Share this content
MyCustomer.com

The Outsourcing and Insourcing Conundrum

by
19th Jul 2004
Share this content

One question has to be asked before getting down to the nitty-gritty of outsourcing: why? The main driver for outsourcing everything from software development to call and contact centre operations is perceived to reduce costs. Theinquirer.net argues in “The real cost of offshore outsourcing”, published in December 2003, that the common assumption that you will save 10-20% on IT salaries (compared with hiring IT professionals in the USA and Europe) is to a certain extent unfounded.

The article says that those who’ve tried have discovered that savings rarely, in actuality, reach 30% and they fall well below expectations. Why is this? They appear to have discovered a number of hidden costs to outsourcing offshore; ones that most of us perhaps won’t see reported in the most of the press. Some Scottish academics also believe that the trends for outsourcing call centres may not always go India’s way. For more information, please read: Call centre passage to India not inevitable, say Scottish academics.

“From the beginning”, Euromole writes with regards to specifying a project, “the move to offshore outsourcing will incur a number of costs. The effort to prepare a project specification is not trivial by any means because the documentation must be sufficiently detailed for the outsourcing provider to clearly understand the requirements.” Please also see: Outsourcing Your Contact Centre - Reaping the Benefits, Reducing the Risk by Verint.

The detail required, according to theinquirer.net, will have to consider:

  • How the software will interface with other software;
  • How it will be integrated or interfaced with existing file or database structures;
  • And the potential lost opportunities of not undertaking far more productive types of work using your existing staff versus the additional IT professionals required to undertake this work.

Other potential areas, which one might consider as areas where costs can be reduced by outsourcing, are also highlighted. These include:

  • The time and costs it takes to evaluate and find potential outsource partners. A report published by theinquirer.net suggests that such a project could take up to 500 hours to complete, costing an extra $20,000 on top of the existing salaries for CIOs and for three other managers who also worked on the project.
  • There will be travel costs, because you will want to visit your potential partners as part of the evaluation process, and as a means of managing the project as it progresses.
  • There will be costs involved, even with regards to call and contact centre staff, with the training of your outsource partners personnel and in some circumstances you may need to help your partner to recruit new staff to work on your project.
  • The outsource partner/vendor may have a number of hidden costs, and so it is vital that you clarify what these costs are before signing a contract to outsource any of your operations.
  • You should expect the costs of communicating directly or indirectly with your outsourcer to be potential quite high.
  • Expect there to be costs in establishing quality control regimes and there will be costs associated with testing your product or service.
  • The costs of the project failing can be quite high, and there are risks involved whether or not you are outsourcing near shore or far shore. These risks may also include the politics of the country or organisation of the market you’ve selected to outsource to, and you must consider its infrastructure. Developing nations don’t necessarily have it in place yet, whether we’re talking about effective roads or IT systems.
  • You may even have to pay your in-house staff, those you might be making redundant as a result of outsourcing your projects, a tidy sum. Meanwhile, you could damage the morale of those who remain working in-house for you. The savings in making them redundant may not be real, because you could end up giving that money to your outsource partner.
  • It will be more difficult to manage the project, and time delays may incur costs, and there needs to be some agreement over priorities. A tight and clear Service Level Agreement is a must.
  • IT is, as the article suggests, the lifeblood of any modern company or organisation and so security is essential (and this may include the control of intellectual property in markets where piracy is abundant).

By not outsourcing you benefit from maintaining more control over your project management. When you see six people riding a small motorbike, the way they drive and other things they do in India is becomes clear that safety is not paramount in the minds of most of its citizens. Quality for me was another concern during my trip with the British Institute of Technology and E-commerce in December 2003. That said, there is a well-qualified workforce and there’s a lot of investment going in places like Nagpur – which is creating a technology park – and particularly Bangalore where work is constantly underway to improve the local infrastructure to attract foreign investors. Delhi by comparison is not so attractive a prospect, even though a number of foreign companies have outsourced their call centres there.

Martin Roberts, Vice President of Marketing and Business Development EMEA at NICE Systems says, "Whatever route is chosen, companies need a mechanism to monitor and measure the quality of service being offered", about the choice to insource or outsource. While Jon Earith, chief technology officer at MBT feels that the success of an outsourced project depends on your ability to listen to your customers and put them first, he says:

“Maintaining a strong emphasis on the customer needs helps to drive the project through its complete lifecycle. This extends from concept, initial testing, strategic consultancy and solutions delivery right through to the potential provision of additional components. “

Itoutsourcingindia.com provides some impartial information about the risks and opportunities involved with outsourcing to India, for example it covers:

  • How to get the contract started;
  • Advice about intellectual property ownership;
  • Licensing and third party suppliers;
  • SLA and management;
  • System requirements and specifications;
  • Insurance and warranties.

