiaries to third parties. There are 4 global companies which profit from this trend: Servisair/GlobeGround, Swissport, Vinci/Worldwide Flight and Menzies/Odgen. They have got a market share of 9,5 % of the overall market.17

2.1.4. General Varieties of Stations and Operations at Lufthansa Cargo AG

Stations are locations which have a uniform IATA code and the ability to document shipments with an airport code. A station consists of following areas:

- Customer area18
- Administration area
- Warehouse
- Ramp and apron parking positions

Stations also differ from the link to the network of LH:

- Online stations are connected by LH flights. There is a further distinction between freighter and passenger operations.
- Offline stations are not served by LH flights. These are connected by RFS or by flights from OAL with code sharing19.

To minimize the running costs of a station, different concepts can be chosen, which mainly divide a station into the major tasks freight handling and documentation. The processing of these areas can either be done by LCAG or by a service supplying Handling Agent (HA). From that point it is possible to divert four main variances for running a station at LCAG:

- Complete management by HA
- Freight handling by HA, documentation by LCAG
- Freight handling by LCAG, documentation by HA
- Complete management by LCAG

Which variance chosen is mainly dependent on the volume of cargo and its concerning costs. Variances where LCAG operates freight handling, and the HA the documentation, will not be found. Some examples of the LCAG-area Americas/Handling (ATL F/H3)20 are shown in the following table.

Table 1: Examples for Business-Models in ATL F/H3

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Source: Cf. Al Mutawaly, I. (2004).

As shown, BOS and DEN operate with a similar model as MIA, but they have less tonnage than MIA. The Actual Analysis will give a deeper insight into the LCAG-station at Miami International Airport.

2.2. Involved Companies

2.2.1. Lufthansa Cargo AG

LCAG was founded in 1994 as autonomous subsidiary of Lufthansa when it was privatized and restructurized. LCAG is 100% owned by LH. LH is organized in a holding structure and consists of seven major business units which operate as autonomous companies: 21

- Passenger business at Lufthansa German Airlines (DLH),
- Logistics at Lufthansa Cargo AG (LCAG),
- Maintenance, Repair and Overhaul at Lufthansa Technik AG (LHT),
- Catering at Lufthansa Service Holding AG (LSG),
- Vacation & Travel at Thomas Cook AG/ Condor Airlines GmbH (DE)
- IT Services at Lufthansa Systems Group GmbH (LSY),
- Service & Finance in several companies.

LH is an ethnocentric22 company with its roots in Germany. The managers worldwide are mostly German and subsidiaries are subordinated to the headquarters in Germany. As a result, also LCAG has to follow the strategies and aims of LH.

LCAG is the market leader in freight transported by air in 2003.23 Combined with the fact that LCAG has a market share of about 7%, illustrate the oligopoly24 situation in the airfreight market. Further facts to LCAG can be viewed in attachment B.

LCAG initiated the strategy “excellence and growth” in Dec 2003. This is a restructuring program to receive a profitable growth by 2006. The focus is on the core business, which is naturally located in the airport to airport business. The goal should be succeeded by:25

- Cost cutting
- Process orientation
- Focus on the customer
- Reduction of organizational complexity
- Shortening the decisions

This paper will touch the three latter named and will therefore always focus on the above named strategic goal and the concerning ways to reach it.

Organization of Lufthansa Cargo AG

LCAG is functionally subdivided into 3 business units:

- Logistics and Production
- Marketing and Sales
- Human Resource and Finance.

The structure is shown in subsequent figure.

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Fig. 4: Structure of LCAG

Source: Own representation in dependence on Lufthansa Cargo AG (A), Aug 10, 2004.

A closer view of the areas GFO, GCN and Human Resource and Finance will be renounced, as this paper confines to Global Cargo Handling Services (GCHS).

GCHS is a unit of Logistics and Production, with the focus on process compliance and improvement. Figure 5 shows that GCHS is further subdivided into several areas and regions. The head office for the area Americas is located in Atlanta (ATL F/H3). The regional office for Florida, the Caribbean, Mexico and Central America is based in Miami (MIAFH).

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Fig. 5: Organization of GCHS

Source: Cf. Lufthansa Cargo AG (A), Aug 10, 2004.

Every Region consists of a group of stations. The region MIAFH consists of the stations Miami (MIAFH/A), Mexico City (MEXFH/A), Santo Domingo (SDQFH/B), San Juan (SJUFH/B) and other smaller stations. The difference between A and B stations is its link to the LH network, which could either be online or offline.

Following figure shows the organizational chart of MIAFH with the concerning local organization of MIAFH/A.

