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Making the Case for Outsourcing Call Centers

Many firms can make a strong case for outsourcing their call centers, especially when they need to scale up. But farming out the work doesn't ensure that you can nip your problems in the bud.

Hiring out the call center is an increasingly viable option for growing midmarket firms. Are you ready?

A few years ago, 1-800-Flowers.com needed to ramp up its call center capacity for one of its biggest revenue-generating holidays of the year, so it contracted with an outside call center to provide 800 additional operators.

"That was a mistake," recalls Lou Orsi, vice president for vendor and service center relations. "They got in a little over their head. They struggled meeting the hiring numbers. They were taking in anyone off the street they could. Quality suffered."

The experience didn't sour Orsi on outsourcing, but it did teach him a couple of lessons: Make sure the vendor understands your expectations, and make sure you don't depend on a single vendor at a revenue-critical moment.

"One of the first conversations I have with vendors is that I tell them, 'I'd rather you undercommit and overperform instead of overcommit and underperform,'" Orsi says.

There comes a time in the life of many midmarket companies when they're enjoying rapid growth and they have to start thinking about how to take the business to the next level.

And since a company's greatest asset is its customers, managing the contact center is a vital task. Yet it's often peripheral to the core business, so increasingly, businesses are deciding that outsourcing is the way to go. The market for call center outsourcing hit $19.5 billion in 2005 and could reach $20.1 billion by 2012, according to Frost & Sullivan, an international consulting firm based in San Antonio.

"The midmarket is riding in on the capacity that's been built by the big companies," says Pawan Verma, a director at PricewaterhouseCoopers Advisory. "With VoIP [Voice over Internet Protocol] and all the investments in capacity the service providers are making, there is finally a value proposition in the midmarket. For midmarket companies to be successful in a globalized arena, they need to be able to scale on a dime, focus on their core competency with limited resources and retain customers across the globe. Call centers are not the focus of most of these companies."

Yet for many CIOs, any type of outsourcing is a hush-hush topic. Few companies are willing to speak openly about their outsourcing arrangements, even when they are domestic. "They prefer to not let their customers know that they don't do direct support," notes Katherin Dockerill, senior vice president of marketing and business strategy at Stream, a Dallas-based outsourcing company that runs contact centers in the U.S., Europe and Asia.

And while the market continues to grow, Gartner Inc. analyst Esteban Kolsky says the expansion rate for all outsourcing has slowed to 2% to 3% a year, which is less than half of what it was previously. "Outsourcing is increasing, but the vast majority of businesses still don't outsource," adds Forrester Research Inc. analyst Elizabeth Herrell. "It's not really a dramatic savings once you get done with everything. The results have not been what a lot of companies expected."

Factor in the cost of outsourcing a call center and the potential for things to go awry, and no wonder companies are wary of making the jump. "Most people will need to spend more money than they expect," warns Stan Lepeak, managing director of research at outsourcing consultant EquaTerra Inc. "People hear you can do it 40% cheaper in India. That's only if you do it right. Most buyers are happy. But there have been notable problems. You want to avoid being one."

As a rule of thumb, Herrell says, companies tend to run their own call centers until the number of operators hits triple digits. "At 100 agents or less, you don't see any outsourcing," says Herrell. "It becomes more appealing and cost-effective with larger call centers." Here are steps to figure out if an outsourced call center is in your future and, if so, how to go about finding and managing one.

Assessment: Does It Make Sense?

For 1-800-Flowers, the decision to partially outsource call center operations was a no-brainer. The Carle Place, N.Y.-based company posted $782 million in revenue last year and is forecasting that sales will hit $930 million this year. The company runs its own 700-person call center. But three mega-holidays -- Christmas, Mother's Day and Valentine's Day -- account for a lot of the company's revenue. During these spikes, the company often needs to add 1,000 operators, which it does by contracting with four different providers.

"We outsource because we have to," Orsi says. "We have a steep spike on three major holidays. The concern is the peaks. How do we hire a massive amount of people for a small window?"

For other midmarket companies, the decision may not be so obvious. Lepeak, for instance, suggests that CIOs start with a thorough company assessment to determine current call center quality. Look at what your competitors are doing. Benchmark your own call center operations' price and performance. "Are there quality problems? Identify them," Lepeak says. "One way to solve them is to invest in training or technology. Outsourcing is another option."

Andy Sealock, a senior associate at consultant Pace Harmon in Vienna, Va., says CIOs have to figure out what role the call center plays in the business. What is the most crucial metric: Efficiency? Sales generation? Quality?

"Are you really committed to building and running a call center as a core competency?" he says. "There are a lot of hard things you have to be good at. You need to get really good at technology, recruiting and hiring, workforce forecasting and managing. If the answer is no or maybe, you might want to look at a call center outsourcer. But you also have to determine what your call center strategy is."

Pawan Verma notes that many upper-midmarket companies may have to sacrifice growth if they choose to scale their contact centers organically. "As you reach $2 billion in revenue, you have to have 24-by-7 coverage and peak demand," he says. "It's quite possible you need multilingual support; you have to cater to the Hispanic population -- and do all that without too much fixed cost or capital expenditure. The opportunity cost of not doing outsourcing becomes tremendous if you're a $2-billion company that wants to be a $4-billion company in a few years."

