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The Lure of Offshore

Monday, April 05, 2004

The Lure of Offshore
Offshoring is worth doing correctly because it taps into qualified low-cost labor. Here's what you can learn from the experience of others.

Kiplinger

Step back from news coverage of American firms "exporting their jobs." Mute the din of election year promises to stop the "shipment" of US employment "offshore."

Now take a hard look at offshoring: locating call centers or outsourcing programs handled in low-developing countries and regions like India, the Philippines, Africa, Eastern Europe, the Caribbean, Mexico and most of Central America.

Offshoring saves call centers 20% to 50% on operating costs and often - but not always - improves service.

Geri Gantman, senior partner, R.H. Oetting (River Edge, NJ), says that Wall Street demands companies shift labor off their books. That also means off the shores if it improves financial results.

Expect offshoring to grow as the US economy bounces back, due in part to the rising value of the American dollar against other currencies, and in part to rising costs and a tighter labor supply.

Dennis Smith, president of PacTac Advisors (New York, NY), predicts the economic arguments will wear down political and public relations resistance, just as the cost case for offshoring manufacturing did two decades ago.

"When companies shrink their labor forces they are reluctant to offshore because it lowers morale and it doesn't look good," says Smith. "But as companies add staff those job loss concerns go away or are minimized."

Offshoring Issues

The chief issue impacting offshoring is poor cultural affinity between offshore agents and American customers, which risks customer satisfaction and retention problems.

Dell's recent withdrawal of high-end support from India has been cited as evidence of this.

No matter how well trained a foreign agent is and how often they watch American media outlets like CNN, they don't know what it's like to live in America.

With offshoring becoming a political issue there is legislation in place and more in the works that could affect call centers if expanded.

For example, WashingtonTechnology.com reports that the Thomas-Voinovich amendment to the federal budget, which President Bush signed on January 23, 2004, prevents offshoring of new federal contracts.

Offshoring magnifies the issues involved with site selection and outsourcing. Assessing, choosing and managing locations, property, vendors and people is much more difficult when they are based in foreign countries that have unique cultures, laws, practices and languages.

There are the long flights and travel hassles in "far-offshoring," like to India. If there is a problem with a call center in Mumbai, and it needs face time to solve, going there is much more involved than if it happened in Moncton, Canada or Mobile, Alabama.

Offshore developing nations tend to have poorer infrastructure, be more bureaucratic and corrupt and are usually more politically unstable than developed foreign nations.

There are security risks facing offshore US call center managers and trainers, in-house and outsourced programs alike. Many offshore nations are not safe. Americans can become crime targets.

You also run data security risks when offshoring. US laws such as HIPAA require that you safeguard American data no matter where it's handled. That also affects your third-party vendors, for which you are responsible.

But it is more difficult to protect data if it leaves the country, especially to a developing offshore nation, which may not have the same safeguards or enforce them as readily as in the US.

Martin Conboy, CEO of callcentres.net (North Sydney, Australia), is picking up anecdotal evidence that some Asian call center staff are being coerced by organized crime and industrial spies to hack into the foreign firms' computer systems.

"But that can happen anywhere," he says. "That includes one's home country. It is just another issue that organizations need to be aware of in their risk balancing analysis when considering offshoring."

Offshore Turnover

There are growing turnover and wage escalations offshore that threaten to make them less competitive. A recent NASSCOM report sets Indian turnover at 52%. The Philippines risks becoming saturated with call centers.

However, Bryan Mekechuk, partner, Pacific Crest Consulting Group (Saratoga, CA), who wrote a report on Indian business processing outsourcing published by the Zelos Group (San Francisco, CA), thinks the issue is overrated and not well understood.

The turnover rates are acceptable for a country and labor market the size of countries like India. There is also no shortage of potential call center labor for the next three or five years.

Most Indian call centers do not know how to manage a certain level of turnover, he points out. Only the savviest call centers understand the total cost of labor and manage their turnover appropriately to keep their cost structures tight.

"People who complain that Indian call center turnover is too high do not understand turnover and call centers," says Mekechuk. "Turnover is part of a call center wherever it is located. Recruiting, hiring and training never stops in call centers."

Yet there are special and more prominent conditions, especially in Indian call centers, that are pushing up offshore turnover and crimping recruiting.