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Fig. 6: Organization of MIAFH and MIAFH/A

Source: Own representation.

Currently, there are 6,75 “Beschäftigungsjahre” (BJ26) assigned to MIAFH/A. 5 BJ in supervisory functions and 1,75 BJ on agent level. The regional office is equipped with 3 BJ. The Actual Analysis will give a further description to MIAFH/A and the link to its handling agent GG.

2.2.2. GlobeGround Inc.

GlobeGround Inc. (GG) was founded after GlobeGround purchased Hudson General in 1999. Today, North America is the major region for GlobeGround, where 30% of worldwide turnover is located.27 LH formerly owned a 51% stake at GlobeGround28, which they sold in 2001 to Penauille Polyservices, France. This transaction created the world’s leading ground handling provider,29 due to the fact that Servisair, which also belongs to the Penauille group, merged with GlobeGround in the same year.

The Penauille group is polycentric organized, which is shown by the acceptance of cultural differences with employing managers from the concerning host countries.30

Penauille Polyservices itself is a pure service providing company which has two main strategic areas:

- Services to airlines/airports and
- Services to companies.

The services to companies reach from cleaning, security, engineering, energy, interim assistance, green areas to urban cleaning.31

illustration not visible in this excerpt

Fig. 7: Structure of Penauille Polyservices

Source: Own representation in dependence on Penauille Polyservices (B), Aug 10, 2004.

Servisair/GlobeGround operates at 150 locations in 31 countries with 18000 staff.32 This business unit reaches from aircraft cleaning, de-icing, fuelling, facility management to cargo handling and trucking.33

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Fig. 8: Organization of GlobeGround Worldcargo

Source: Cf. GlobeGround, Sep 08, 2004; Mora, A. (2004).

GlobeGround Worldcargo is the concerning business segment in this case. It is illustrated in the figure above. It is subdivided into Americas, Europe, Business Planning and IT. The station MIA is located under the subdivision cargo in the segment Caribbean/South America, Appearance and Cargo and is further shown in figure below. It consists of a Station Manager, Senior Supervisor, Supervisors, Agents, the warehouse Foremen and concerning staff. GG/MIA currently employs 50,5 BJ34.

illustration not visible in this excerpt

Fig. 9: Organization of GG/MIA

Source: Own representation in dependence on Mora, A. (2004).

2.3. Market overview

2.3.1. Miami as an International Air-Cargo Hub

The market in Florida is more connected to the Caribbean and South America (SA) than to North America (NA). This is mostly caused by its geographical location and the cultural connections between immigrants from Latin America and their home countries. Miami itself is known as the only South American capital in North America. 55% of traffic between the U.S. and Latin America passes through Florida.35

MIA offers direct air service to 150 cities worldwide. It is serving the Caribbean and Latin America with more frequencies than all over U.S. airports combined. MIA was number 9 airport in total cargo worldwide and number 4 in the U.S. with 1,81 million tons of cargo in 2003. Colombia, Brazil and Chile are in top position in trade with MIA. The top imports are perishables like fish, flowers or fruits; top exports are technical or electronical equipment.36

It is expected that the air cargo market in both, NA and SA, will grow at an average of about 4-5% p.a. in the next six years.37 For comparison: the expectations for the Asian market lie at about 6-8%.38

The external influences, mainly caused by the events of 9-11 made the situation more difficult. This is not only caused by a break in trade exchange, but furthermore by governmental decisions. These affect international hubs in the U.S. The known-shipper program, including its new control mechanism AAMS39, and the intentions of the U.S. Department of Homeland Security (DHS) to screen all cargo passing thru U.S. hubs made the transport logistics more difficult. The fact that most of the perishables in transit must be personally checked40 by U.S. customs officers can cause terrible effects on the time-dependent supply chain. The DHS and American Airlines (AA) are already implementing a pilot project at MIA to screen all cargo. Its obvious that the wish to control 100% of cargo passing U.S. Airports, would significantly harm the U.S. economy.41 It would be extremely expensive, cause delays, and can cause a disruption to U.S. businesses and the suffering airline industry.42 This can be one of the reasons that Iberia (IB) stopped its “mini-hub” system in MIA and is now flying directly from MAD into Latin American countries. Forwarding Agencies in SA try to avoid transporting cargo via U.S.-hubs as it takes more time, due to another stop, and there is the risk of stopping cargo in transit by U.S.-customs. Preferred hubs for the Northern part of SA are therefore mostly CCS or SCL.43 As the entire airline- and airport- business is struggling, there is the fear that AA could focus on the hub DFW by stopping its tri-hub44 system, which also includes MIA, where AA operates 54% of the movements.45 This could affect the airline related industry in MIA’s catchment-area.46

