When Outsourcing, Hope is not a Strategy

Outsourcing: Hope is Not a Strategy
Almost every day we read about another company or organization announcing that they are outsourcing or off-shoring some function or work, often call centers. It is now fashionable to do so. For example just today I read that 43 states have outsourced federal programs they administer. One hears less frequently of the failures and problems associated with unsuccessful outsourcing or are provided with any learning of how to avoid these issues. In fact according to Deloitte Consulting some 70% of survey respondents reported significantly negative outsource experiences.

All outsourcing follows a distinct pattern of three stages: Stage One - Preparation Evaluation and Planning, Stage Two – Proposals, Assignment and Transition, Stage Three: Maintenance, Monitoring and Oversight. Successful projects are those where the management is attentive to the details of all three stages and possess the skills to ensure the disciplines for each are followed. We will focus here on Stage One considerations.

The first and most common point of failure is the skipping over Stage One and jumping directly to a proposal from the vendors either domestically or offshore. This happens so often that some vendors count on it for part of their profit.

2500 years ago Sun Tzu wrote in the Art of War in the chapter on Offensive Strategy:
o Know the enemy & know yourself; in a hundred battles you will never be in peril.
o When you are ignorant of the enemy, but know yourself, your chances of winning or losing are equal.
o If ignorant of both your enemy and of yourself you are certain in every battle to be in peril.

It is this ignorance of one’s self, or organization that is the cause of much peril for the organizations outsourcing their call centers and customer service. One good practice is to have a thorough audit done of the call centers or other functions to be outsourced. This puts the client organization in a better position to deal with the vendors and others who come calling. Knowing what is; aids with the negotiations, the estimates of what it will take to move over, what will be saved, what the goal of the exercise is and how much money needs spending to achieve the end. Knowing “what you don’t know”, allows you to focus on solution providers who may have expertise which you lack internally. It should be kept in mind that generally speaking outsourcers do not “fix” dysfunction processes or mismatched alignment related issues. Outsourcers simply replicate what you have been doing and do it for less based upon their economies of scale and/or dollar arbitrage. Addressing fundamental and structural issues before outsourcing can dramatically improve the likelihood of success.


Again from Sun Tzu’s Estimates: With many calculations one can win. With few one cannot. How much less a chance of victory has one who makes none at all?

There are number of outsourcing checklists are available. Most often these are developed by vendors to aid the transfer of your business to them. What is less apparent is the “why” behind the questions posed to facility the “how” of outsourcing.

Why is outsourcing being considered?
If the only answer is cost, then have all other approaches to reducing the demand and effort required to complete the work been exhausted? Changes to marketing, sales, service or service offerings can often generate as much if not more long term savings than outsourcing alone. This is important because once the work is outsourced; changing anything, the processes etc. usually becomes much more difficult and longer to affect. For instance, if the vendor is paid on the number of talk-time minutes, there is no reason for them to aid in strategies to significantly reduce the number of calls or the call length, since this affects their revenue base. Since the vendors are now closer to the calls, demand, they are likely to see opportunities to reduce the demand before the client company does. Unless there are very good controls and transparency to the relationship and work, clients may never see these opportunities.

Vendors also often count on the client firms to overlook being organized with good documentation. Additional tasks and activities that were not clearly identified up front can drive up the costs and sometimes is the causes outsourcing projects to failure because the cost is higher then it was in-house.

What is the size of the project and revenue in relationship to the vendor revenues?
Many companies and their staff considering outsourcing want to go with a large secure vendor in order to minimize risk. The old adage “Nobody gets fired for buying from IBM” comes to mind here. The risk is that many companies the amount of work is a fraction of the vendors total revenues and therefore the work will not get the time and attention it deserves from their senior managers and experienced staff. Many organizations simply become a small fish in a a very big bowl. Too small a vendor and the risk is that opposite. The client is too large a portion of their revenues. Any hiccup in vendors operation, financing, staff and the client is left high and dry with little or no means of recourse or recovery. To solve this last risk many clients spread the work over multiple vendors, thereby compounding the management oversight required to keep the quality of work at their standards, multiplying the reporting issues and points of failure.

