Customer Disservice?

Bigotry and xenophobia are traits not usually associated with San Francisco, which surely ranks among the most diverse, tolerant, and cosmopolitan cities in the world. But when consultant Tom Weakland appeared on a San Francisco radio talk show early this summer to discuss the globalization of customer service, he touched a nerve. "Everybody who called in complained about people from foreign countries answering calls, and I mean everybody," says Weakland, a managing partner at Chicago-based consulting firm DiamondCluster International Inc.

Globalization and outsourcing are two megatrends whose benefits most businesses can't afford to ignore. But the practice of outsourcing customer service to offshore call centers is beginning to look like a classic example of a good idea carried too far. Critics of the practice point to a growing body of evidence that suggests faulty economics and customer dissatisfaction are forcing a rethink of what once seemed a no-brainer. But proponents maintain that there are cost advantages and that current problems can be resolved (see "Can You Make It Work?" at the end of this story).

"The economic benefits of outsourcing customer service are grossly overstated," according to Niels Kjellerup, a senior partner with Australian consulting firm Resource International and editor of a Website devoted to call centers (www.callcentres.com.au). Customer resistance, along with data-security concerns and the unexpectedly high costs of managing offshore call centers, offset and dilute their promised economic benefits, says Kjellerup.

There is already evidence that these factors have combined to slow the offshore migration. Several large firms, including Dell, credit-card giant Capital One, and insurer Conseco, have shifted at least some customer-support operations back to the United States. And after several recent years of 30 percent or better growth in offshore customer service and support, growth should slow to 11 percent this year and 5 to 10 percent a year by the end of the decade, according to Gartner Inc. analyst Robert Brown.

With offshore outsourcing of IT functions such as application development and maintenance well established, and with corporate customers generally happy with the result, it was only natural that companies would look for other areas of business to export as well. And customer service — which many companies view as nothing more than a drain on income — looked like an area ripe for savings. While call-center agents in the United States may make $9 to $10 an hour, those in India, for example, are likely to earn one-third or less of that amount.

Offshore customer service, problematic as it may be, does work well in specific situations. Companies with monopolistic or overwhelmingly dominant market positions are more apt to risk customer alienation where near-term savings can be realized. And certain types of customer service jobs are well suited to offshoring. Jobs that involve large numbers of fairly simple interactions — credit-card-balance inquiries, for example — are a good match for offshore centers, notes Gartner analyst Esteban Kolsky. Offshore centers are generally effective solutions when agents can learn what they need from training and scripts but require little relevant experience or nonscripted decision-making, he explains. Of course, these are also the types of inquiries that are increasingly handled by automated voice systems.

Alexa Bona, a Gartner analyst based in London, predicts that during the next three years, up to 60 percent of companies outsourcing customer-facing services will encounter customer defections and hidden costs that will either cancel or outweigh any perceived savings in such arrangements. There are things companies can do to improve those odds, but some experts say more-savvy management may not be enough to counter the fundamental mistakes companies make when they forecast huge savings from the offshoring of customer service.

For starters, "companies neglect a number of management costs," notes Chris Selland, an analyst at Covington Associates in Boston. These costs include the training of agents, the need for supervisory management, and the time and cost of travel to distant locales. "You must have people dedicated to managing the outsourced relationships," agrees Weakland.

He says executives at firms that have employed offshore call centers keep telling him that "it's harder, it takes more management attention, and you have to be meticulous about the way you structure the agreement." As a result of all this unexpected overhead, the projected savings from offshoring can swiftly evaporate. "The typical promise is a 30 to 60 percent cost reduction. We think 10 to 30 percent is probably realistic," says Weakland.

Kjellerup is more pessimistic, putting it at 15 to 20 percent. One problem, he says, is the huge turnover at Indian centers, as much as 70 percent per year. Lured by the fabulous success and growth of such established outsourcers as Wipro and Tata, entrepreneurs have raced to set up shop, touching off recruiting wars and escalating pay scales.

Kjellerup believes that companies need to beware of the flawed logic that leads them to regard customer service as an expensive and underperforming function that doesn't produce revenue (and is thus ripe for offshoring). Instead, they should focus on the impact that a steady drop in "valued" customers will have on profits in three or four years' time. "Valued customers are depleted yearly by 15 to 20 percent," he says, "and if the source to create new valued customers has been outsourced and generates only half the expected number because of the bad or indifferent treatment customers get, that will have a significant impact on the business."

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