On the other hand there are such carriers like LA, which opened their air cargo-hub in MIA. LA is a very offensive carrier in the market and has 25 % annual growth rates on their main routes, which are located between SA and the U.S. and the European Union (EU).47

2.3.2. The Station Miami (MIAFH/A)

The warehouse with a size of 35.732 ft² (3320 m²) and 12 truck doors is located in the Cargo City of MIA. It is owned by Miami-Dade County, Florida. The warehouse offers ramp side handling, parking positions for various aircraft types, including 74F, and 2 cooling chambers. MIAFH/A presently handles 7/7 (FRA, 744) and 3/7 (MUC, 343) LH-passenger flights. This cargo emerge wouldn’t justify the warehouse facilities, which resulted from the 74F service to/from FRA. Therefore, MIAFH/A started to cooperate with DHL and handles currently cargo for 19/7 DHL flights. Besides the scheduled air-services, MIAFH/A also handles 6/7 RFS to ATL, which is served by a 74F to/from FRA twice a week.48

GG is responsible for the physical and documental handling of cargo. The unfortunate financial situation49 at MIAFH/A is also a result of the contracts entered with GG before it was sold to the Penauille group. These contracts were concluded assuming that Global Cargo Net (GCN) of LCAG would fly much more tonnage to MIA. GCHS is still the leaseholder of the entire facility and has to pay the overhead costs of 450.000 US$ p.a. GG was unwilling to take over the lease from GCHS at the end of 2002 when the lease expired. GG conceived their intention behind ostensible problems obtaining a necessary permit from Miami Dade Aviation. MIAFH/A is not expecting that GG will ever get such a permission. For that reason LCAG considers that GG violates the agreed handling contract.50

There are 5 main competitors of GCHS at MIA which posses such a license for offering cargo ground handling, as well as ramp-handling services at Miami International Airport. They are as follows:

- American Sales & Management Organization Corp.
- ASIG Miami Inc.
- Evergreen Aviation Ground Logistic
- Swissport USA Inc.
- Worldwide Flight Services

Non-airline companies51 have to request a license which can be very time-consuming. To shorten the waiting period, they can participate in a yearly lottery. But the chances to win a license are very limited.52

3. Theory to Outsourcing and its Management

3.1. Terminology

3.1.1. Steering

The term “steering” is rarely clarified in literature. Therefore, the term “management” is often used synonymous. Steering means to ensure a meaningful action orientation with respect to the task, the extraction, the realization and the modification.53

Steering describes the stimulation, prevention and adjustments of the organizational coordination. Coordination is needed to reach defined goals with several tasks and actions. These are mostly interdependent and need to be adjusted on each other.54

Steering can be partitioned into the selection, the concretion and the reflection. The main aim is selected from several options to secure the constant fortune of a company. This orientation has to be concretized with tasks and actions. The way of reaching the aim should be critically reflected and proven. Steering is an ongoing process and should enforce the informational exchange of occurring disturbances in a timely manner.55

3.1.2. Outsourcing

Outsourcing is a shimmering term, which is used in business papers to several topics. This chapter shall give a brief introduction and will differentiate the term. Besides outsourcing, there are several other words based on the same roots, like single sourcing, local sourcing or modular sourcing. Outsourcing is an artificial word and arose from the words outside, resource and using. 56 This means in brief: the usage of external resources.57 The most important part is therefore the word “resource”, because it describes the object of the outsourcing process.

Outsourcing was mostly used in IT industries,58 but in the course of development other resources were also bought from external companies. Therefore, outsourcing cannot only be seen as a concept of data processing. Mostly it is the external purchase of arbitrary services, functions or processes, independent from the object of outsourcing.59 Outsourcing is described as the transition of the construction of services, which were so far rendered by the enterprise with own means, to an external third party who takes on the durable entrepreneurial responsibility for this.60

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Fig. 10: Client and Provider

Source: Own representation in dependence on GAO (2001), p. 7.

Outsourcing itself includes the client, which is willing to give some services to third parties and the provider, which has the ability to offer these services in the required quality. Above shown figure reflects the main tasks in Outsourcing. On both sides the participants can be multiple. For instance if one HA (provider) is responsible for the handling of several airlines (clients) or one airline has got several providers in different processes involved (ramp – warehouse – counter). If one provider supplies the entire service can this be called a “one-stop shopping solution”.61 The principal criterions for outsourcing are as follows:62

- The transition of a process has to be permanent or long lasting.
- Existence of an individual and specific way of cooperation.
- It has to be market related; one company has to be legally independent.

