Is Outsourcing Dying Or Thriving? (Part 4)

By guest author Tony Scott

The Double-Edged Sword: The Flat World

A few years ago Thomas Friedman’s “The World Is Flat” became a global best seller. One of that book’s key areas of focus was examining the immense change that lower-cost, effective global communications was causing by enabling back-office call centers and IT support work to be provided in lower-cost labor environments, particularly India.

It is clear that India has benefited immensely from this movement over the past ten years. Numerous companies (both Indian and non-Indian) set up call centers and support operations in India to take advantage of the significant labor differential between U.S. skilled labor and its equivalent in India. With wage rates on the subcontinent being one-fourth to one-fifth of those in the United States, companies simply could not ignore the potential impact on their bottom line.

The call centers and IT support centers were set up very much like those in the United States: a central building or group of buildings that housed hundreds or thousands of workers, densely packed like a beehive. The workers have calls routed to them by expensive automatic call routing equipment and work on desktop clients connected to servers running sophisticated software to track and manage the incoming calls so as to maximize efficiency.

This model had worked for well over twenty years in the United States for outsourced call centers – all India was doing was replicating the model and providing a lower cost labor component. And in India, it perhaps made even more sense to try to consolidate the call center operations rather than disperse with somewhat smaller units in multiple locales. After all, traditional switched telephone lines were expensive and difficult to bring on line. The equipment and systems needed to operate a call center were also expensive and required sophisticated support. Having fewer large locations also made managing the utilization of the workforce somewhat simpler.

Add to that the need for a constant supply of power to insure the call center never “went down” meant that companies often had to build their own electrical power generation source for their centers – or pay to have the infrastructure built to bring utilities to their centers. Of course, it is usually much more efficient to build or bring power to a single large locale than multiple smaller ones.

Then the great boom in telecommunications started to kick in. Telephony over the Internet (Voice Over Internet Protocol, or VOIP) became more and more common and of higher quality. And as more undersea telephone cables came on line, the cost of making or receiving a phone call dropped dramatically.

At the same time, Indian wages increased and it became increasingly difficult for latecomers to the Indian outsourcing game to attract and keep skilled workers. Companies started to seriously evaluate locales other than India as options because of the wage rates, difficulties in attracting and retaining talent, and complications in managing operations that were halfway around the world and in completely opposite time zones.

The main variable component for a call center is labor cost, which has led the companies providing outsourced call center operations to continuously chase the next low labor-cost countries to put in new operations and/or move existing operations. In the early 2000s the Philippines began to emerge as a favored alternative for call center operations. In addition, locales in the Caribbean and Latin America sprung up for call centers serving North American clients, and a number of Eastern European and North African countries saw the build-out of call centers serving European clients.

All of the call centers in the “new” locations still followed essentially the same model: big buildings with big telecom pipes coming in to them; and hundreds or thousands of workers being fed call after call automatically by sophisticated systems. As noted before, those centralized call-centers require a not-insignificant capital investment to build and equip.

Let’s say a company followed the trend of seeking out the lowest labor costs and built a call center in Timbuktu to take advantage of newest lowest labor rates in the world. But, after it was built and staffed, there wasn’t enough volume business to turn a profit, or the utilization of the agents was too difficult to manage to control costs?

Workers, of course, want to work on known schedules and be paid for the hours that they are at the job, regardless of whether they are busy. Call center operators must keep their workforce as close to 100% utilization as possible – every minute a call center agent is not on the phone is a pure cost.

That puts huge pressure on outsourced call center operators that are proving nothing more than labor arbitrage. That pressure encourages off-shore call center operators to lower pricing as long as they are covering their fixed costs when times are difficult. Of course, the customers and potential customers of outsourced offshore call centers aren’t ignorant of this trend and are happy to take advantage of it – thus creating a vicious cycle in pricing and margins for services that have been outsourced purely or predominantly because of labor arbitrage.

The “flat world” of low-cost global communications has enabled and encouraged this trend of companies seeking to find ever lower-cost locales. But the evolution of the “flat world” now provides an interesting alternative model that can enable a mix of off-shore, near-shore, traditional large centralized call centers, dispersed smaller centers, and even completely virtual call centers with agents working from home.

In the next segment of this series I will share the results of my interview with the senior management team of a U.S.-based outsourced call center services provider that is increasingly moving to a virtual call center model staffed with home-based agents. You’ll read how their model helps them to attract and keep great talent at a lower cost; manage utilization more effectively; and cut capital expenditures – all while maintaining or increasing customer satisfaction.

Their model has already begun to prove its potential to lower costs for domestically provided call center services, further reducing the already diminishing labor rate differential between U.S. on-shore and off-shore – giving these call centers a huge advantage over many of their domestic competitors. But as you might imagine, this model also has the potential to massively disrupt the traditional “brick and mortar, hub and spoke” call center model used by outsourcers around the world.

This segment is part 4 in the series : Is Outsourcing Dying Or Thriving?
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