What is the exact extent of the work and functions being considered for outsourcing?
This question requires that a detailed Scope of Work document be developed. The organization must examine every aspect of the activities they are considering to outsource. Once again effort that is invested here can pay huge dividends and those who gloss over this step will dramatically increase their likelihood of failure. Again a detailed assessment of the call center encompassing all of its’ activities can provide the basis for this document.

When was the last set of process maps done for all functions in the center?
If the answer is “we don’t have any” then they need developing before sending them to an outsourcer. The vendor will usually do as you ask. With good up-to-date documentation this is relatively simple. Without it, the transition is fraught with risk to both the client company and the outsourcer. Without definition and boundaries both firms will have difficulty achieving the goal of reducing cost and maintaining good quality customer service.

It is dangerous to think of call centers as only a cost centers. Remember that your call center is likely the primary communications channel for customer interactions. In fact there are only two types of calls that any organization will receive in their call center; Fault calls and Value calls. Fault calls arise due to some action taken or not taken by the organization that requires a customer to call to ‘Fix’ something and Value call generates revenue. In our experience most call centers expend fully a third of their call center efforts (and budgets) dealing with Fault calls. Looking at the work in the center should reveal details as the number and ratio’s of fault versus value calls. If the issue is one of absolute costs, then what is the value of having a center in the first place. Sell to the customers and forget giving any service. There must be some value or the center would not been started. Call centers and customer service defends the revenue and customer base generated by sales and marketing. Unfortunately the following is also true.

“54% of customer have a lower opinion of a company/brand following a contact with that company’s call center then they had before the transaction” – Transveral Study

One goal of outsourcing could be to increase the level of service while either reducing or maintaining the costs. This is a laudable goal and a worthy one to pursue. If this is the intent it is even more important to do it right.

How will you measure the Outsourcing project?
Some organizations who examine the outsourcing option fail to properly prepare themselves to assess the success or failure of the relationship. It is critical that the metrics that will be employed to complete this assessment are known and in place. Further these comparisons must be ‘apples to apples’ and not to grapefruits. Don’t not measure the performance of the outsourcer to what you wished you could have achieved but rather to what you actually did achieve. This is true not only in securing pricing and negotiations but also in the day-to day management of the program.

One client we worked with issued an RFP to outsource a part of their business and included mandatory service levels significantly greater than those achieved in the in-house center. The net result of course was that the outsource vendors priced the solution to the service level desired, which was more labor intensive and submitted the corresponding price. The Call Center manager used the RFP responses to justify retaining the business internally “since there was no cost advantage to outsource”.

Similarly you must ensure that when comparing costs that the cost burdens are also equivalent; if rent was charged to the call center internally then rent relief or a credit should credited to the department if the work is outsourced and the space no longer required.

Of course there are other metrics beyond the financial; customer retentions (churn), average order value, customer satisfaction etc. Regardless of the metric(s) employed be sure that you maintain a level playing field and can compare ‘apples to apples’. Also make it abundantly clear to any potential outsource provider the metrics you will require and how you want to view them.

Check References:
While this seems obvious, we have seen companies that expend significantly more time and effort checking the references and background of a new TSR, than they do checking the references and background of a potential supplier who will invoice the company millions of dollars. Ask for references, ask for references that are similar to your needs, Nobody wants to be a guinea pig. Then check the references, bear in mind that the company will only provide those references where it expects a positive response, so also ask for former customers in the same or a similar vertical. When doing reference checks ensure you do more than just verify they worked together; ask how the relationship was managed, how disputes were resolved, speed of action, sense of urgency and about the access to management. The answers to these questions will give you an insight to how the company is operated and where their priorities lie. Addressing this in advance will eliminate potential problems downstream.

Sun Tzu, “So assess them to find out their plans, both successful and the failures. Incite them to action in order to find out the patterns of their movement and rest”. This is always good advice in battle of in business