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November 2002

How To Outsource And Still Sleep At Night

By Derek Holley, eTelecare

The decision to outsource is never simple. Anyone who contemplates outsourcing a customer service program has to consider a variety of often conflicting factors such as expected savings, new management challenges, long-term partnerships, performance expectations and dealing with an outside company that will now be an intermediary in your relationship with your customers. Properly handled, however, an outsourcing relationship offers tremendous opportunities to add value, reduce costs and help your company focus on what it does best.

The best way to unsnarl the outsourcing tangle is to ask three key questions: 
' Should I outsource?
' If so, how do I choose a vendor?
' How do I manage my vendor?

This article will provide frameworks that will walk you, step-by-step, to the answers. 

Should I Outsource?
Even a casual observer can see that call center outsourcing is on the rise, and the percentage of those that are offshore continues to climb rapidly. Using an outsourcer isn't just for small clients any more. Ever since Jack Welch made focusing on core competencies an international corporate mantra, even the major players outsource significant functions they believe someone else could do better. Today, most of the Fortune 500 companies outsource a broad range of major functions, including customer contact centers. 

However, the fact that other companies outsource does not mean that yours should as well. The decision should be based on a careful examination of the importance, cost and skills required to manage a call center. Your answer may not involve the entire company ' you should analyze each product and each contact channel independently, as the answers may be different for each one. 

Your decision should be based on the following outsourcing framework: 
' Internal costs versus outsourcing costs,
' Internal abilities versus outsourcer abilities,
' Variability in transaction volume,
' Importance of the transaction,
' Complexity of the transaction, and
' Rate of change for the program or products.

Internal costs versus outsourcing costs. Many companies are unaware of their internal call center costs. When judging an outsourcer's bid, consider how much your company spends on salaries, benefits, physical plant and utilities, etc., just to keep the internal call center up and running. Consider also, the opportunity cost of having your managers and employees look after your internal call center when they could be engaged in more productive work. Outsourcers often have lower costs because they face strong, price-based competition that drives their costs down and gives them powerful incentives for efficiency.

Internal strengths versus outsourcer's strengths. This is the most important point, one that many clients get backwards. You should not decide to outsource until you have compared your capabilities with those of a qualified outsourcer. After all, outsourcing only creates value if the outsourcer can execute faster, more efficiently or more effectively than you.

Variability in transaction volume. It can be difficult for an internal call center to efficiently cover a program with highly variable call volume. Understaffed programs will be easily overwhelmed when volume spikes, and overstaffed programs will be underused during call troughs. Because an outsourcer has multiple clients, they can often transfer staff between programs instantly, making it easy for them to efficiently handle the constant variability in volume of typical call center programs.

Importance of the transaction. The less crucial a transaction is to a company, the less effort a company should spend on it. For example, while good customer relations are very important, answering basic requests for product information is relatively unimportant. Outsourcing these functions allows a company to focus its efforts on more crucial activities, such as improving the quality of its core products and services.

Complexity of the transaction. Simple transactions should cost as little as possible. Internal employees, including temporaries, generally have a high base cost. Outsourcing simple transactions such as offer fulfillment enables a company to reduce the costs associated with such interactions, often dramatically.

Rate of change for the program/products. Inevitably, outsourcing increases the transaction cost, or 'friction,' of program changes. As a result, the faster your product changes, the higher the cost of outsourcing related programs. 

Case History
The outsourcing framework described in Figure 1 is applied to a computer manufacturer considering outsourcing its consumer technical support functions.

Figure 1

The key to using this framework is to look at these factors objectively and decide how you want to weight each one. In this case, the high internal cost of technical support and its high seasonal variability steered the client towards outsourcing.

How Do I Choose A Vendor?
When you're ready to outsource, use the vendor selection framework in Figure 2 to evaluate your candidates.

Figure 2

Most clients focus on the first three points: technology strength, scale and experience. However, the final three points: quality, success record and communications are what truly differentiate superior outsourcers. Costs, of course, are fairly easy to compare. Each point is discussed below.

Technology strength. If a vendor has reliable voice, data and power systems, and is competent at CRM, there is little it can do to differentiate itself, technology-wise, from other vendors.

Scale. The real issue is scalability. Is this vendor prepared to meet your growth requirements? Consider its access to capital and how you will compete with other clients for your outsourcer's internal resources. In the long run, only companies that successfully deliver quality service will have the access to capital required to be scalable. 

Experience. It is not necessary that the vendor have experience with the exact product or function in question. It is more important that it has experience with analogous programs, programs that require similar technology, training and quality management to the program you want to outsource.

Costs. It is important to carefully evaluate total costs, including both the upfront costs and the ongoing costs. Upfront costs include training, program design and IT setup. Often overlooked are the hidden costs, such as attrition, telecommunications charges, reporting and call handling. Consider also the savings (or costs) that come from an outsourcer's efficiency and effectiveness, including reductions (or increases) in Average Handle Time and First Time Call Resolution.

Quality. Vendor quality is extremely important to the success of an outsourced program. Good execution improves customer satisfaction, reduces average handle times and improves the rate at which callers' issues are resolved on the first try, all of which save money in the long run. A vendor that is committed to quality will have stringent quality monitoring and continuous improvement practices in place before you ask for them. 

Success record. It is very important to examine the outsourcer's record with its recent clients. Don't ask for case histories on the company's top three clients; ask for histories on the last three, then talk to the outsourcer and the client separately. Ask what went well and where there was room for improvement. Ask what lessons were learned and how they were applied. This will reveal whether the outsourcer is learning from experience, the importance of which is frequently underrated.