The main feature which binds both parties to each other is the contract and the service level agreement63 (SLA), which assures the basic quality.

Barriers of the Terminology

In connection with outsourcing more terms are used synonymous. These terms can be spin-off, roll-out and external procurement with the “make or buy” decision.

Spin-off describes the transition from formerly self performed to outside performed services. It is often combined with transition of fortune to one or more companies. This results in a higher flexibility, more efficient service production and cost transparency without giving up the possibility to intervene in such a company.

Roll out is the total or partial transfer of services to outside business-units. This is done without capital interweaving. Therefore, there is no possibility of a direct influence into the outside company. Furthermore, this is only possible by the contract or the service level agreement.64

Another term which is often used regarding outsourcing is the expression “make or buy” or external procurement. This simply answers the question if a process shall be produced inside the company (make) or by another company (buy). This can also be used for new processes to a company, and not only for already in-house produced goods or services.65

Insourcing is often named as antonym of outsourcing.66 It describes the integration of new services into the portfolio of a company. The re-introduction of former outsourced processes can be defined as Backsourcing.67 Even if Insourcing is also used in this particular context,68 following chapters will use Insourcing as first described.

3.2. Reasons for Outsourcing

3.2.1. Overall Aim in Outsourcing – Strengthen the Competitiveness

The globalized market increased the competition in each branch. All companies in a specific field are in worldwide competition. This economical pressure leads to the goal to be as productive as possible to produce a service cheaper, faster and smarter than others.69 This could eventually be done more effectively by a service provider, which leads to the “make-or buy” decision.

The above aim is to preserve, or to strengthen, the company’s competitiveness and is realized by increasing the efficient result of an enterprise. To secure a lasting safeguarding outsourcing relationship, the chances and risks have to be evaluated.

The sub intentions to the overall aim of increasing the competitiveness are described in the following chapters and cannot be seen as stand alone. The sub intentions are furthermore connected to each other and cause several chances and risks. As outsourcing is a form of division of labor, the positive aspects of outsourcing are the same.70

3.2.2. Cost Aspects

To meet the increasing competitive pressure it is inescapable to have an optimized production process at the lowest cost with the highest level of flexibility. The main aim is to lower fix costs and to reduce the overhead costs by variabilization. This goal can be achieved by outsourcing, as the provider will mostly be paid depending on the output. The most important requirement is to get the same product/ service at lower cost with minimum the similar quality.

Specialized companies are usually in the situation to reach this task, because they can realize several economies. To underline this: If a client wants to save minimum 15% of the former cost, the provider has to produce the service at 60% of the former cost.71 The economical effect results also from experience in the specific field of the provider. Other cost factors are the lower personnel costs, which result either from lower compensation or from higher productivity of staff. The latter named can be realized in an increased personnel utilization and a more efficient use of staff.72 The ideal conclusion shall be a “win-win” situation, because the client is able to concentrate on core competencies and the provider can increase scale effects.73

More significant is the effect of changing fix- into variable costs, which mean personnel costs on the medium term and assets on the long term. Therefore, the advances for the client are almost clear:74

- Transparency in cost accounting, due to exact prices
- Reduction of cost intensive overcapacities
- Increase in cost consciousness
- Planable costs, as contracts last about 5 years
- Easier calculations
- Prevention of bound capital
- “Balance-neutral” investments, due to variable billing

Outsourcing processes are more interesting for a client if the added value is higher compared to the operational risks of an in-house-produced process. Moreover, the higher the need for investments in business processes, the better can be the usages of cost advantages.75

3.2.3. Strengthen the Core-Competencies

Core-competencies, core-activities or core-products can be described as relevant to innovation, differentiation and strategy.76 Core-competencies have the highest growth potential in the portfolio of a company. Four meanings can be described as core -activities, -products or -services:77

- Traditionally in-house performed
- Critical to business performance
- Competitive advantage (current and potential)
- Possible future growth or innovation

After evaluating the company’s core-competencies, the company can decide which services to be produced in-house. The company now has the opportunity to contract out non-core-activities.78 Concentrating on core-activities is one of the central motivations for outsourcing. The benefits are as follows:79

- Cost reductions (as named in previous chapter)
- Relieve from activities, which are marginal. This enables the management to use the short resources for core activities.
- Bundling of forces in the company; resulting in a faster reactivity to changes in the market.
- Reduction of complexity in organization and human resource management, as there is mostly no more training or personnel procurement needed.
- Ability to get qualified and high motivated80 staff with a specialized supplier, simultaneous to balance the lack of competence in a specific field.