Suresh Gupta, managing partner with The Paaras Group (West Harrison, NY), explains that most US-serving Indian agents work graveyard shifts. This is because when it is 3:45 pm in New York and 12:45 pm in Los Angeles, it is 2:15 am the next day in New Delhi.

But those hours discourage women from working in call centers, inhibit social life and cause family and relationship tensions, he says.

Also, Indian agents are becoming discouraged when discovering little advancement or career growth in call centers. Only one in eight agents can hope to move up the ladder. Most Indian agents are college-educated, ambitious 20-somethings who were lured to call centers by high salaries.

These two factors have combined to knock down call centers from their status as quality jobs. Status is very important in India.

"It used to be that people were proud to say they worked in a call center," says Gupta. "Now they say they don't do 'call center work' but instead they do 'business process or IT outsourcing work.'"

Mistakes to Avoid

YJust as poor application, implementation and management have too frequently given call centers, outsourcing and CRM bad raps, similar errors made in offshoring have done likewise to that strategy.

These mistakes include jumping into high-end support and outsourcing without gaining experience at the low end and in outsourcing domestically.

Geri Gantman points to Lehman Brothers, which pulled back its outsourced internal help desk from India.

"Lehman underestimated the complexity of internal help desk calls, and the training and process documentation involved," says Gantman.

Gupta explains it takes several years to fully understand another nation, especially one that is as culturally complex as India.

He blames part of the well-publicized poor service on poor quality outsourcers and on US clients that willingly contract with the lowest-priced vendors - without performing adequate due diligence.

"Just as you outsource in the US, you must invest in evaluating prospective vendors' experience, capabilities and customer feedback," Gupta points out. "It's doubly important in India since the call center market is immature, fragmented and full of inexperienced vendors expecting to make a quick buck."

Is Offshoring Worth It?

Put these trends together and you may ask: is offshoring worth the hassle? Aren't we better off paying the higher cost to have customer contacts handled in the US, or Canada instead?

King White, senior vice president, Trammell Crow (Dallas, TX), says his clients are increasingly asking themselves those questions. Many of the projects set up in India were pilots and many of these are coming back to the US unsuccessful.

"The low-end, back office data entry, e-mail and chat will stay in India with many higher end voice services coming back to North America," predicts White. "The Philippines will be more successful than India in retaining voice services because American English is spoken there, but only if the saturation can be managed."

Some consultants recommend thinking out-of-the-box on call center labor. Paul Stockford, founder of Saddletree Research (Scottsdale, AZ), suggests locating on American Indian reservations, specifically the Navaho Nation.

Jack Heacock of Jack Heacock and Associates (Parker, CO) advises teleworking to eliminate facilities costs, raise productivity and tap into new labor supplies (more about this in next month's Teleworking article).

John Boyd, president, The Boyd Company (Princeton, NJ), sees more of his clients, especially financial services firms, asking him for guidance on offshoring.

They have seen their competitors and peers dramatically lower their costs. But they are also aware of the customer satisfaction problems and opposition to offshoring.

"The difficulty lies in quantifying and tracking the customer satisfaction issues to analyze their impacts on revenues and profits," Boyd explains.

Do It, But Do It Smartly

Offshoring is not for every call center or program. Organizations that are leery about cultural affinity, consumer and political backlash and that do not want to put considerable effort into starting and maintaining such projects or partners should not do it.

Oetting's Gantman points out that it isn't so much the offshore outsourcing program type but rather the client that drives whether offshoring will be successful.

Users who are highly experienced in outsourcing and have established infrastructures for managing outsourcers are much more likely to consider going offshore.

"A client who desires close ongoing and often on-site participation with their outsourcers will be better served staying in the US," recommends Gantman. "Unless their programs are large enough to support this kind of on-site presence or they have management in the offshore location."

Gupta recommends against offshoring highly sensitive work, such as serving high-end customers. Companies can't afford to lose top-quality customers through any misunderstandings.

You should only look at having your high-level work offshored when you have gained several years' experience outsourcing and offshoring less-sensitive work and have a sufficient business case for doing so.

A 2003 NASSCOM/Evalueserve report says it costs an average 18% more to manage projects offshore than onshore, no matter the size. The lower the volume, the more the impact of the additional management costs.

"There is no compelling reason to move your higher-grade work offshore," says Gupta. "There is not the same cost savings as there is with high-volume commodity calls. Also the expenses are higher because you need to spend more money selecting the very best agents and training them more rigorously."

