Despite initial expectations, outsourcing has not fully delivered on its promise. Sending the customer service function out of state or offshore was supposed to reduce costs without impacting service quality. Unfortunately, dissatisfaction and attrition have proven otherwise.

According to one study, 95% of the Fortune 1000 rushed to implement an offshore strategy, lured by huge labor cost savings and skilled workers. Unfortunately, less than 50% of companies surveyed have saved money. This is not surprising, given that as little as a 1% increase in customer churn can reduce savings by as much as 50%. Improvements in service quality have also been elusive. As the well-publicized failures of Dell and Lehman Brothers demonstrate, delegating your customer service to others creates a "feedback gap" that may defeat the purpose of outsourcing.

To be effective, you must proactively manage outsourcing relationshipsâ€"whether your provider is located 10 states or 10,000 miles away. Winning at outsourcing requires the right combination of executive mindset, technology and business processes. It also demands that enterprises and their outsourcing partners focus on eliminating the feedback gap.

What is the Feedback Gap?
On the whole, companies have learned that standard arm's length approaches to managing outsourced operations distance them from their customers and lessen their ability to address quality issues and dissatisfaction.

Where customer service is in sourced, informal communication among sales and marketing, back office and call center operations makes it easier to pinpoint and solve the problems created by, for example, a new marketing initiative or billing policy that is driving an increase in call volumes. Although informal systems often surface only the most critical issues, these systems, coupled with an operational performance management solution, enable companies to continuously improve quality and satisfaction levels.

In a typical outsourcing scenario, informal systems do not exist, and often there is an insurmountable communication barrier between marketing, back office and call center. This makes it significantly more difficult to quickly identify problems and apply the fixes that maintain satisfaction levels. Moreover, if a formal feedback system is in place, too often it focuses solely on efficiency metrics and ignores the quality and satisfaction measures required to ensure that hard cost savings are not eviscerated by increased churn. A typical example is the peculiar evaluation metric that says the more calls an agent handles, the better the agent.

A Typical (Incomplete) Business Case
A telecommunications company has 8 million customers. Its call center gets a total of 20 million customer service calls a year. In sourcing costs $4.50 a call. Outsourcing costs $2.25, or a 50% saving. The company expects to save $45 million annually on outsourcing customer service.

At year's end, the company has saved $45 million, but only improved its bottom line by $25 million because of a decrease in revenue due to customer churn. Its churn rate has risen only one percent from 20 to 21%, and it has lost 80,000 customers. A one percent increase in churn seems small, yet it can reduce cost savings benefits by 50 percentâ€"and moreâ€"if high-value customers decamp.

This scenario occurs too frequently, because companies assume they will continue to straight line their customer base and retention rates and do not build their business cases carefully. Ultimately, the economics of outsourcing depend on a negligible increase in churn, otherwise a company shifts costs from service operations to marketing as it attempts to replace the customers it has lost.

Quality Matters Most
Your customers are where it all starts, and they value more than short call queues. An Accenture survey reports that 75% of respondents were frustrated by repeating problems to multiple agents, while 69% were irritated by talking to agents who could not solve a problem.

Companies must look beyond traditional performance metrics. They must focus on enabling outsourcers to deliver high quality customer service and on continuing to learn from customer feedback.

Best Practices
Extracting the full value from your investment in outsourcing has five key components.

Integrate and Analyze Full Customer Experience Data
Outsourcers see customer interactions as discrete events to be handled as efficiently as possible. The enterprise that "owns" the customer, however, sees them as part of an ongoing relationship over time and across communication channels. Meshing these complementary views means tightly integrating data from contact and back office repositories and analyzing it against appropriate metrics, such as first contact resolution, contacts per account event and customer satisfaction. The right solution can pull together data from front-office, back-office and survey systems, essentially removing the walls around these silos. The right solution makes it easier to accurately assess outsourcer performance and develop more effective service strategies. For example, a telecommunications company can use information from its operational performance management application to determine that a billing error has caused a huge increase in call center traffic and dissatisfaction. Addressing the problem quickly reduces call volumeâ€"a strategy known as Call Avoidanceâ€"and increases customer satisfaction and loyalty.

Set the Right Expectations, Create the Right Incentives
You must set goals and incentives for outsourcer performance that balance quality and efficiency metrics. Financial incentives go a long way toward ensuring that service quality becomes as important as number of calls handled and speed.

Respond Rapidly
Lost time means lost customers. The owner of the customer relationship is responsible for evaluating outsourcer performance, identifying problems and taking specific corrective actionâ€"whether it is implementing new policies, beefing up training or enhancing the online knowledge base.

No business system is or will ever be perfect. Rapid problem detection is vital, because it not only ensures continuous performance improvement but also prevents crises. Structured analysis should quickly identify any service problems, allowing your management team and the outsourcer to resolve them fast.

Make Changes Systematically
Properly integrated and analyzed data gives companies the information to systematically eliminate root causes, improve agent training and proactively communicate with customers and agents. It also helps in determining where responsibilities lie and in improving communication channels.

Create Real Partnerships
Bottom line: Arm's length outsourcer relationships do not work. Driva Solutions' Bill Price notes that companies who succeed at outsourcing invest significant resources in developing those relationships. A company with a particularly complex product might, for example, send customer service managers to the outsourcer's facility to provide on-the-job training and learn first-hand the issues agents are encountering. Though this decision adds to up-front costs, it will likely save time and money going forward.

Winning at Outsourcing
The pitfalls associated with outsourcing are clear. The fact that a 5% increase in churn can turn your offshore call center into a breakeven proposition is a powerful lesson learned. Still, the potential for savings is too great for companies with a significant customer service operation to ignore.

You can succeed at outsourcing, but, as with so many situations in business, success requires clear goals and the appropriate people, processes, and technology. The management team must be fully committed to making outsourcing work for long-term gain and not just for short-term cost reduction. Management controls and systems must focus not only on monitoring metrics but also on closing the feedback gap to improve the customer experience. And the performance management technology must provide a comprehensive understanding of cost, quality and churn to ensure that outsourcing's anticipated cost savings are not lost.


Ron Hildebrandt is co-founder and president of Enkata.