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Outsourcing, Off-Shoring: Truth and Consequences

Outsourcing and Off-Shoring are not new ideas or a new way of doing things. Companies have been moving manufacturing to lower cost of production centers since the sixties and services since the late eighties. It isn’t new but once service outsourcing received the stamp of approval from mainstream media it has increasingly been perceived as a panacea for all ills that are impacting the company. Of course outsourcing/off-shoring won’t solve all a companies ills, it can if, executed well, it can reduce the cost of delivering service. But there are risks in outsourcing: degrading service quality, eroding customer loyalty and negatively impacting employee morale. So how can a company determine when and where to employ outsourcing/off-shoring and estimate what the savings might really be? In this article we will examine a number of questions that a company should ask when considering outsourcing the provision of service to help gain a realistic perspective or what they can achieve through outsourcing or off-shoring.

First a couple of definitions:
Outsourcing is the use of an independent company to provide services that previously were delivered by a companies own staff. Off-Shoring is the use of resources that are located in a country remote to the company. Both of these concepts can be executed independently or in combination. There are domestic outsource service providers, there are off-shore outsource service providers and there are captive (company operated) off-shore service providers. Another term that comes up in discussions of outsourcing and off-shoring is ‘near-shoring’ the provision of services in another country, but one that is close both geographically as well as culturally.

The news has been full of outsourcing stories gone bad…British Rail outsourcing their call center to India and then telling customers that they cannot book a ‘slipper car’, when the customer wanted a ‘sleeper car’. Dell has publicly announced moving support services to India and then publicly returning it to the US. An automaker outsourced technical support for their mechanics to India only to have the mechanics boycott the center and ultimately bring it back to the US. In the latter two cases the costs to move the business off-shore and then to bring it back cost significantly more than leaving it alone in the first place. What were the company executives thinking when they made their original decisions, did they ask themselves and their organizations the right questions?

The media message related to outsourcing is that companies can save 40, 50 even 60% of their processing costs simply by moving the services to an off-shore location like India or the Philippines. The truth is quite different while the costs of labour in off-shore locations are significantly less than the costs to operate domestically (often less than half), there are other costs which can be significant. These additional costs include: Management costs; to support a service operation half way around the world requires a team of staff to support this initiative, Systems and networks need to be expanded and secured, Travel costs to deliver trainings and to attend meetings is not insignificant in terms of both costs and senior management time. So what is the bottom line? According to Gartner the average savings a company actually achieves is only 12%. Savings greater than 12% can often be achieved domestically by streamlining or reengineering the current operational model. In call and contact centers we often se organizations that save 20% to 30% by improving the existing center.

So what should a company consider when considering outsourcing and/or off-shoring? First, we must understand what the nature of the services that are being provided. Specifically we must look at whether the service provides direct interaction with customers. Back office processes where no customer interaction are the easiest services to move to an outsource and/or off-shore provider. This assessment focuses almost exclusively on the price and quality of the work that will be completed. But where the service involves direct interaction with customer such as a call center the assessment becomes far more complicated. For simplicity’s sake we can classify customer interactions into two categories: those that are one time or one-off events and interactions that are a part of a broader customer relationship. In the case of a one off one time transaction then quality of service is often less important than the cost to provide the service. These types of interactions can usually be off-shored within acceptable cost and quality parameters. Where the interaction is a part of an on-going relationship we must consider the value of the relationship, the lifetime value of a customer and the quality of the service that can be delivered. The costs of executing service may well be lower off-shore, but the quality is impacted by customer perceptions, actual quality of linguistic or communications skills and the context of knowledge that the provider may or may not possess. Thus the service quality may actually erode customer value, drive churn and increase customer dissatisfaction.

Second, before any company looks at outsourcing or off-shoring they need first to ensure that they have taken all possible measures internally to improve the service quality that is delivered to customers. Outsourcers of all kinds but significantly domestic outsourcers employ labour arbitrage and economies of scale to deliver an operational cost lower than that possible internally. In reality outsourcers take the existing processes and procedures and deliver the service employing these operational parameters with lower paid staff and across a larger more technologically sophisticated and more efficient operation. Outsourcing and expecting the outsource provider to reengineer your processes and procedures is unrealistic. So if your processes are dysfunctional or your procedures are counterproductive the outsourcer will deliver the service with the same dysfunctional and/or counterproductive activities at a lower cost. There will be no operational breakthroughs through outsourcing. The company must ensure that they have optimized their service provision before outsourcing, because it won’t happen after.

So as you assess your company’s suitability you must determine:

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