Gartner: Outsourcing to cut costs destined to fail
Gartner: Outsourcing to cut costs destined to fail
Mar 07, 2005: The majority of organisations that outsource their customer service operations with the primary goal of saving money are destined to fail, according to a new study by Gartner.
The worldwide market for customer service outsourcing is set to grow from US$8.4bn in 2004 to US$12.2bn in 2007, but less than two percent of that total is currently made up from offshore customer service outsourcing, with that percentage set to rise only marginally by 2007 to less than five percent of the overall market.
Through 2007, 80 percent of organisations that outsource customer service and support contact centres with the primary goal of reducing cost will fail. Meanwhile, 60 percent of organisations that outsource parts of the customer-facing process will encounter customer defections and hidden costs that outweigh any potential savings they derive from outsourcing.
By the end of this year, 70 percent of the top 15 Indian owned BPO startups that offer customer call centre services will be acquired merged or be marginalised. The report also found that outsourced contact centres have higher staff turnover than in-house contact centres.
“Our research shows there are significant risks associated with outsourcing customer service,” said Alexa Bona, Research Director at Gartner. “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 unmeasureable service levels and cost metrics.”
Despite this, Gartner says that 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 also outlined additional key challenges to be aware of. She said most companies neglect to manage the customer service experience sufficiently and often lock the organisation 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 in in-house contact centres.
Gartner concluded that there are benefits to be gained from outsourcing non-core processes, but rewards will not be instant and organisations should adopt a controlled and phased approach. Bona advised organisations 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 off-shore provider, as well as your own ability to manage off-shore relationships.”
Gartner's recommends that organisations when defining their customer service outsourcing strategy should only consider outsourcing non-core processes and those that are not key organisational competencies; map the entire customer process from the customer perspective; develop contracts that require innovation in service delivery to reduce the cost of ongoing operation; and do not underestimate the management time required to make an outsourcing relationship work.
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