Damage Control

How to combat offshore outsourcing backlash.

Last November, after a deluge of customer complaints about unintelligible English, lengthy telephone waits and poor service, Dell Inc. rerouted technical support for its U.S. corporate clients from a call center in India to facilities in Texas, Idaho and Tennessee.

Weeks later, Lehman Brothers Inc. followed suit, shifting offshore help desk support for the financial firm's internal users back to the U.S.

Another company, Fremont, Calif.-based Everdream Corp., pulled the plug on its offshore help desk center in Costa Rica in April. The reason: plummeting customer satisfaction.

Elsewhere, a decision by the Washington State Health Care Authority to use offshore labor for a major IT contract prompted legislation that would effectively bar state agencies from future use of offshore contractors.

For CIOs, offshore outsourcing used to be a pretty straightforward dollars-and-cents decision -- a relatively modest financial investment in cheap foreign labor in return for significantly lower ongoing operational costs.

Not anymore. Backlash from employees and customers has triggered productivity and revenue losses, plus more than a few public relations nightmares and political donnybrooks.

Clearly, U.S. companies are in the hot seat when it comes to offshore outsourcing. But despite the backlash, including the ongoing public outcry over lost U.S. jobs and the heated rhetoric of politicians in a presidential election year, most businesses have no intention of scaling back or delaying their offshore plans. Indeed, 86% of 96 attendees polled at a Gartner Inc. outsourcing conference in May said none of the backlash factors would cause them to change their offshore plans.

The reason is pure and simple: economics.

Image Credit: Dave Wheeler

"Customers are constantly pursuing cost benefits. It's a constant, like gravity," says Mike Hoyt, CEO of Paradigm Works Inc., a chip design company in Andover, Mass., that sends design and IT work to India. "To outsource offshore is not a political decision on the part of the company. It's an economic decision with political ramifications."

Political Problems

But those ramifications are considerable, and mounting backlash from employees, corporate partners and consumers substantially increases the risks involved in offshore outsourcing, says Alfred Ricci, who heads the newly launched sourcing management office at Union Bank of California (UBOC) in Los Angeles. A technical decision to move work offshore could "absolutely" trigger enough of a backlash to affect a company's stock price, Ricci says.

As an example, he mentions California Senate Bill 1386 , which requires a company to inform customers if their privacy may have been compromised. "A violation of that law [by an offshore outsourcer] would have a tidal-wave effect, which could result in a downgrading of the bank's creditworthiness," he notes.

To mitigate that risk and minimize damage, the UBOC created a dedicated sourcing office, which reports to an executive vice president and handles not only all contracts for professional services and staff augmentation, but also all strategy and communications regarding offshore plans.

Internal Issues

Two of the thorniest backlash problems around offshore outsourcing are rumors and employee flight, Ricci says. "The first reduces productivity, and with the second, the bank loses skills and knowledge," he notes. The sourcing office helps prevent both problems.

It assists senior management in preparing presentations to line employees about the effect outsourcing will have on them. It also provides managers with a list of answers to frequently asked questions so all information is consistent. Moreover, the bank has a person dedicated to tracking legislation and regulatory updates that could affect how and where the company outsources IT work.

Ricci emphasizes that the cost of running the sourcing office is "100% overhead. But the way you mitigate some of the risks associated with outsourcing is to plow some of the cost savings back into the monitoring and management of the [outsourcing] relationship." That includes managing employees and customers. "Basically, the cost savings is 50%. You take 25% of that and put it in legal, contracts, extra management. You can't be greedy," Ricci says.

Synygy Inc., a software and services company in Conshohocken, Pa., that has development centers in Pune, India, and Iasi, Romania, is hoping to minimize employee backlash. It offers U.S. employees who might otherwise be laid off the choice of working at one of those centers at a salary equivalent to what local IT employees earn, which is 30% to 70% less than in the U.S.

In addition to cost savings, the "exchange program" offers other benefits, says Chief Technology Officer Chetan Shah. "It helps people gain experience and understand why this global model is so important. They also gain respect for their foreign counterparts.

"You need to be honest with employees," explain the economics of the situation and offer them the right to return when jobs become available in the U.S. again, Shah adds.

But choosing which IT employees should remain after sending work offshore can be tricky, warns Gartner analyst Linda Cohen.

"Not all people are going to make the transition to higher-level positions here as the commodity work is moved offshore," she says, adding that CIOs often choose the wrong people to stay. "Typically, they choose the guys who stuck with them and stayed up all night to fix broken code. They usually pick people who do the very things they're choosing to outsource."

The solution, Cohen says, is to profile all IT employees, flagging as keepers "those with consultative skills who aren't wedded to how work is done but instead are wedded to the outcome."

CIOs should also be forewarned that IT workers aren't the only potential source of employee backlash. Business managers and workers in other departments are often resistant to change, says Kaushik Bhaumik, vice president of business technology consulting at offshore outsourcing vendor Cognizant Technology Solutions Corp. in Teaneck, N.J.

"Each one of those organizations has gotten used to working with IT in a certain way, and they may be used to Tom or Mary from IT. So you need to identify those users' key concerns, and it may mean keeping Tom or Mary where they are and developing a role around them," he says.

Bhaumik also recommends choosing "change leaders" to remain on board as employees. "Change leaders speak up at meetings and command respect from peers, regardless of their titles," he says. "People listen more and espouse change when they hear it from their peers."

Lay Out Plans

Counseling corporate customers about how to prevent or deal with worker and customer backlash to offshore outsourcing is a growing part of a consultancy's work, Bhaumik says. The most important advice he gives clients is to have what he calls an offshore road map.

"One of the most painful aspects of [offshore outsourcing] is when it comes out in dribs and drabs," he says. "It can be very disconcerting to people. It just stops work." Bhaumik advises clients who are offshoring more than 25 jobs to lay out what they are doing in three, six, nine and 12 months. "People respond better to a long-term road map and their place on it, rather than a road map that appears to be thought up on the fly," he says.

Regardless of the extent of work to be sent offshore, the absolute cornerstone of all backlash-control strategies has to be factual information, experts say.

"You don't want rumor to overtake reality," says Michael Treacy, author of several management books and co-founder of Gen3 Partners Inc., an Internet and offshore outsourcing consulting firm in Boston. "In the end, you can only politicize so long, and then the facts will prevail."

According to Treacy, the "hysteria" that surrounds offshore outsourcing doesn't reflect reality. He says the highest prediction of the number of jobs lost to offshore outsourcing is 300,000, yet the U.S. economy has 130 million jobs. "That means offshore outsourcing accounts for one quarter of 1% of the American economy," he says.

Customer Concerns

In dealing with customers, Treacy advises CIOs and other executives to always explain their decision to go offshore in terms of the value it brings to the customer. "Customers fundamentally don't care what you're doing with your employees," he says. "That's why every communication to customers must be couched in such a way that you're providing better value to them."

The best way to control damage, of course, is not to outsource offshore. That's the strategy at DSLExtreme, a Canoga Park, Calif.-based cable communications and Internet service provider with 50,000 subscribers. The company tries to offset its higher labor costs by touting itself as a hometown player -- "a local company with a local feel," says CEO Ari Ramezani.

The downside, Ramezani says, is the unavoidable fact that consumers have to be willing to pay more for services from companies that don't outsource overseas.

Copyright © 2004 IDG Communications, Inc.

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