Is outsourcing a one-way street?

“False Economy” is defined as an action that saves money at the beginning - but which over a longer period of time results in more money being wasted than being saved.

Speaking from a Contact Center perspective - on a “level playing field” – onshore Call Centers are financially competitive with offshore Call Centers – and the quality of work is vastly superior.

In a Sept. 2010 survey by the State of Nebraska - experts estimated that hiring someone in Nebraska to work at a Call Center costs only 15% more than hiring that same employee in India. When you also take into account tax-breaks for hiring new (American) employees - as well as the impact that employee’s paycheck has on the local economy – the economic benefits of a US based Call Center add up.

American consumers also express much more favorable feedback when they perceive their call to be handled by a Contact Center located in the USA – and American consumers are also strongly opposed to sending Call Center jobs overseas to begin with.

Results of the 2010 Contact Center Customer Satisfaction Index from the CFI Group www.cfigroup.com:

First Contact Resolution: onshore 67% offshore 50%

Ease of Understanding: onshore 85% offshore 54%

Overall Customer Satisfaction: onshore 79% offshore 58%

Additionally, Average Handle Time (AHT) has been reported to be 39%-105% longer with offshore Call Centers than with onshore Call Centers handling calls of the same type.

Opting to “come home” for their Call Center employees is making sense for more & more companies seeking to enhance their Service Levels & Brand Reputation while delivering a higher degree of overall Customer Satisfaction.

In the past 2 years a few of the companies that have moved Call Centers back onshore include: United Airlines, AT&T, Dell, Expedia, HP & Monster. Another company that’s moved overseas Call Centers back is Delta Airlines. According to CEO Richard Anderson: "One of the ways to mitigate the impact of the recession is to insource work. It provides job protection and it is consistent with what the administration wants companies to do in the US today - which is to bring back work from overseas and do our best to increase employment."

When cell phone company Jitterbug brought its Call Center back to the USA from India it began to boast in its ads that all of its operators are based in the U.S. "We really believe that our customer satisfaction saves us more money in the long term than offshoring," said Jitterbug CEO David Inns.

From Site Selection Magazine: “Offshoring calls to India works in very limited situations. Interaction with clients and understanding the culture & environment of clients doesn’t work very well at all. The direction of the industry is to bring these customer facing jobs back to the USA.”

From the Chartered Institute of Personnel & Development: “UK companies are bringing back call centre operations to the UK from India. Most of the companies that we deal with are looking to keep customer service staff in the UK because there is a significant increase in the level of service and customer satisfaction provided by those call centres based here in the UK."

Shipping Call Center jobs overseas in a ‘race to the bottom’ for Labor Costs is a “False Economy”.

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To answer your question directly: "No". It is a myth that once you outsource something that you can't bring it back in-house or that it will be a lot more expensive when you do so.

Many companies are moving functions back in-house currently, for various reasons. I've spent 14 yrs in Outsourcing as a Provider, Client, and Third-party transition consultant and based on that experience I find that it is not a one-way street. In fact, many Companies that bring it back in-house find their costs to be much lower (than prior to outsourcing). Why? The Outsourcer made the efforts to remove steps from processes, combine procedures, use Six Sigma on what they inherited from you, automate transactions, go paperless, etc etc---all streamlining efforts. When moved back inside, and using employees for delivery (not Contractors), the function's costs generally fall between the prior in-house cost and outsourced cost, usually much lower than it's prior in-house cost. It's a direct function of the planning efforts prior to the move back in-house.

Moving back in-house may be more expensive initially due to the need for capital investment in technology, office space, use of Contractors/transition Consultants, etc. However, after those investments, costs should drop significantly.

That's one man's findings. Hope that helps.

There is not a definitive answer. In some cases, the answer might be "never," while in others prospects for return - or near-return - could be rosy.

One recent respected study projects that the total cost differential between US and China manufacturing will be less than 10% in just a few years (the subject of my latest blog). If so, the risks, variability, and inconvenience of continuing to outsource might not be worth it. Would a move even farther away in search of lower cost labor be the next step? Maybe, or maybe not.

Near-shoring is for real, with mexican or Caribbean manufacture/assembly often an attractive cost option (tempered with productivity and quality requirements).

Beyond manufacturing, there might be cultural issues, such as nominal English that doesn't really communicate with idiomnatic native speakers. And, the narrowing wage gap in call center operations has already resulted in son=me re-shoring.

Then, there is the often-neglected option of outsourcing domesticzally for work-at-home solutions, or processing in an otherwise economically depressed area. Not nearly all outsourcing is off-shoring.

I am assuming, by your question, that you are strictly referring to “outsourcing” of which offshoring is simply one option. I do not believe that it is a “one way street” unless the management that implemented the strategy simply did a poor job.

In my last startup, I made the decision that anything that was not customer facing, except accounting, would be outsourced! I consider strategy, production, development, sales, operations and accounts receivable very core functions in most companies. Could I pull the trigger on anything that was outsourced? You bet!

I believe in a balanced score card where some functions might be better off outsourced; most in sourced; and some functions added like social media until you get a handle on it. If your strategy is right then the move back-and-forth should be somewhat straight forward. However, if you outsource because you don’t have the management skills to fix a problem then you likely will not have a strategy that provides the agility the business needs to bring it back in house. Decisions are not permanent and the market fluctuates – so should your outsourcing strategy.