Furthermore the client has not to focus on managing the complete process, but the interfaces to its provider. The transaction to a service provider means a potential gain or loss. Therefore, the possible benefits and losses need to be determined in advance.81

3.2.4. Service Improvement

Service improvement is a further motive for outsourcing processes to third parties. Especially in fast changing areas which are non-core, the ability to build up competences in-house is cost-intensive and more difficult. For staying competitive it is important to have access to high capabilities. The service provider has a specialized knowledge and resources can be used more rational. This results in same/or higher quality with same/or less cost.82 The service provider is usually exposed to the free market. This competition situation can result in an increased quality level.83 The responsiveness for delivering a service is also outsourced to the provider. Thus, the provider solves problems much faster in these non-core functions than the client before outsourcing.84

3.3. Outsourcing – Lifecycle

3.3.1. Overview

The framework of the outsourcing-lifecycle is represented in following table.

Table 2: Outsourcing – Lifecycle

illustration not visible in this excerpt

Source: Own Representation in dependence on Dittrich, J., Braun, M. (2004), p. 121 and GAO (2001), p. 9.

Outsourcing a process can be seen as a project, as it is timely defined with a start and the end, classified in the contract. Managing outsourcing includes technical planning and management control.85 The critical success factors are also soft factors in a business relationship, as they deal with humans. These ensure the overall satisfaction of the client, the provider, all relevant staff and most important: the customer.

Due to the relevance and the link between each stage the following chapters will describe the phases of the outsourced object, including the critical success factors. As this paper is referring to an already outsourced project, the focus will lie on stage VI. At the current situation it is not planned to backsource the handling operation at MIAFH/A by the end of the contract in 2006,86 thus stage VII will only be briefly described.

3.3.2. Determine Sourcing Strategy

This stage defines mostly “make or buy” decisions and will end with a strategy for the company about creating a product or service. In this phase processes should be identified, evaluated and assessed. The analysis consists of an internal analysis, focusing on processes, and an external analysis, including the market, competition and trends. Afterwards there is a focus on the competencies, identifying lasting advantages of the company. There has to be a clear connection to the overall strategy of the company. As shown in figure 11, several options need to be evaluated afterwards. But, following points should always be considered:87

- Consideration of optimizing business processes in-house before outsourcing
- Company and environment analysis
- Definition of competencies and all processes with regarding in-house costs
- Segmentation of processes into possible sourcing strategies
- Identification of talented and indispensable employees
- Definition of improvements and cost savings
- Estimation of possible future impacts

This phase is significant, as it secures the entire project. The check of all possibilities ensures that the focus is placed on the specified processes in future stages. Decisions should always be evaluated in a team, consisting from all fields of a company to get several statements on this topic.88 Furthermore, the fear of losing control over processes needs to be resolved.89

Fig. 11:XXXX

illustration not visible in this excerpt

Fig. 11: Determine Sourcing Strategy

Source: Own representation in dependence on Gebhardt, A. (2004), p. 11.

After finding a feasible strategy for outsourcing a process, the goals have to be clearly communicated to avoid demoralizing rumors in the company. Questions have to be answered to relevant staff to ensure motivation, as there is an understandable fear of losing jobs. Empowered staff is often tending to leave the company first. As a result, the top-management has to demonstrate development potentials to motivate the staff and to get support from the bottom line. The in-house communication is often missed or implemented too late. This can cause negative cost-effects and could harm the entire outsourcing-project in this early stage.90

3.3.3. Define the Operational Model

The operational model of the outsourcing object is critical for the success of future relationships. This model shall give a guide to the structure of the contract and the transition. It should delimitate the plan versus the expectations and should clearly settle the objectives. The most important aspect is to plan the communication of needs and feedback to a relevant provider to avoid discontinuities.91

The main duties in this stage are therefore:92

- Specification of quality standards and measurements
- Definition of interfaces between the relevant processes
- Establishment of executive leadership to facilitate the outsourcing project
- Continuous communication and clarification of objectives
- Creation of contract management with concerning managers
- Classification of contact persons for the outsourcing-project

In personnel aspects it is necessary to establish a project team which is involved in all stages of the outsourcing lifecycle. Furthermore a contract-negotiator needs to be selected to ensure relationship-management. This person should not be the project manager as she/he is in the project team and has to follow other guidelines. In addition, the client has to ensure that the competencies for the different management processes, like contract-, financial-, interpersonal relationship- and project-management, are inside the company. 93 As there is mostly a lack of resources and/or competence, the client is enabled to buy these competences from third parties. Otherwise the entire decision process is in danger, only sub-optimal solutions can be found and the success guarantee of the outsourcing-project is at risk.94