“India is turning itself into a dominant force in global business outsourcing”, claims the site, “as far as software development is concerned. With nearly one billion inhabitants, India already lays claim to producing an impressive 30% of the world’s IT professionals and to generating more than $6 billion (£4.2 bn) in software exports in 2002-2003. More so are the powers of business outsourcing.” Please also see: The Indian CRM Market by Sandeep Mittal, Amit Sharma, Praveen Wicliff.

The growth of the Internet and India’s large mobile population provides a huge market, not just for outsourcing products but also for selling your products and services locally. The country has adopted a more liberal regime to attract foreign investment too, and this started – to a certain extent – the popular drive to outsource projects and operations to the sub-continent. Like the Irish government, the Indian administration is providing a number of financial incentives for either setting up an office there or for working in partnership with an Indian company. Normally, under the current visa regime, as a foreign enterprise you are expected to establish mutual agreements to take advantage of much of what is on offer.

Ireland by comparison to India could prove a more attractive prospect. It is nearer to us, easier to get to, attention to quality is potentially more important (even though many companies have addressed quality control issues in India by putting various measure in place), corporation tax breaks are available of up to 12.5%, and the Irish have a number of language skills (and are more likely to speak a high level of English). Other benefits of near shore outsourcing to markets like Eire include:

  • It's flexibility and adaptability,
  • A non-unionised IT industry,
  • Competitive salary scales,
  • It is said to be cost competitive,
  • There’s much cultural and business practice familiarity between the UK and Ireland,
  • And there’s a better understanding of international intellectual property rights.

The country’s development agency, IDA Ireland, has developed its IT infrastructure at lighting speed over the last 11 years. The Irish government has invested over $5bn on it to attract foreign investment, and the Science Foundation of Ireland has been allocated 650 billion euros, aimed at developing the country’s IT industry. Ireland, it claimed, is the largest exporter of software in the world.

Dublin is the epicentre of IT outsourcing in Ireland, and indeed of the country’s IT industry as a whole. Shane Nolan, Development Executive at IDA Ireland says that there is over 600,000 square feet of co-location and hosting space available in the city. With unemployment rates at around 4%, it is also easy to find new and well qualified staff and the majority of the those between 18-28 will have been to university. More specifically, the University of Limerick produces 1500 IT students per year.

Roberts says, talking about the contact centre sector, you must put the quality angle into context: "The contact centre sector is a good example of an industry affected by insourcing versus outsourcing issues. All parties are looking at ways to differentiate themselves, to prove that their service is the right option. To do this they need to demonstrate that the systems and solutions are in place, constantly monitoring the quality of services being offered.”

So how do contact centres measure quality? They use interaction management and analysis software to allow the “capture the of the vital information being traded daily between agents”, reveals Roberts, “and customers. By turning soft data into hard information, companies can ensure they deliver quality on two levels: a professional service and a service that responds directly to the needs of the customers."

Outsourcing makes commonsense when you are unable to buy in the resources, or use your existing infrastructure to deliver to the customer, but it doesn’t if the sole driver is one that negates the customer. As a result the call centre debate about whether it is better to localise customer service will continue. It perhaps makes more sense to outsource IT projects, providing you have the right pool of graduates and quality control systems in place. Lastly, one Indian academic commented to me that while India is able to profit from the current outsourcing bandwagon, he expects - referring to the nature of economic cycles - much of what has left UK, US and European shores may in fact return and maybe Indian companies could be the ones outsourcing projects offshore to US and European markets. Time will tell!

Don't lurk.... we welcome your comments. Make them below or email me at [email protected]

By Graham Jarvis
[email protected]
15th July 2004

Recommended Further Reading

  1. SMEs: A Step Towards Profit - Interview with Gerry Brierley, UK4M - chargeable
  2. The Status of Customer Relationship Management in India: Findings of a Survey in Service Firms - Dr G. Shainesh, Ramneesh Mohan - free
  3. Call Centre Migration - New Technology will keep Multimedia Contact Centres in the UK - Dr Mike Thomas - free
  4. Call centre passage to India not inevitable, say Scottish academics - free
  5. Outsourcing Your Contact Centre - Reaping the Benefits, Reducing the Risk - Verint - free
  6. Approaching the Indian Outsourcing Market - free
  7. Offshore Outsourcing - Brian Huff - chargeable
  8. Successful IT Outsourcing - Strategies, Tactics and Management Approaches - Gartner Research - chargeable
  9. The Indian CRM Market - Sandeep Mittal, Amit Sharma, Praveen Wicliff - free
  10. Asia-Pacific mCRM markets - Datamonitor - chargeable
  11. Profit Or Pain From Your User Experience: Benefits & ROI - Hewson Group - chargeable
  12. ASC to Partner With iCOPE For Providing Solutions to Indian Contact Centres - free