As executive promotions are based on last quarter's performance then indeed offshoring is a good thing. Since compensation is not tied to the company's long term performance that suffers. (This applies to Congress also.) The old men that rule (thru the Communist Party) China don't worry about elections every 4 years, they make decisions on China's long term future.
Examples:
1. I worked for Keane at one time. They outsourced to India, specifically Caritor. Keane continued to lose money and was purchased by Caritor, which adopted the Keane name. The Indian company Keane has since moved callcenters to the US.
2. Foreign automakers continue to move more production to the US and Canada, ostensibly for better productivity. American automakers outsourced production because "on paper" they saved money.
3. Cisco outsourced production to Hauwei. Cisco laid off 5000 and now is circling the drain. Hauwei is a rising star.
4. Corporate Socialism (the absorbing of traditional corporate costs by the US taxpayer) led to outsourcing of Steel. This led to decline of US steelmaking, thence a decline in US mining of Rare Earth metals used in hardening iron. Now we are threatened by China's monopoly of Rare Earth metals.
5. Outsourcing of course must include moving jobs from higher paying states to lower wage "right to work" Southern states (e.g. Texas, Florida, Arizona) where worker rights and wages are kept low by state law; and also by availability of immigrant workers. Under Bush, corporations do not bear responsibility for hiring illegal workers.

I think you are confusing (or at least mixing) outsourcing and offshoring. Offshoring is a completely different discussion for which I believe that strategic economics would dictate that it poses a threat that is rarely discussed. Certainly, there is a balance that can be achieved in offshoring but I think that the U.S. has gone way beyond that and it should be reined in.

In many businesses, outsource/offshore decisions are made based on short-term payback criteria. We would be neglectful not to mention that these frequently align with how corporate and executive performance is measured and rewarded. The longer term potential for adverse consequences – “less-than-success,” eroding a company’s core competencies, depleting the overall capabilities located for that industry in the U.S., or adverse impacts on the remaining U.S. workforce or locale – is frequently minimized or ignored in these decision processes.

This short-term focus of decision-making can lead – and has led – to many businesses seriously underestimating the probability of negative outcomes in outsource/offshore decisions. Often there is a significant time lag between the decision (and its immediate positive effects) and the adverse outcomes; frequently the original decision-makers have moved on and someone else has to deal with the problems. As a result, the organization learning that should take place often does not, and the poor decision-making repeats itself.

While not true in every situation, the cumulative impact of all these effects can make it difficult and costly to reverse outsource/offshore decisions.

I want to address one other aspect of this question, which is very important for U.S. businesses to consider. A focus on Corporate Social Responsibility is a growing trend in U.S. business. Perhaps the time has come to extend the concept of CSR and ask – beyond the very limited requirements in U.S. law – what responsibility U.S. businesses should take for the permanent displacement of jobs in an economy where the existence of abundant replacement jobs may no longer be taken as a given.

For more information on better decision-making for outsource/offshore situations, please see my article on this subject, which is accessible here: http://www.vittoriconsulting.com/bio.

Answering a very old post -

Having spent most of my career outsourcing non-core activities, I more recently found myself in a positon where it became necessary to learn a new skill: Insourcing.

The two initiatives pose very different challenges.

When a firm outsources an activity, it does so because it is non-core - and because there are organisations out there for whom it is core. These external organisations are (or should be) more effective and efficient at handing these unwanted 'jobs'.

For an Insource to work well, the above logic must (normally) apply in reverse: i.e. that the receiving business can be at least as efficient / effective and managing the processes as the donor company.

In my view, this is rarely the case - particularly if it is a reversal of a previous outsource.

Not only has the receiving business ceased to have the necessary managment and process controls that are required to run the job efficiently - it is also invariably the case that the economies of scale (and other economies) that exist in the 'specialist outsource provider' do not exist in house.

There are exceptions: it does make sense to insource if the business has a pool of stranded labour - e.g. if it makes people available through restructuring but elects not to make staff compulsorily redundant. In such cases it clearly makes sense to 'mop up' this spare capacity. Whilst the insourced work may cost more than when purchased from a third party, it is advantageous overall to utilise the labour that would otherwise be idle.

What I read in this string was a lot of reasons not to outsource (and in particular, not to offshore - which I agree holds a different set of challenges).

To get off the fence, my view is that outsourcing - if you do it properly and for the right reasons - should be a one-way street. Otherwise you were wrong to do it in the first place...

Regards,

John Hatton

It really depends on what you are outsourcing and why... If they are true "commodity-like" functions that do not offer much in the way of differentiation then I'm not sure they should come back.

Of course there are cost and quality considerations. If the outsourcer does a crummy job (and some do, while others do reasonably well) then it may be a candidate to bring back in house.

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As for offshoring that is a whole different matter. Not about whether it will come back, but whether a company ever receives the benefits they were sold on. The sales pitches are LONNNNgggggggg on promises and very, very short on actual delivery in my experience.

Great topic and I think it depends on the projects being outsourced and the cost variance of having it done offshore vs. keeping it inhouse.

While I do have a concern that more and more jobs are leaving our country with unemployment so high, I also understand the cost saving and efficiency reasons why businesses outsource work.

Getting back to your inquiry, if the variables are such that a project is being done efficiently and less expensive offshore than inhouse, it wouldn't make much sense to ever bring it back, would it?

Outsourcing has emerged to be a key businss process for smart operations. In today's business environment , success lies in value addition. We have very less choice but to procure the best from any where in the world.Prof Ram K. Verma

Out sourcing enables to have smart oprations