Study reveals the financial impact of outsourcing

In the quest for profit and market share, businesses are confronted with myriad challenges, such as keeping up with rapid technological advances, deregulation, changes in consumer behavior, increasing costs and global considerations.

In their attempts to balance these demands, companies are seeking advantages wherever they can find them. The explosive growth of the teleservices industry provides evidence that many companies have found these advantages through outsourcing their call center functions. However, according to the results of our new study, Trends, Issues and Opportunities Driving the Teleservices Market, many more may be overlooking this solution.

While many companies have contracted with specialists outside their organization to manage much of their non-core business -- payroll, advertising, legal, staffing -- these same business leaders are often reluctant to outsource call center functions. Even though they are now realizing the benefits of prior outsourcing decisions, many stand idle wondering if outsourcing call center functions is a financially superior way to enhance organizational effectiveness. It is no wonder since, until recently, there has been a lack of information about the financial impact of outsourcing.

To address this issue and to provide an independent analysis of the findings, DGY Associates undertook a study, speaking with almost 25 percent of U.S. business leaders from the FORTUNE 1000, the results of which have been published in a 154-page study.

The statistics revealed in this firstever study allow us to gain a better understanding of how outsourcing affects financial indicators such as return to investors, growth, earning per share, stockholder's equity and market value. Current use of teleservices, perceptions of outsourcing call center functions, prior experiences with teleservice agencies and their future plans, if any, for contracting with an external source are also addressed, along with geographical differences.

The findings in this study were startling as to the consistencies between companies that have decided to outsource compared to those that have decided not to outsource.

Should You Outsource?

Ever since service agencies and teleservice providers entered the business scene, potential clients have wrestled with the question of whether or not a third party could manage personal contact with customers as well as, or better than, they can.

Their reluctance to embrace call center outsourcing functions is evidenced by the fact that there are relatively few companies that outsource call center functions in comparison to the number of companies in business today. Maintaining control over interactions with customers was both a vital and valid concern among all industries we surveyed.

However, we also found that once a company has had experience with an outsource partner, it is less likely to worry about control issues. Even exposure to service agencies increases the chances of a company outsourcing because it becomes more familiar with the concept of external centers. This is best illustrated by companies in the Midwest. Companies in this region are more likely to outsource than any other. Therefore, educating companies about the benefits of teleservices and outsourcing is imperative to the growth of the industry and the success of the business community.

This education process begins by answering such questions as: "We have an internal call center, why should we outsource?" "Will we get better results if we outsource?" "What should we outsource and what should we keep internal, if anything?" Or, for some, the question is as basic as, "How will a call center benefit us?"

Teleservices can help any business improve service levels and market share, reduce costs and boost revenues as well as instill loyalty. This is demonstrated by the fact that all 44 industries represented in this study benefited from the use of teleservices, whether it was performed in-house or externally.

Further, our findings revealed that businesses that have internal call centers outperformed companies without call centers, but still lagged behind those that outsourced. Moreover, companies that partially outsourced reaped a higher average percentage return to investors on an annual basis than those previously mentioned; companies fully outsourcing produced the best results overall. This is illustrated with a greater 10-year average return to investors, a higher average 10-year annual growth rate and a larger average percentage change in annual earnings per share.

Companies without call centers showed the weakest financial performance.

Clearly, the trends indicate that teleservices is a financial benefit to any company.

The question is whether you will utilize an internal center only, outsource only or partially outsource.

In considering an internal call center, costs and resources must be evaluated. Determining the cost of establishing and maintaining a center internally is key in the decision of whether or not those functions should be outsourced.

The easiest costs to determine are those that are most evident, such as payroll, employee benefits, supplies, equipment, utilities and furniture. However, there are other costs that should be accounted for as well. These include:

* Management oversight,

* Facilities support,

* Human resources support,

* Technology support,

* Diversion of resources,

* Diversion of assets,

* Diversion of capital.