3.3.4. Provider Selection

The provider selection needs a special attention, as the decisions made are usually long term and therefore non-reversible.95 There has to be an accurate market-, vendor- and technology research, as there are often multiple providers of the demanded services. The tendering is, depending on the amount of possible providers, either done directly, via consultants or passive with an invitation to a bid. If the field of possible providers is relatively small, like in ground handling businesses, the preferred methodology is the direct contact, as the concerning companies are mostly well known. Interested providers can be single invited to eliminate misunderstandings, and with higher importance: to get a feeling about the responsible project manager from the providers.96 The selection procedure can thus be compared with hiring an average employee or the best.

The required qualifications are therefore mostly similar:97

- Polyvalent background
- Innovative and imaginative
- Challenge the obvious
- Flexible and adjustable
- Deep sense of planning and control

The requirements can be defined in a request for proposal. This identifies the expected performance levels, the roles and the responsibilities in the client – provider relationship.98 The assessment is done in two stages which mainly depend on the cost- or competence- intention of the outsourcing-project. Firstly, there is a rough choice made by scoring the providers to eliminate ineffective bidders. The scoring model shall mainly be based on the assessment of all sub-criterions. It is realized by assessment-teams which try to rate the relevant criteria in a defined time.99 This task is significant for further examinations with possible providers, as the offers can vary in pricing structure and delivered service. The next assessment stage includes a due diligence process to verify the vendor’s and the client‘s capabilities exactly before signing the contract. The aim during this both party due diligence is the construction of a successful operational concept.100 The final vendor selection is made after negotiating the contract. There is the possibility to conclude a letter of intent to hold on to the pre-negotiation phase. It underlines the intention to finish the contract.101 But no vendor should be excluded from possible negotiations as there could be further difficulties with the favored candidate.102

3.3.5. Contract Development and Negotiation

The contractual phase starts after defining the operational model, keeps a focus on the request for proposal and ends with the signature on the contract from both parties. As already mentioned in chapter 3.1.2, the contract should keep both parties together and should eliminate opened questions. The connected SLA sets the standards for the demanded process.

As fewest outsourcing-projects work without difficulties,103 the focus has to lie on this stage as both parties establish the legal terms for a lasting relationship. The contract is in most cases an individual contract as it is in a relational form,104 which describes complex service-relationships. The contract is generally based on mutual interest and sets the framework for further negotiations. It is an indispensable device to ensure the daily cooperation. Besides typical clauses like cancellation or observances of secrecy the most important aspects are shown in the following table.

Table 3: Contract and Service Level Agreement

illustration not visible in this excerpt

Source: Own representation in dependence on Barth, T. (2003), p. 230; Dittrich, J., Braun, M. (2004), pp. 11; GAO (2001), pp. 19; Pracht D., Riegl, W. (1999), pp. 245.

The clauses should be as flexible as possible to enable adjustments to new technologies, new processes, changing volumes, etc. Especially pricing structure should be either connected to branch internal benchmarks, or linked to the cost-structure of the provider to avoid higher prices on the long run.105 This phase is very central as the comparative power of negotiation can decrease on the client’s side after the contract finalization. This can also cause a “lock-in” situation for the client,106 as the client is dependent on the provider from then on.

3.3.6. Transition to the Provider

This stage defines the process of transferring the client’s responsibility to the provider. The focus lies on managing the change in the organization. It is the most demanding and critical phase of the outsourcing-project as it ensures the lasting success of this specific business partnership. Consequently, a systematical procedure with an experienced project team is required.

The concept of transferring is relevant to the success of this stage and includes:107

- Project-team, project-organization and cooperation
- Clearance about tasks, roles and responsibilities
- Transfer of staff
- Transfer of assets
- Transition of services with concerning know-how
- Communication

As mentioned in previous chapters the exchange of information has to take place on each level of the organization. The implementation of a communication scheme ensures the level-fair communication and builds an efficient cooperation.108 It is significant to involve all parties and to find solutions for all affected employees, even if transferred or not. To motivate relevant staff it is inevitable to show opportunities and potentials. This can be done by including bonuses or stock options into their contracts. Non-existing or unclear information induce assumptions and cause fears at operating- and mid-levels. This needs to be avoided by honest communication from the top level to all concerning staff.

