Myths and Realities of Customer Service Outsourcing

80 percent of customer service outsourcing projects aimed to cut costs are destined to fail, Gartner predicts

80 percent of customer service outsourcing projects aimed to cut costs are destined to fail, Gartner predicts

Egham, UK  March 24, 2005  The worldwide market for customer service outsourcing is set to grow from $8.4 billion in 2004 to $12.2 billion in 2007, but the offshore component will remain small and moreover 80 percent of customer service outsourcing projects aimed to cut costs ultimately will fail, according to new research from technology consultancy Gartner Inc.

In a presentation in London, Gartner research director Alexa Bona today identified business risks associated with customer service outsourcing, contradicted a number of misconceptions surrounding the dominance of offshore call centers and offered key recommendations to make customer service outsourcing pay.

Bona made her presentation, "The Myths and Realities of Customer Service Outsourcing," at Gartner's recent Customer Relationship Management Summit 2005 in London. Key findings from Bona's research included:

  • The worldwide market for customer service outsourcing is set to grow by nearly 50 percent in the next few years, increasing from $8.4 billion in 2004 to $12.2 billion in 2007.

  • Through 2007, 80 percent of organizations that outsource customer service and support contact centers with the primary goal of reducing cost will fail.

  • Up to 2008, 60 percent of organizations that outsource parts of the customer-facing process will encounter customer defections and hidden costs that outweigh any potential savings they derive from outsourcing.

  • Despite the hype surrounding offshore call centers, offshore customer service outsourcing only represents a tiny fraction of the market  less than 2 percent in 2005, increasing to less than 5 percent in 2007.

  • By year-end 2005, 70 percent of the top 15 Indian-owned business process outsourcing (BPO) startups that offer customer call centre services will be acquired merged or be marginalized.

  • Outsourced contact centers have higher staff turnover than in-house contact centers.
"Our research shows there are significant risks associated with outsourcing customer service," said Bona. "Historically, outsourcing has been seen as a way to reduce costs by getting others in cheaper locations, or with greater economies of scale, to own the processes that are not core to the business. Companies are encountering problems because they don't approach this strategically. They usually lack information to make meaningful cost/benefit analysis and often focus on inappropriate or unmeasurable service levels and cost metrics."

According to Gartner, companies that outsource successfully can achieve cost savings of 25 to 30 percent. However, Bona warned that a poorly managed model can reduce the quality of the customer experience, dilute the brand values of the company and fail to deliver cost savings.

Bona went on to outline additional key challenges. She said most companies neglect to manage the customer service experience sufficiently and often lock the organization into long-term outsourcing contracts without conducting appropriate pilot testing. She also pointed to risks related to knowledge management and retention, accentuated by the fact that customer service outsourcing providers have staff attrition rates of up to 70 to 80 percent, compared to an average of 19 to 25 percent for in-house contact centers.

Gartner concluded that there are benefits to be gained from outsourcing non-core processes, but rewards will not be instant and organizations should adopt a controlled and phased approach. Bona advised organizations new to business process outsourcing to start by outsourcing onshore.

"Don't be lured by the apparent cost appeal of placing end-to-end customer services processes in the cheapest offshore locations without conducting a thorough assessment of the transition methodologies of the offshore provider, as well as your own ability to manage offshore relationships," she said.

Gartner offered the following recommendations for organizations when defining their customer service outsourcing strategy:

  1. Identify objectives  be certain customer-facing business processes need to be outsourced. Businesses should only consider outsourcing non-core processes and those that are not key organizational competencies. Organizations should ask themselves two questions to identify if the process is core: First, if we were building our business from scratch, would we build this process or buy it? Second, are we so good at executing this process that other organizations might hire us to do it for them?

  2. Map customer-facing processes from end to end and dedicate sufficient management resources to the intersection between outsourced and retained processes. A significant number of failures occur because organizations forget to map the entire customer process from the customer perspective. This frequently results in a poor customer service experience and sometimes customer defection. To be successful, organizations and outsourcers must understand the entire process and clearly articulate each party's entry and exit point.

  3. Develop contracts that require innovation in service delivery to reduce the cost of ongoing operation. To avoid conflicts between the objectives of the enterprise and the goals of the outsourcer, customer service outsourcing contracts should not be based only on operational metrics such as number of calls handled or average call time. In this scenario, the outsourcer maximizes profits by increasing the number of calls handled. Instead, contracts should include pricing related to service levels and customer satisfaction or other quality metrics to measure and motivate outsourcers.

  4. Do not underestimate the management time required to make an outsourcing relationship work. Outsourcing should not be used as a means to offload the responsibility for problems. Effective integration of an outsourcer's services, to ensure it appears seamless to the customer is crucial. That integration needs careful and close management especially in the early stages of the relationship.

Additional Articles of Interest

For more information on procurement business process outsourcing (BPO), see the articles "The Procurement Outsourcing Imperative," "The Procurement Outsourcing Imperative, Part II" and "Has Procurement Outsourcing's Time Come?"