Sending Customer-Facing Functions Offshore

Originally published: May-28-2008

Photo © Sergey Ilin Image from BigStockPhoto.com

The outsourcing industry has definitely come of age. Rare are any businesses, large or small, that are not outsourcing at least some of their processes. With the exception of a few die-hard skeptics, almost all business executives recognize outsourcing as the most cost effective means of efficiently managing non-core business functions.

Offshore outsourcing, however, is a different story. The practice of moving a business process outside a company’s own national boundaries**, although gaining ground, hasn’t been as widely accepted.

A recent CFO Survey referenced in the March, 2008 issue of CFO Europe Magazine reported that while twice as many of the U.S. respondents (36%) are now outsourcing offshore as compared with 2004 – more than 50% of respondents have no plans whatever to outsource offshore.

**Note: For the purposes of this article, we are using “offshore outsourcing” to also encompass “nearshore” outsourcing activities.

The on-shore/offshore controversy is most apparent when it comes to outsourcing customer-contact (or customer-facing) functions such as inside sales, customer service, and 1st- and even 3rd-party collections.

A Gartner study, anticipating the worldwide market for customer service outsourcing to be $12 billion in 2007, set offshoring at only 5% of that projection. The same survey predicted that 80% of organizations that outsourced customer-facing functions solely to save costs – a primary reason given for offshore outsourcing – would fail.

What to consider before sending any customer-contact function offshore

1. Risks of Offshore Outsourcing

General risks of outsourcing any function to an offshore location include:

• Regulatory risks. Offshore firms need to be fully compliant with all domestic corporate regulations related to their industry. As a rule, the offshore vendor isn’t obliged to meet any such conditions (those of the U.S. Sarbanes-Oxley legislation, for instance). Nevertheless, it’s critical that its processes, security, and outputs are thorough and accurate. If they are not, the firm utilizing its services will find it difficult, if not impossible, to meet its compliancy requirements. This is particularly important with finance related functions like receivable management.
• Infrastructure risks. Many less developed countries have serious infrastructure issues. Call centers require reliable telecommunications and power in order to function effectively. There can be no tolerance for power outages, brown-outs, or poor connections. While countries like India are making great strides in dealing with these issues via redundancy, they are still a significant concern in general.
• Political and security risks. It is often difficult to assess the international political and security risk of foreign countries. Many, especially less developed countries that appear attractive for outsourcing due to low labor costs, have limited intellectual property laws or are still developing their political infrastructures.
• Loss of quality. The primary inducement to move jobs overseas is labor arbitrage – the availability of skilled labor at a much lower cost. In order to remain competitive, however, call centers in more advanced countries have been able to reduce costs through a combination of technology, process improvements, and skill specialization. As a result, offshoring a function such as receivable management may reduce costs in terms of labor, but at the expense of the ability to enhance or improve internal processes.

In addition to the above, offshore outsourcing of customer-contact functions carries very real risks in terms of lost business.

Western consumers have become wary of foreign call center support for two reasons:

1. The perception that “foreigners are stealing our jobs” – a particularly threatening concept in the current economic environment.
2. Unsatisfactory customer service experiences, citing difficulty in understanding foreign reps, poor phone connections, and late night sales calls from foreign time zones.

Regardless of your position on these matters, cultural, language and accent differences are issues for consumers, and they remain one of the greatest risks in offshoring customer contact functions.

Your customers – whatever their perceptions – are your most valuable asset. Providing them with quality customer service, on their terms, can become a key factor that differentiates your company from others, giving you a competitive edge.

How important is customer satisfaction? Instant, worldwide communication via the internet has given just one or two disgruntled customers the power to cause serious damage to your hard-won base of loyal customers. This is unquestionably an area where “an ounce of prevention is worth a pound of cure.”

The influence of consumer perception is far reaching. Due to the backlash against offshoring, some governments and legislators are considering enacting laws to discourage outsourcing to third countries.

2. Labor Arbitrage vs Total Cost of Offshore Outsourcing

As mentioned above, the cost savings capability of offshore outsourcing relies solely on labor arbitrage.

Call center employee salaries in countries like India, Mexico, or the Philippines can be as much as 40-75% lower than what you would pay domestically. As demand rises, however, direct labor costs are flattening out in places like India.

Because the figures can often be dramatic, labor costs receive the lion’s share of focus when a firm considers offshore outsourcing. They are, however, just one of many costs to be considered and, generally account for less than 30% of the total cost of offshore call center operations.

Expenses for communications infrastructure, on the other hand, can be 30-60% higher than “at home”.

There are also additional, “hidden” costs to offshore outsourcing that include:

• Vendor selection: This process generally costs 1% to 10% of the annual contract commitment.
• Relationship management: Language and cultural differences will result in the need for face-to-face contact to resolve certain issues, so expect to travel to your foreign provider’s location frequently, especially in the first year in order to get everything running smoothly. Expect communication with your offshore provider, whether by long distance phone call or email to take more time and to be required more often. These costs typically run 6-10% of the annual contract commitment.
• Costs of transitioning skills and terminating internal staff: Effective transition generally takes 5-7 months and may cost 3-5% of the contract price.
• Fluctuations in exchange rates: This factor can significantly affect the cost of doing business offshore. For example, with the dollar at record lows vis-à-vis other currencies, U.S. companies are, for the first time in awhile, at a disadvantage in this regard.

From purely a dollars and cents perspective, smaller offshore outsourcing engagements won’t realize significant levels of savings. Experts feel that firms need to offshore at least 80-85% of the outsourced function’s staffing requirements for 3-5 years to make the numbers really work.

When to “Say No” to Offshore Outsourcing

Along with the risks and hidden costs involved, there are situations where offshore outsourcing just isn’t the right answer.

You should not consider offshore outsourcing if:

• The internal function you want to outsource is not in order. Clean up your processes in-house before even considering sending them offshore. Remember, the off-shore vendor most likely will be less equipped than your own firm when it comes to implementing operational improvements.
• You can’t afford some degree of quality degradation. Most offshore outsourcing projects result in a decrease in the level of quality service, at least initially.
• Your objective is more than cost savings alone. For example, if you need other than English speaking staff, you’ll find it difficult, in most developing countries, to locate an offshore vendor with a broad range of language capabilities.
• You are unable to designate an internal team to manage the offshore function. Getting an offshore project up and running will take a tremendous toll on your internal resources.
• Your initiative does not involve outsourcing an entire process. Off-shoring a portion of a process in an attempt to enhance an internal department has shown to be counter productive.
• You anticipate your outsourcing requirement to be temporary or seasonal. It takes months to get an offshore outsourcing project up-to-speed and rolling along efficiently.

*****

This information is provided by ABC-Amega Inc. Providing flexible, effective receivable management services focusing on improving DSO and cash flow for our clients. For information about ABC-Amega's receivable management solutions, contact info@abc-amega.com.