3.3.7. Operating an Outsourcing – Cooperation Managing the Provider’s Performance

This phase includes most of the time of the outsourcing project. It lasts from the transmission to the provider until the end of the contract. The focal point in this stage lies on managing the provider’s performance. The client wants to ensure that the provider meets the requested volumes and quality standards set by the SLA. Identifying occurring problems at an early stage is desirable and the aim in this stage.


1 At Lufthansa AG the exchange rate has a negative effect at freight-sales side, but the increasing oil-price is mostly absorbed by the rate of the US$.

2 Cf. Lufthansa Cargo AG (2004), pp. 2.

3 Cf. Obst, M. (2004), p. 49.

4 Cf. Airbus (2003), p. 35; Boeing (2004a), p. 4; International Air Transport Association (2003), p. 11;

MergeGlobal (2004), pp. 25.

5 For instance: Atlas Air operates 1/7 service for Schenker between HHN and PVG.

6 Cf. Grandjot, H. H. (2002), p. 97.

7 For instance: LCAG has got a blocked space agreement with LA on the route FRA-MIA.

8 Even if some suppliers in this segment started to invest into higher volume shipments like UPS

does; they bought Menlo Worldwide in October 2004.

9 Cf. Gompf, G. (1994), pp. 59.

10 Cf. Albers, S. (2000), pp. 35.

11 Cf. Schaaf, O. (2001), p. 3.

12 Cf. Grandjot, H. H. (2002), p. 127.

13 Cf. Albers, S. (2000), pp. 25.

14 Cf. Albers, S. (2000), pp. 25; Gompf, G. (1994), pp. 46.

15 Cf. Gompf, G. (1994), p. 55.

16 Cf. International Air Transport Association (A), Aug 23, 2004.

17 Cf. Cargolux, Aug 23, 2004.

18 The customer area includes the counter in the front office, the telephone in the back office and the front area in the warehouse.

19 Code-sharing is an agreement between two or more airlines. On that basis, the defined flights can be sold from each of the airlines with own airline-code and flight-number. The actual realization of the flight is only operated with a plane from one of the partners (operating carrier).

20 The organization of LCAG will be explained in the following chapter.

21 Cf. Lufthansa AG (2004), pp. 7.

22 Cf. Hofstede, G. (2001), pp. 18.

23 Cf. International Air Transport Association (2004), p. 28.

24 Air France, KLM and Singapore Airlines have a similar market share.

25 Cf. Jansen, J. P. (2004), p. 2.

26 LCAG uses worldwide the abbreviation BJ for man-year.

27 Cf. Penauille Polyservices (2002), p. 2.

28 GlobeGround Berlin GmbH is still 100% owned by Lufthansa.

29 Cf. The International Air Cargo Association, Aug 10, 2004.

30 Cf. Hofstede, G. (2001), pp. 18.

31 Cf. Penauille Polyservices (A), Aug 10, 2004.

32 Cf. Servisair (A), Aug 12, 2004.

33 Cf. Servisair (B), Aug 12, 2004.

34 Counted on Nov 01, 2004.

35 Cf. Schreiber, B. (2004).

36 Cf. Inboundlogistics (2004), Sep 01, 2004.

37 Cf. Airbus (2003), pp. 55; Boeing (2004b), pp. 28; International Air Transport Association(2003), p. 21; MergeGlobal (2004), pp. 28.

38 Cf. Airbus (2003), pp. 55; Boeing (2004b), pp. 57; International Air Transport Association (2003), p. 16; MergeGlobal (2004), p 45.

39 Air Automated Manifest System: Carriers which want to fly into the U.S. have to provide the manifested cargo to U.S.- customs 4hrs prior to arrival. The difficult point is that carriers transport cargo mostly on MAWB, where only the regarding forwarding companies are signed, but the U.S.-customs needs the Shipper’s- and the Consignee’s- address. Transferring cargo via MIA is

now a more complex task than it was before.

40 Cf. Crisostomo, L. M. (2004); Cuesta, S. C. (2004).

41 Cf. Deutsche Verkehrszeitung (2004), Sep 27, 2004.

42 Cf. McCain, J. (2003), pp. 2.

43 Cf. Crisostomo, L. M. (2004); Timcke, H. (2004).

44 This includes the airports DFW, MIA and STL.

45 Cf. Boston Consulting Group (2004), pp. 10.

46 Catchment-area = Einzugsgebiet.

47 Cf. Baugh, T. (2004).

48 The tonnage development can be viewed at Attachment D.

49 Cf. Attachment D and chapter

50 Cf. Bleckmann, D. (2004).

51 GG belongs to aforementioned group, but does not have a license.

52 Cf. Arthur D. Little (2003), pp. 3.

53 Cf. Bonsiep, W. (2002), pp. 25.

54 Cf. Mayrhofer, W. (1996), pp. 85.

55 Cf. Bonsiep, W. (2002), pp. 26.

56 Cf. Barth, T. (2003), p. 6; Carter, P., Center for Advanced Purchasing Studies, Vlcek, J. (2003), p. 5; Mayer, A. G., Söbbing, T. (2004), p. 9; Zahn, E., Barth, T., Hertweck, A. (1999), p. 5.