To make offshoring work there must be internal cooperation from all levels of management, says Gantman. You must have your staff members on the project, including overseas at those centers, in setup and ongoing.

"You can't 'fire-and-forget': turn over a program to an offshore vendor and walk away," says Gantman. "Solving problems become harder if the call center is 3,000 miles away or more."

Near-Shore Alternatives

One route around the offshore obstacles is nearshoring to developed or nearby developing countries.

John Boyd sees growing interest by in-house call centers in nearshore locations. He cites Canada, Northern Ireland, Australia, New Zealand, Argentina, Chile, Costa Rica, Mexico and Spain for the US Spanish-speaking market.

"These countries are well-positioned to benefit from the growing corporate concerns of quality customer service, political stability and security," explains Boyd. "They also have sizeable domestic markets or access to regional markets that justify having centers there."

The downside with nearshoring is that the cost advantages are smaller: typically, 8%-15%, compared with 30% or more with offshoring.

With the US dollar declining in value against other currencies and with turnover and costs starting to climb in many of these nearshore locales, their appeal is at risk.

Australia and New Zealand, for example, have little value proposition for US contacts, says White. Both countries also suffer from long travel times. Instead, consider Australia as a base to serve the Asian market.

There is more of a nearshoring business case with Northern Ireland. Larry Buchsbaum, marketing manager, Invest Northern Ireland (Boston, MA), says it is not competing against India for high-volume commodity-grade contacts.

Northern Ireland only has 1.7 million people. But it has a quality labor force, many of whom speak languages other than English, a large number of college graduates and single-digit turnover. Northern Ireland is also becoming more politically stable.

Northern Ireland's niche is high-end/high-touch call centers, such as business-to-business and tech support, enabling companies to serve their UK, other European and American customers.

The dropping US dollar has caused Canada to lose much of its competitiveness, in the short-term. The Canadian dollar's comparative worth has risen by 17% over the past year.

Even so, US-based site selectors and Canadian economic development agencies and consultants have not seen a letup in projects.

Susan Arledge, principal with Arledge Power Real Estate (Dallas, TX), says there is still sizable savings, especially when adding in Canada's provincially-run health care system that eliminates the need for employers to pay employees' medical costs.

"We're seeing an integration of Canadian and US locations, in the same matrix, instead of Canada being looked at separately, like India," she explains. "We're being asked to examine US and Canadian sites on average wages, unemployment, underemployment, saturation, facilities and incentives and cost of doing business."

The Sutherland Group (Rochester, NY) opened its first Canadian center in Sault Ste. Marie, Ontario in December 2003. It also opened a new 1,500-agent call center in Chennai, India.

New centers are in the works for JP Morgan Chase in Surrey; Telerx in Penticton, British Columbia; and Convergys (Cincinnati, OH) in Brandon, Manitoba and Cornwallis, Nova Scotia.

Frank McKenna is the former New Brunswick premier who is credited with starting the foreign-shoring revolution. In the late 1980s, his Liberal government identified call centers as a means to create jobs for the province's large numbers of well-educated but unemployed workers.

In partnership with NB Tel (now Aliant), the province started to attract American-serving as well as Canadian call centers to New Brunswick.

Since leaving office in 1995 McKenna, an attorney with McInnes Cooper (Moncton, NB, Canada), has worked on call center projects on behalf of clients such as Aliant and TeleTech.

"There has been a lot of talk about offshoring but it hasn't diminished the business coming into Canada, including New Brunswick," he says. "Instead, we are seeing higher-value outsourced projects, outsourcers and in-house call centers coming into Canada."

Making It Work

Offshoring's benefits are compelling enough, with the right program or project, to find ways of making it work.

To cope with cultural affinity, train offshore agents to listen and understand what callers are saying so they can empathize with their calls more, reports Mekechuk.

In the top firms, agents go through rigorous 80-hour accent neutralization and cultural training, including training agents to pronounce words differently, for American (or UK) ears. Trainees must pass these classes before they are qualified to answer calls on the call center floor.

Agents then take on easy-to-understand and pronounceable pseudonyms, to avoid raising any unnecessary questions that could lengthen calls.

But if you or your outsourcer's agents use pseudonyms, make sure they register them internally, as required by the Telemarketing Sales Rule. All US telemarketing rules apply offshore if the agents talk to Americans.

He advises against agents faking accents or locations, which some offshore call centers do.