Preparation: Are You Ready to Outsource?

Although vendors may offer turnkey call center operations, the reality is that the company doing the outsourcing has a lot of work to do to ensure that its business processes are transferred smoothly.

"The biggest pitfall -- especially for the midmarket -- when looking at outsourcing is doing due diligence," says Verma, "picking the right process to outsource and selecting the right service provider. Companies think, 'Let's outsource our problem.' When you outsource a problem, it's still a problem."

Sealock says that companies need to plan the migration process thoroughly. He says there are three main ways to go:

  • Optimize the call center business process and then outsource it, which requires the longest lead time and most internal talent but carries the lowest risk.
  • Outsource the center, then let the vendor optimize the process, which carries relatively high cost.
  • Do both at the same time, which Sealock warns carries the highest risk.

"Not picking your outsourcing scenario causes failure," he says. "The first scenario gives you the least gray hair. But a lot of companies do a poor job of documenting processes. A lot of times, you can get away with that in the family, but when you outsource that, you expose those weaknesses. Service levels take a hit. Productivity takes a nosedive."

Not surprisingly, consultants say that companies should hire consultants. "Get external support," says Verma. "You shouldn't have to know all this stuff."

Selection: Picking the Right Partner

After the holiday debacle, 1-800-Flowers decided to parcel out its call center operations to four vendors. The company decided to stay with a higher-cost, U.S.-based workforce because it worried that an offshore one might struggle to meet head count targets at the expense of language quality.

So when the company started to look at vendors, it pursued only U.S.-based operations with a minimum of 200 seats. Technological compatibility was also an issue. "We have a thin-client environment and use Genesys for call routing," says Orsi. "We wanted to avoid proprietary CRM [customer relationship management] systems, as we've had some problems with compatibility."

The company now uses four vendors from different parts of the U.S.: Alpine Access Inc., L&S TeleServices, American Customer Care Inc. and Choice Hotels International Inc., the last of which shares a call center with 1-800-Flowers.

Sealock says that distributing call center services to multiple partners gives a CIO leverage to motivate vendor behavior. "You essentially have the ability to create a competitive marketplace for your services," he explains, "by shifting volume to or away from individual vendors within your vendor portfolio based on performance."

Another reason to spread contact center functions around is to play to the strengths of different providers. "You may want to send technical traffic to a provider that is the best at complex, technical support," Sealock says, "and general information calls to another, cheaper provider that is capable of handling the less complex transaction."

When an organization has enough volume to allow each provider to hit cost structure efficiencies, using multiple vendors works best. "These economies of scale let you get far enough along the tiered-volume-discount curve that you aren't giving up too much on unit cost for the sake of vendor diversity," Sealock says.

Governance: Trust, but Verify

After every holiday, 1-800-Flowers reviews how the outsourced call center operations fared. Did the operators convert calls into sales at the expected rate? Were the staffing targets met? Was call length in line with expectations? But the company also verifies performance on an ongoing basis. Transactions are monitored in real time. And there are weekly calibration sessions, where the company's vendors and quality assurance staff jointly monitor calls and compare notes.

"We want to be on the same page with grading," Orsi says. "Before, we saw they were grading the same call as a 90, and we were grading it as a 70. Now when we say we have an issue with X, they know exactly what we're talking about." The company, moreover, handles the training of the outsourced staff. "We've done it both ways," Orsi says. "We found it a lot easier to provide the trainer and do it ourselves."

Good governance makes for good partnerships. Service-level agreements (SLAs) should spell out performance targets and metrics as well as financial incentives and penalties.

"Governance tends to be an afterthought," says Lepeak. "Governance is important. You're touching a customer. Does the SLA or contract cover everything? You can be managing at the service level and still not have a happy customer."

But Verma says that effective governance also involves a commitment among high-level management to work on the relationship. "Your key people always have to manage it," he says. "Your customers are too important not to."

Sealock adds the SLA should include a compensation scheme that reinforces the company's priorities, whether it is promoting efficiency, generating sales or ensuring quality. "The most successful outsourcing partnerships blur the line between the outsourcer and outsourcee," he notes. "Start inculcating the outsource employees just like they were part of the company. They get a paycheck from the outsourcer, but they should feel like they are working for the company."

Orsi agrees. For 1-800-Flowers, the idea is that a customer can't tell an in-house facility from an outsourced one. "We're looking for consistency for how clients are handled," Orsi says. "We want to make sure if you contact one of our internal call centers or an outsourced one you'll get the same level of experience."

Michael Ybarra is a contributing writer for SearchCIO-Midmarket.com. Write to him at editor@ciodecisions.com.

This was last published in December 2006

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While it may have some positive impact on the bottom line, outsourcing is one of the most destructive business practices devised. It abrogates all local responsibility, separates the solution form the problem, and undermines the careers of local workers in favor of unseen foreign labor. Any sense of growing a business or gaining employee loyalty is gone. All to retain a negligible bit of money. IMHO it's definitely not worth it.  
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