Replies (2)

Please login or register to join the discussion.

avatar
By servitor
30th Jul 2004 08:29

The outsourcing wave creates great debate and hype because a 100 high street urban jobs LOST attract more socio-eco-political attention than when a manufacturing plant with a 1000 workers closes down in a remote location.
In the past few decades of globalization manufacturing cost differentials of 15 to 20% have provided sufficient motivation to move production offshore. In services the salary differentials are in multiples of 4 and above, and are difficult to equalize merely through efficiency and re-engineering. This is irreversible if evaluated on paper. Practically however
the future cannot be good for outsourcing to offshore contractors, and that will not grow as fast as before.The reasons will not be economics. Political and social pressure plus the REAL cost of management will reduce the economic sense that seems to be clear today. IF manufacturing tariffs have resulted in trade wars despite WTO, tariffs or taxes on MANHOURS used are just a few years away. developing economies will have to TAX manhours consumed and to be declared within the balance sheet like any other raw material and resource.
Outsourcing will therefore remain sustainable perhaps only for transnationals who will outsource INHOUSE but offshore within their own global operations. This they have been doing anyway for decades for manufacturing.
But one could forecast that outsourcing will gradually reduce for pure contractors because
a) Consumers will start to differentiate "offshore CRM versus at home CRM in socio-economic terms, including brand valuations". The customer will need to see a clear and real savings for them from the outsource(job loss to an unequal environment cannot be justified if the savings are just for the orporate).
b)With increase in web services and levels of transparency through CRM the reasons for a customer to CONTACT will become too valuable in economic terms to outsource. Every call will become an IPR too valuable to outsource.
c) The data required to effectively service and satisfy a customer will require corporates to delve deeper and deeper into the data servers. This cannot be done or permitted for a contractor, and there has to be some legal issue that prevents this data from being accessible to an outsider outside the home country!!
While there is a huge hue and cry when LOW end jobs are being transferred to India the MOST SERIOUS LOSS to the developing world is when leading IPR owners are setting up of offshore R&D centres. This is a greater loss to the developed economies than the outsourcing of low end jobs, BUT very few protests are heard about these development centres. The governments need to provide huge incentives and protection to insure that these skills and IPR is not lost. BUT as an Indian one is not complaining.

Thanks (0)
avatar
By servitor
30th Jul 2004 08:29

The outsourcing wave creates great debate and hype because a 100 high street urban jobs LOST attract more socio-eco-political attention than when a manufacturing plant with a 1000 workers closes down in a remote location.
In the past few decades of globalization manufacturing cost differentials of 15 to 20% have provided sufficient motivation to move production offshore. In services the salary differentials are in multiples of 4 and above, and are difficult to equalize merely through efficiency and re-engineering. This is irreversible if evaluated on paper. Practically however
the future cannot be good for outsourcing to offshore contractors, and that will not grow as fast as before.The reasons will not be economics. Political and social pressure plus the REAL cost of management will reduce the economic sense that seems to be clear today. IF manufacturing tariffs have resulted in trade wars despite WTO, tariffs or taxes on MANHOURS used are just a few years away. developing economies will have to TAX manhours consumed and to be declared within the balance sheet like any other raw material and resource.
Outsourcing will therefore remain sustainable perhaps only for transnationals who will outsource INHOUSE but offshore within their own global operations. This they have been doing anyway for decades for manufacturing.
But one could forecast that outsourcing will gradually reduce for pure contractors because
a) Consumers will start to differentiate "offshore CRM versus at home CRM in socio-economic terms, including brand valuations". The customer will need to see a clear and real savings for them from the outsource(job loss to an unequal environment cannot be justified if the savings are just for the orporate).
b)With increase in web services and levels of transparency through CRM the reasons for a customer to CONTACT will become too valuable in economic terms to outsource. Every call will become an IPR too valuable to outsource.
c) The data required to effectively service and satisfy a customer will require corporates to delve deeper and deeper into the data servers. This cannot be done or permitted for a contractor, and there has to be some legal issue that prevents this data from being accessible to an outsider outside the home country!!
While there is a huge hue and cry when LOW end jobs are being transferred to India the MOST SERIOUS LOSS to the developing world is when leading IPR owners are setting up of offshore R&D centres. This is a greater loss to the developed economies than the outsourcing of low end jobs, BUT very few protests are heard about these development centres. The governments need to provide huge incentives and protection to insure that these skills and IPR is not lost. BUT as an Indian one is not complaining.

Thanks (0)