If outsourcing is done in a well thought out manner the benefits are immense. One of the primary reasons for manufacturing companies to outsource is lower cost of production. This could mainly happen due to global economy and lower currency exchange rates. When you outsource your services that you are not in the business of (e.g. Human resource is an external service for a business that primararily is involved in production of goods) you cost analysis could change and would give you a better view of your costs. The cost of the service instead of a variable cost it becomes fixed cost. Many times you would save yourself from the cost of gaining knowledge that is required solely for the development of a new process. When doing this you expose your self to the risk that you may not be an expert on the subject. A great example of this has recently boomed are software giants providing developers with SDKs. Apple and Facebook instead of developing application themselves are “outsourcing” it to users allowing them to customize it to their flare. This way they are getting free development, the clients are happy as their needs are satisfied, they are getting brand loyalty all at a very minimal cost compared to that they would have spent if they were to do it themselves. For customer service business if you outsource globally you could provide support to your clients around the clock while saving on cost of providing support at higher expense.
As noted earlier that if the process of outsourcing is not carried out carefully it could turnout into your nightmare. Here are some common myths that are attached with outsourcing.
- We can have it all: When outsourcing a lot of companies tries to achieve all and forget that when outsourcing while achieving one there’s a trade-off in the other objective e.g. to boost effectiveness you have to factor in that cost will increase
- Outsourcing Services is Like Buying Commodities: Many costs are associated while outsourcing such as transaction costs, vendor costs, and operational cost.
- We need an Ironclad Contract: Instead of writing a lengthy contract more attention should be concentrated on roles and responsibilities of each party involved. Instead of controlling the vendor, control the process
- Contracts Don’t Matter: Needless to say ignoring a contract does not help either. A contract should be used to share the vision and relationship between the client and service provider.
- Vendors Are Insurance Companies: There should be well defined standards of service and penalties incase of failures. The clients should not hold the vendor for a full liability when only part of the full product is provided as a service.
- It’s Not Our Headache Anymore: While outsourcing a process does not mean you do not have to worry about it any more, the clients should still have the knowledge of the process and hot it fits in the company’s picture. Such knowledge could come in handy if in future you decide to bring the process in-house.
- Our First Failure Should be Our Last Attempt: As it is well said, If at first you don’t succeed try again. Many clients take the first failure as a sign to stop instead of improving the process. Experience with the vendor might correct a lot of mistakes.
As we discussed outsourcing could be a boon to some organizations while it could be as nightmare for others. In today’s world the technology has grown to an extent that one cannot perform efficiently with the lack of it. At Liberty Mutual Group, just like any other insurance company there are many systems and software that are being used to perform daily operations. Each computer at Liberty Mutual has a standardized image that has all the basic tools need by any user. For each additional task that needs to be performed by the individual they need to install the software that is “advertised” to them. Each desktop is a locked down device which has no ability to install any programs unless the software is QA certified. This process helps to limit any virus attacks or the risk of getting hacked. The QA process makes sure each new application goes through rigorous testing to make sure it does not alter the standardized image or makes the computer vulnerable to any outside attacks. When a new application is introduced in the environment there are basic “getting started” user guides that are written which would help the user.
Whenever a user needed help with any issues either related to a business application or any computer related issues they had to call the help desk. The level one help desk would follow the scripts that were written and try to resolve the issue. If they could not resolve the issue it would then get escalated two level two help desk. Level one help desk calls were outsourced to an outside company. Level two help desk comprised to technicians that were located in Liberty Mutual. That was not the only difference, level one help desk were not very familiar with the liberty mutual environment and the standard image. They had very basic knowledge of the business application mainly limited the scripted support. This lack of knowledge frustrated a lots of users, many time they would call the help desk only find themselves at the same sport they started or some times even worse. Also since the techs were not an employee of Liberty Mutual, no admin access was provided to them. There was a new name given to the help desk “The Helpless Desk”. Users were always looking for alternate means of support. Many times instead of calling the level one help desk would directly contact level two and this information was passed around in the colleagues.
This was obviously an issue; more time was spent getting an issue resolved. There were more resources that needed to be allocated to get the issue resolved. The cost per issue resolved was higher as the eventual solution was provided by an in house level two tech. The employees were loosing faith in the help desk. The management was worried as the ROI on the help desk was not as expected. More importantly, the time spent without the application functioning properly was directly affecting the business. The two entities instead of working as one functioned as separate and neither could utilize each other. This needed to be fixed.
At this point the decision to outsource the help desk was questioned by the new management. After careful analysis it was decided to bring the level one help desk In-house as well. As a part of the decision there were several things that changed along with the basic structure. The two level splits were still in place however more level one technician were used. The key problem: communication was solved as soon as the techs were brought In-house. The techs knew and were familiar with the functionality of many business applications and the standardized environment. Admin access was granted to the level one help desk. Many technicians were educated whenever a new application was released in the environment; this was not possible when the help desk was outsourced. More scripts were written identifying any new issues by the level one help desk. In the past since they were not part of the organization, no initiation of improving scripts was adapted. The results were positive and once again it was identified as “help desk”.
Dell Inc. was of the pioneers to tap into cross border outsourcing. Dell did its research and found that labor and land were very cheap in the South Asian market. Many people spoke English as a language of communication and thus that was not seen as one of the obstacles during the process of outsourcing. Dell looked at cheaper operating costs, round the clock support and increasing profits as the key factors to make the decision. Dell expected to cash in on this opportunity but the opposite happened. Dell’s primary business is customer service and their customer service ratio dropped down to 74, which is low compared to their competitors. One of the key failures was the language barrier that they thought would not affect as much. They also spent a lot or resources in training and educating their customer service representatives.
This is not a problem of one or two organizations. Many organizations in the hope of reducing costs forget to factor in many unforeseen obstacles. Employees are one of the few who are directly affected by it. Many times when outsourcing services organizations forget to factor in relationships that are destroyed. Also sometimes organizations forget to factor regional obstacles. When considering the costs mainly labor or asset costs are factored in, however sometimes there are more regional costs needed to run business. Time and money needs to be spent adequately in order to train and educate the vendor about the service they will be offering. Many problems could arise if your vendor cannot communicate effectively to your clients. The difference of cultures also plays an important role in unsuccessful outsourcing. Other risks, such as protecting your assets against local nuisance, your own employees and the service that you are involved in etc. You could spend a lot more if you do not have a plan of action.
So in conclusion outsourcing could help your organization or hurt it, it all depends on how you are utilizing it. You should not be doing it just because everyone else is doing it and they are succeeding at it. There are risks that need to be assessed and there are precautionary steps that need to be taken. If not followed correctly you could end up on the side of the fence you did not expect to be on first place.
Bibliography
Seven Myths About Outsourcing, Phanish Puranam and Kannan Srikanth, The Wall Street Journal, June 16, 2007.
Tenth circle added to ‘Dell Hell’, http://digitaldaily.allthingsd.com/20070814/american-customer-satisfaction-index
