Print this article | Return to Article | Return to CFO.com
Critics say the promised savings from offshoring come at too steep a price, while companies say very little at all.
Norm Alster, CFO IT
September 15, 2005
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."
Martha Rogers, a consultant and author of several books on customer relationships, contends that the metrics generally used to measure call-center performance are flawed. Managers who try to minimize the length and cost of each phone interaction "drive bad behavior on the part of their representatives," says Rogers. Instead, corporations should see each call as an opportunity to enhance the long-term value of a customer's business. Rather than putting agents on the clock, managers should tie some portion of agent compensation to "the future value of a customer's business," according to Rogers (see related story, "Building a Better Workforce").
As for those angry talk-show callers, there is no doubt that consumers experience a variety of frustrations with offshore centers. Some are simple, but maddening nonetheless: international phone lines can demonstrate slight delays, a problem that some companies cause themselves when they fail to buy sufficient bandwidth. And although agents in India are by most accounts competent, articulate, and polite, their accents can be hard to understand. Roger Sinnes is chief marketing officer for the Professional Education Institute, a distance-learning company based in Burr Ridge, Illinois. Before choosing a call center to help students with registration and other issues, Sinnes evaluated offshore centers, actually listening in on conversations between customers and agents. "Based on the calls I listened to, I felt our students could be better served by centers on the mainland," says Sinnes.
University-trained agents in India, the Phililppines, and elsewhere may actually have excellent command of English, but subtle gaps in clutural context can turn routine calls into protracted problems. In a recent posting on www.complaints.com, a traveler describes losing his luggage on a Delta flight from Florida to Las Vegas. To report the loss, he called an 800 number and told the offshore agent that he was staying in Las Vegas at the New York-New York Hotel and Casino. When his baggage failed to show up, he called back only to find that it had been sent to the Casino Hotel in New York. An understandable error, to be sure, but one that an American call agent would be less likely to make. Delta decline to comment on its offshore reservations centers.
Many companies that outsource customer service, in fact, don't like talking about it, and more than a dozen turned down requests for interviews. "Companies are looking to do everything they can to hide the fact they are using offshore call centers," says Selland. "From a political standpoint and a customer-acceptance standpoint, it is something they are trying to downplay." At some Asian centers, agents are actually trained to conceal their real names and adopt phony American monikers, a practice that fools few and can further inflame an already angry caller.
Customers are far more likely to complain about quality than about privacy, but data security has also emerged as an issue. Although American companies have proved every bit as negligent in handling consumer data as any offshore business, the fact remains that "a lot of customers are uncomfortable being served by offshore customer service," according to Selland.
This, incidentally, is not just the case with Americans. One in three respondents in a British survey said they would stop doing business with a bank that relocates its call centers offshore. Another study, conducted in 2004, reported that just 5 percent of the British are satisfied with offshore call centers. The Irish arm of Sweden's Tele2AG, a telecommunications firm, recently switched its call-center operations out of India and back to Ireland, citing consumer preference.
Indian Prime Minister Manmohan Singh, apparently stung by the fallout from two highly publicized incidents of data theft, has promised to tighten that country's data-security laws. But better laws won't provide the total solution, says Larry Ponemon of the Ponemon Institute, a research and consulting firm that specializes in information security and privacy issues. He points out that U.S. companies that tap overseas firms to handle customer service (and the requisite data) need to understand just how the work will be handled. In an unpublicized data-theft case now under investigation, a large U.S.-based technology multinational contracted with a call center in India without knowing that that company in turn subcontracted a portion of the work to firms outside India, where employees of the subcontractor apparently managed to penetrate the American company's information database.
"The U.S. company had no knowledge of the sub-outsourcers," notes Ponemon. He cautions that growing outsourcing industries in Eastern Europe and Latin America have been targeted by criminals seeking access to customer data. U.S. firms ignoring potential data-security threats abroad risk customer outrage, as well as legal retribution. For these reasons, says Ponemon, "data security has to be a major consideration in outsourcing offshore."
But even if one allows that data security is an issue that affects shores near and far, the offshoring of customer service still looks like an idea that merits reconsideration. "For companies that regard customer service as a key part of future revenue growth, bringing such operations back to domestic shores is the way to go," says Kjellerup. "To see this as a noncore competency is a flawed business model."
Can You Make It Work?
While some experts urge companies to pull back from offshore customer service, Gartner and others say such arrangements can work — or, at least, work better — if companies follow some key steps:
• Pilot an outsourced approach to customer service before signing any kind of major deal. Better yet, pilot it domestically first to see how it plays, then consider moving it offshore.
• Related to the above, consider "nearshoring" options such as Canada, where the culture is more in sync with the United States, or Latin America if your firm has a sizable Hispanic customer base.
• Create a rigorous system of measurement and apply it to both the outsourcer (call volumes handled, staff turnover, resolution success rate, and so on) and your customers (Are they voicing discontent? Are their needs being met? Are they more or less inclined to do more business with you?). Base payment on a mix of those, so the outsourcer has incentive to not simply handle calls quickly, but to handle them well.
• Spread the work among several outsourcers, and reward those that excel with a bigger slice of the pie.
• Communicate often with outsourcers, including face time, and make sure they understand the nature of your business, particularly as it may affect volumes (seasonal spikes, or a surge following a special promotion, for example). Put a governance system in place to work out problems, and stay involved with your outsourcers. Don't underestimate the amount of time the relationship will require if it is to be managed well.