Gartner: Customer-service outsourcing often fails

And it can cost companies some of their customers

Companies that outsource customer-service functions to reduce costs may risk reducing their client list as well, Gartner Inc. warned today.

In fact, the Stamford, Conn.-based research company predicted that through 2007, some 80% of organizations that outsource customer-service projects to cut costs will fail. This is because outsourced centers often have high staff-attrition rates of up to 80%, and many companies neglect to manage their outsourced operations, according to Gartner.

"Companies are not looking at processes from a customer point of view and this is risky," said Gartner research director Alexa Bona.

Those that outsource internal functions such as human resources and finance don't have the same level of exposure because problems are dealt with by their own staff, Bona said. But customer-facing processes such as call center services and tech support require specific training and management to prevent client loss.

Gartner predicted that through 2008, about 60% of organizations that outsource customer-facing functions will see client defections and hidden costs that outweigh any potential cost savings. And reduced costs aren't guaranteed, Bona said. Gartner found that companies that employ outsourcing firms for customer service processes pay 30% more than top global companies pay to do the same functions in-house, she said.

Gartner predicted that the customer-service outsourcing market would continue to grow, however, from $8.4 billion in 2004 to $12.2 billion in 2007. But it still represents a small portion of the total outsourcing market, accounting for less than 2% this year and growing to just under 5% in 2007, said Gartner.

Companies should choose outsourcing firms wisely, Bona said, especially since the outsourcing market in India is experiencing a great deal of movement and multiple mergers. The region has seen rapid growth, and big U.S. outsourcing firms are looking to make buys in the area. Gartner forecast that 70% of the top 15 Indian-owned start-ups that offer call center services will be bought or marginalized by the end of this year.

"When that kind of rapid growth occurs, processes break down," Bona said. Indian outsourcing start-ups currently have a staff turnover rate of 55%, so companies should look for outsourcers with more stability, she said.

While outsourcing key customer-facing functions carries a high level of risk, successful outsourcing of other noncore operations can reap cost savings of 25% to 30%, Gartner said.

To make outsourcing work, companies should map their customer-facing processes from end to end and dedicate sufficient management to the project, Gartner said. Companies were also advised to develop innovative contracts that tie service levels to compensation.

Copyright © 2005 IDG Communications, Inc.

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