The responsibility of managing a call center is not limited to the call center manager. This person must report to someone else, and that person must report to someone, and on and on all the way up to the Chairman of the Board. What percentage of time will be allocated to manage this department? What percentage of time will be allocated to manage the manager of this department and so on?

What must be included in this calculation are the direct costs of managing. Additionally, opportunity costs must be added for time diverted away from the company's core business.

Next, figure in facilities support for the costs associated with the additional space of a call center. This encompasses everything from janitorial, maintenance, utility issues and security, to complying with ADA requirements.

Now, add additional worker's compensation, benefits, recruiting, training and liability costs to your calculation. Also consider how long it will take to identify personnel to build the department. Then, evaluate how much time it will take to develop employees' skills to the point where they will allow the department to run efficiently.

How much must you invest in technology? Is it state-of-the-art or will you barely get by? How much must you invest to upgrade to stay current or gain a competitive advantage?

Will there be other departments or employees whose main purpose is to support an in-house call center? What would their financial impact be on the core business both from a direct cost standpoint as well as an opportunity cost? Don't forget to consider additional legal liabilities.

Also look at the direct cost of operating an internal call center. Could those assets be used elsewhere to enhance core responsibilities? What is the financial impact on other departments by having this function inhouse?

How much will you invest in assets, salaries, benefits, equipment and so forth? Compare this to the benefit it would have on the company if this amount was instead invested in the core business.

Once you have determined all the associated costs of operating an internal call center, compare it to the fees quoted by service agencies.

Besides cost, evaluate the level of knowledge and expertise of those performing and managing these functions. This is a service agency's business, to stay on top of the best and latest in all facets of call center operations. If, in your company, it is merely a support function, it can easily be left behind.

Which Functions Are Outsourced Most Successfully?

The FORTUNE 1000 have found benefits in outsourcing most types of call center functions.

Companies outsourcing outbound calls showed the largest earnings per share, a higher growth rate as well as a higher average annual 10-year return to investors when compared to inbound or those using a combination of centers.

Also, companies who have outsourced inbound sales experienced the greatest increase in revenues over a period of a year when compared to all other outsourced functions.

When evaluating the largest return to investors over a 10-year period, inbound customer service took first place.

Companies also found providing proactive service translates into higher earnings, an increased growth rate and a larger return to investors both on a short- and long-term basis, with outbound support ranking significantly higher than other types of functions.

What Is The Future Of Outsourcing?

Based on what we have learned from the FORTUNE 1000, the explosive growth of the teleservices industry will continue as long as agencies address the control, quality and cost concerns of the businesses they serve.

For the most part, companies that outsource say they receive service that is expected, however, while 8 percent receive service that is less than expected. Because companies have learned that quality of service is a competitive advantage with their customers, businesses are now demanding the same standards from companies that serve them.

They have demonstrated this through their actions in prior outsourcing experiences - over 10 percent of companies that previously tried outsourcing became dissatisfied with their teleservice provider and terminated their relationship. Instead of trying a different provider, they instead brought these functions back in-house. Most of these companieS were ranked in the FORTUNE 500(R).

It is the voice of such companies that is being heard by others not currently using agencies. Therefore, it is critical for service agencies to ensure they provide superior service because without it, companies may choose not to contract with them, which could hinder the growth of this industry while simultaneously affecting the ability of potential outsourcers to perform at a higher level.

Many times potential clients of service agencies will ask, "Why should an agency be willing to provide service to our customers as well as we do?" Because it is their livelihood too. This is an agency's only business activity. If customers are not satisfied and their clients are not satisfied, then the agency will not have that business long. Without satisfied and loyal clients, a service agency will fail.

Whether you are a company looking to outsource or an agency looking to gain new business, both can boost financial performance by partnering to help each other achieve their business goals. You are interdependent. By gaining an understanding of each other's environments and being flexible, each can contribute to the other's success.

Dorothy G. Young is president of DGY Associates, a consulting and research firm that specializes in enhancing competitive advantage for its clients through the use of current industry data.

Copyright Technology Marketing Corporation Mar 1998
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