…drives three successive waves flow through it’s outsourcing.

Introduction

Gordon Moore, one of the founders of Intel, in 1965 made the prediction that every 2 years the capacity of a central processing unit for computers would double. By now it is long forgotten by the average man since these hearts of a computer have achieved stratospheric capabilities since the early days of the start-up in Silicon Valley, however, most industries seem to go along by such generic patterns.

Without any pretension to come even close to the importance in history of Mr. Moore or the accuracy of his prediction, I dare to say that also Customer Service knows such long term trends. In this blog I would like to examine some trends in this industry a little bit closer.

The cost drive

Initially, non-core activities of Western concerns were outsourced for mainly financial reasons: large concerns with high employee cost and often extensive secundary employee compensation packages tried to save costs by outsourcing these tasks to suppliers with significantly lower cost levels. The outsourced activities were seen as non-core, and not significant. This pattern did not only apply to Customer Service-industry, but to all Business Process Outsourcing and manufacturing. Typically, services were outsourced to several suppliers who had to compete – sometimes even on a weekly basis – to get the business. Especially the outbound telemarketing saw examples hereof, since a client could compare conversion rates among suppliers easily. This practice contributed to some of the dubious practices that were deployed by ‘cowboys’ in this business segment. The negotiating power of the purchasers was exploited to the fullest here.

An interesting example of the drive to cut secondary employment costs, and driving it to the top was the initiative from KPN in The Netherlands, which bought a large supplier of call centre services, SNT, and merged it with it’s in-house call centers in a (largely failed) try to get rid of its pension liabilities for the in-house call center staff.

After the simple national outsourcing, the lower costs of developing countries was utilized in ‘offshoring’, and countries like India and The Philippines made great inroads in the Business Process Outsourcing industry. Interestingly enough, it was their colonial history that provided them with the competitive advantage to corner the services market: a large language knowledge inheritance made the difference and enabled e.g. the Philippines to develop a $9 bn industry employing 500,000 people in 2013. In that country, Teleperformance, a large BPO-provider, by itself already employs 20,000 employees.

The control drive

After these ‘quick wins’ were realized, it turned out that they might have been fairly ‘quick’, but not always a long term ‘win’. Increasing cost levels in developing countries sent manufacturing scurrying for new, unspoiled areas for manufacturing sites. Unspoiled here means still low cost. In addition, an ever increasing dynamism in the market required shorter lead times, where transportation times and cost from mainly Asia to the Western World became an ever increasing concern. Apparently, the activities were more significant than originally assumed.

Similar forces played in the services industry, although alternatives were more scarce: a conveyor belt can be placed virtually anywhere in the World, but many services are tied to a certain language capability of the staff.

I have once been in a position where a client of mine resisted moving the activity away from the city to the countryside because of the 2 hour ride to reach this new facility. On a larger scale, it turned out that the management of a facility on the other side of the World is quite a different cup of tea from managing the same next door. The reduction of the price advantage combined with the desire for increased control led for significant parts of the market to ‘near-shoring’. The fall of the Iron Curtain also made access to new supplier of cheap labor, and many sites were moved back to Europe again. So far, this is fairly common knowledge, but it sets the stage for the third trend that is now coming up in the Customer Service-segment of BPO.

The quality drive

Although control often can not be translated into the bottomline directly, the need for control did pave the way for further insights: more and more concerns are realizing that immediately identifiable costs are not everything. I have seen many change or investment proposals in customer service with unrealistic returns on investment in their Business Cases. It is very easy to calculate the savings of sending a bunch of temporaries home, much more difficult to calculate the costs of scurrying to replace them when volumes pick up unexpectedly, let alone the reputational cost of the resulting long waiting queues. Everybody knows of companies in their own market that got into ‘rough weather’ because the Customer Service Department could not handle the orders for new products, resulting into backlogs for new customers, double work for installation engineers and – lo and behold – evaporating earnings.

In several industries the cost of Customer Service is only 2-3% of revenues, when that business process experiences production or quality issues, it endangers the whole value chain. In costs, Customer Service might be not significant, but in profit impact it often is. Therefore, several parties are realizing that extreme cost cutting on this activity may look good for theoretical ‘quick wins’, but loses out on durability – and here I use the word without any environmental meaning.

Whether this will mean a trend towards theoretical overstaffing, ‘insourcing’ in it’s various forms, or more to local outsourcing depends on case-specific argumentation and I would not feel comfortable to provide a generic answer. There are also plenty of off-shoring arrangements that do provide the quality that is required. However, it has become clear to the more sophisticated parties that the extreme penny-pinching of the budget in this activity – regardless of inhouse or outhouse constructions – may be ‘pennywise but poundfoolish’.

(Originally posted on January 8, 2014)