57 Cf. Oecking, C., et. al. (2000), p. 95.

58 Cf. Chapman, R. B., Andrade, K. (1998), p. 2.

59 Cf. Dillerup, R., Foschiani, S. (1996), p. 64; Zahn, E., Barth T. (2001), p. 26.

60 Cf. Barth, T. (2003), p. 9.

61 Cf. Quinn, F. J. (2002), Sep 15, 2004.

62 Cf. Zahn, E., Barth, T., Hertweck, A. (1999), p. 6.

63 The Service Level Agreement will be described in chapter 3.3.5.

64 Cf. Hodel, M., Berger, A., Risi, P. (2004), pp. 26.

65 Cf. Herff, M. (2002), pp. 5.

66 Cf. Hodel, M., Berger, A., Risi, P. (2004), p. 25; Zahn, E., Barth, T., Hertweck, A. (1999), p. 6.

67 Cf. Barth, T. (2003), p. 12; Hodel, M., Berger, A., Risi, P. (2004), p. 26.

68 Cf. Mayer, A. G., Söbbing, T. (2004), p. 28.

69 Cf. The Outsourcing Institute, Aug 20, 2004.

70 Cf. Barth, T. (2003), p. 13.

71 Opinion of McKinsey in: Mayer, A. G., Söbbing, T. (2004), p. 11.

72 Cf. Nagengast, J. (1997), pp. 90.

73 Cf. Hodel, M., Berger, A., Risi, P. (2004), p. 5.

74 Cf. Barth. T. (2003), pp. 16; Dittrich, J., Braun, M. (2004), p. 43; Hodel, M., Berger, A., Risi, P. (2004), pp. 11; Mayer, A. G., Söbbing, T. (2004), p. 11.

75 Cf. Dittrich, J., Braun, M. (2004), p. 43.

76 Cf. Herff, M. (2002), p. 37.

77 Cf. Alexander, M., Young, D. (1996), p. 116.

78 Cf. Domberger, S. (1998), pp. 35.

79 Cf. Barth, T. (2003), pp. 13.

80 This aspect is mostly named in context with IT.

81 Cf. Domberger, S. (1998), p. 37.

82 Cf. Barth, T. (2003) p. 15.

83 Cf. Domberger, S. (1998), p. 43.

84 Cf. Linder, J. C. (2004), p. 33.

85 Cf. Chorafas, D. N. (2003), p.97.

86 Cf. Bleckmann, D. (2004).

87 Cf. Barth, T. (2003), pp. 182; GAO (2001), pp. 10.

88 Cf. Dittrich, J., Braun, M. (2004), p. 65; Herff, M. (2002), p. 19.

89 Cf. Silber, H., Guth, W. (2003), p. 19.

90 Cf. Linder, J. C. (2004), p. 160.

91 Cf. GAO (2001), pp. 14.

92 Cf. ibid.

93 Cf. ibid.

94 Cf. Barth, T. (2003), p. 185.

95 Cf. ibid, p. 201.

96 Cf. Köhler-Frost, W. (1999), p. 203.

97 Cf. Chorafas, D. N. (2003), p. 97.

98 Cf. GAO (2001), p. 24.

99 Cf. Dittrich, J., Braun, M. (2004), pp. 129.

100 Cf. ibid, p. 133.

101 Cf. Hodel, M., Berger, A., Risi, P. (2004), p. 80; Mayer, A. G., Söbbing, T. (2004), p. 158.

102 Cf. GAO (2001), p. 25.

103 Cf. Barth, T. (2003), p. 230.

104 Cf. Barth, T. (2003), p. 232; Sommerlad, K. (2000), p. 284.

105 Cf. Dittrich, J., Braun, M. (2004), p. 149.

106 Cf. Bretzke, W. R. (2004), Aug 08, 2004.

107 Cf. Hodel, M., Berger, A., Risi, P. (2004), p. 119.

108 Cf. ibid, pp. 110.

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Steering an outsourced handling agent at Lufthansa Cargo AG/ Miami, USA
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