Communications. Frequently, as a project develops, the vendor interfaces only with customers and not much with the client. However, a commitment to consistent communication is critical. For example, the outsourcing vendor should schedule weekly meetings with the client during the startup phase, followed by monthly and quarterly progress reviews. In addition, the vendor should also provide 100 percent, 24x7 availability from a senior manager with decision-making power over the program. 

Outsourcing Offshore
A common client concern is that it will be more difficult to manage an overseas operation than one close to home. The truth is that a disaster can happen down the hall as easily as around the world, and once an outsourcer is located more than 150 miles from your headquarters, a site visit requires a plane trip. In practical terms, the only real difference between an offshore outsourcer and an onshore outsourcer is that site visits to the offshore outsourcer will likely take longer. 

Because it is a new and rapidly growing market, offshore outsourcing can offer many advantages. For example, newer facilities mean newer technologies, technologies that aren't tied to the infrastructure of the past. Further, low labor and infrastructure costs reduce the barriers to entry, ensuring both capacity and competition. Because there are many new players in the market, though, it is important for the client to look for evidence of the vendor's performance rather than relying on its sales pitch. 

Evaluating The Evidence
Good sources of evidence for a vendor's commitment to quality include: observing its work, checking its references, interviewing its customer service agents and, most importantly, visiting its site. 

Before the visit, absorb as much of the company's background as possible. Read over its RFP carefully, review its Web site and ask around about the company. Look for the elements that don't match the picture you've been presented. This will help you ask questions that draw out the outsourcer's actual experience in the market. Try to spend a full day, or more, at the site and talk with as many of the company's employees as possible. Talk to the CSAs and managers independently, and sit in on their processes, particularly recruiting, training and quality management. Make sure you get a complete overview, in addition to a detailed view of the areas you care about most. Again, the key is to gather evidence, not just a story.

How To Manage A Vendor
The keys to managing an outsourced vendor are similar to those for supervising a new internal program: Try a pilot program first, then devote the necessary resources and prepare for growth.

Pilot Programs
Real pilot programs give you real answers, and the size of the pilot should be comparable to the size of the program. For a program that will eventually involve 100+ seats, a good pilot program would involve 50 FTEs over a three-month period.

An effective pilot program should be representative, low-cost and measure all relevant factors. Efficiency is not critical here. The pilot program should allow the outsourcer to show the quality they can bring to a program, even if the program isn't running at full speed. 

The Daily Operations Of Managing Vendors
Managing outsourced vendors is much like managing in-house teams, and similar rules apply.

Set clear and reasonable expectations. Both you and your vendor should know, in detail, what you expect from the program before the design or implementation process begins. That said, if your expectations aren't based in reality, they aren't likely to be met by any outsourcer. The pilot program should have gone a long way to making sure your requirements are within reason.

Monitor and evaluate. Observed behavior is the key to monitoring and evaluating performance. By recording service calls and collecting anecdotes, you can judge performance on specific events rather than ill-defined impressions. You should also develop and require regular reports that measure the outsourcer's commitments to quality and efficiency. All of the above is a full-time job, and it's a good idea to give your outsourced program the same importance you would an in-house program and assign an experienced manager to supervise it. 

Coach for performance improvement. Coaching for continuous performance improvement goes well beyond harping on a vendor's flaws; it encompasses all aspects of a vendor's performance. Don't stint on praise. Telling your outsourcer where it has succeeded is just as important as telling it where it failed. 

Start by reviewing performance data and building a common basis for discussions. From there, you and your vendor should develop clear action plans to improve performance. These plans should include firm deadlines and definite goals that address the program's short-term concerns and longer-term objectives. Once a plan has been developed, don't assume it will take effect. Follow up on it regularly and hold your outsourcer accountable if it doesn't meet its deadlines. 

Offer serious incentives. One way to make sure your outsourcer takes your goals seriously is to include penalties and bonuses in your contract. These should apply to measurable quantities, including: average handle time, service levels and quality and customer satisfaction.

Both the penalties and the bonuses should be realistic, balanced and fair. They should also be adjusted over time to raise the bar as an outsourcer's performance improves. Sometimes clients are upset when they have to pay performance bonuses, but in fact, paying for service well in excess of what was expected is a great deal. 

Handling Growth
Growing a successful program should be easy, but it isn't always. You'll need to maintain clear and realistic expectations, understand your vendor's capacity, invest in your vendor and prepare for your future needs. It is important to work with your outsourcer as a partner, so it makes the same investments in the program that you do. At the same time, don't over-hype your plans. If it over-invests in your program, by hiring CSAs or building infrastructure it doesn't really need, you'll pay for it in the end. 

Likely you won't be your vendor's only customer, which means you may have to compete with other clients for your vendor's resources. As you grow, it's essential to know how quickly your vendor can expand and how committed it is to meeting your changing needs. Consequently, the program's growth should be matched by increased investments in money and management resources on your part.

Finally, the power in a relationship shifts over time from a customer to a vendor. When you first start a program, vendors compete for your business, but after a program is operational, the costs of switching grow, increasing your dependence on the vendor. This makes it more difficult to renegotiate a contract, so be sure your contract includes terms for growth over the long term even before you begin a pilot program. One way to reduce this power shift is to maintain multiple vendors. That way, even as the program becomes successful, your outsourcers will continue to compete for your business. 

As a final word, our experience has shown that there are a few common mistakes that clients make in evaluating and managing an outsourcer. Avoiding these may mean the difference between failure and success.

Derek Holley is president of U.S. Operations for eTelecare International, a Los Angeles-based company with operational contact centers located throughout the Philippines.

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