"If the offshore agents come off as being fake, you violated callers' trusts," warns Mekechuk. "If that happens, you risk losing business and make it more difficult to continue or expand offshoring."

Mekechuk recommends that you or your offshore-outsourced partner take steps to protect privacy, in compliance with FSMA, HIPAA and other legislation.

Keep all data onshore: in a secure server such as a Citrix server, either for US or foreign-based outsourcers. That way agents only see what is on their screen; they cannot download any information. Also, deploy secure transmission means such as encryption through VPNs.

You should record and archive calls onshore. You and your outsource partners need to consider disabling removable storage media, such as disk drives and CD burners on PCs.

Further, don't allow people to take notes but if it is necessary as part of their jobs, provide shredders. Restrict access such as with turnstiles to prevent unauthorized visitors tailgating. Top-tier outsourcers take these measures but lower-tier firms may not.

"No firm should compromise security whether they outsource or locate offshore," stresses Mekechuk.

Tony Chase, CEO of ChaseCom (Houston, TX), says his firm has been operating in India for the past three years, partnering with an Indian outsourcer.

"We've managed to maintain tight control of projects by having our people conduct the training and front-line supervision of the agents assigned to his clients' projects," he says. "It's also possible for all client data to simultaneously reside in the US."

Agent Retention

To curb agent attrition offshore deploy many of the same techniques you would use in the US: effective screening, better amenities, and better career development prospects. But you should adapt these programs to fit local cultures.

During his recent visit to Bangalore, Gupta found that call centers are entering into mutual agreements not to hire applicants they had worked for at least 12 months in their old jobs.

Convergys has been tackling the night shift issue at its Indian call centers by recruiting specifically for the shift.

The outsourcer lets applicants know immediately the hours they are expected to work. It plays orientation videos and outlines the medical and social effects of working that shift.

The agents receive their initial training on the shift in which they will most likely be working. Supervisors are also trained to watch for signs of fatigue and to react to how the employees might be feeling adjusting to the job and to the change of hours.

Supervisors suggest eating healthy, balanced meals and maintaining a consistent sleep schedule including during the off-days to cope with the hours.

"If employees are not ready to work that shift and if they try to maintain the same kind of social life as when they worked or studied days, then they are going to find it difficult to adjust to the job," explains Dennis Ross, general manager, offshore operations.

Convergys also offers postings to daytime work, such as e-mail response and IVR response transcription. Much coveted by agents is live-call handling from 24x7 US operations and from the UK. Morning in Newcastle is afternoon in New Delhi.

Ross acknowledges that the limited advancement from call centers is an issue. Last year Convergys promoted agents into 180 supervisory/management openings in India. Among 7,000 employees, 2,000 applied.

"We carefully select and train supervisors and managers," says Ross. "We look for management skills such as previous management experience and strong interpersonal skills. The good news is that we are seeing very qualified applicants."

Blendshoring: Best Of All Worlds

Just as you've gotten used to the notion of offshoring, some are advocating a more conservative middle ground, called "blendshoring." This is a mix of onshore [US], nearshore and offshore locations that balances cultural affinity, disaster response, currency risks and labor costs and quality.

For example, with blendshoring if an earthquake hits your bureau's Indian call center, it can shift part of your program to South Africa with the rest to the US. Or if you needed more Spanish-speaking agents, you can ask your Mexican call center to add more workstations and direct more calls there.

The leading firms have centralized their switching and workforce management onshore to permit program shifting from one country to another. Bureaus offer blended prices based on the locations selected.

To assist clients in determining the best strategy - onshoring, offshoring or nearshoring and how best to implement them - outsourcer LiveBridge (Portland, OR) recently launched a professional services division.

The unit offers assistance examining operational efficiencies, technologies, vendor selection and management, site selection and design, facility management and technology hosting. It has already completed consulting, assessment and benchmarking projects.

ICT Group (Newtown Square, PA) deploys a blendshoring strategy. It has call centers in the US, Canada, Mexico, Barbados, the Philippines and soon India.

Duffy Campbell, ICT Group's executive vice president, global sales and marketing, says several clients have migrated work from North America to offshore locations.

Precision Response Corporation (PRC; Plantation, FL) keeps a percentage, determined jointly with the client of the offshore work onshore.

"We do that to provide a domestic benchmark for offshore and provide business continuity in case there are problems offshore," says Alicia Miyares, PRC's vice president of marketing.

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