February 26, 2004

Big differences between offshoring and outsourcing

Author: Robin 'Roblimo' Miller

The terms "offshoring" and "outsourcing" are often used as if they were interchangeable, but they aren't. As business tools, they each have advantages and disadvantages that wise managers need to consider before they start thinking about using either strategy -- or both at once.

Outsourcing the call center

The first big wave of outsourcing call centers wasn't to India or another country but to companies specializing in these functions based in U.S. Midwestern states, such as Iowa and North Dakota. The reasons usually given for outsourcing these functions were:

  • A specialist company could invest in high-level Customer Relationship Management (CRM) software no single end user company could afford and therefore could operate a more efficient call center than the company could on its own.
  • A company specializing in call center operations could train a "pool" of workers who could be shunted from one client's operations to another in a few seconds (by changing what appeared on their monitor screens and which calls were routed to them), thereby making more efficient use of personnel.
  • If the employees of a contract call center were a little short of customer service calls for a few hours or days, they could do outbound telemarketing (often on commission, for a variety of willing clients) during those "slack" periods, thereby increasing efficiency even further -- which meant even lower costs to end user companies.

A major reason the Midwest became a popular call center location was that, according to a series of studies, voices from that part of the country were perceived by most Americans as being friendly and helpful; voices of people from New York and New England were commonly perceived as brusque or rude; and voices from the deep South were often hard to understand by residents of other regions.

When we say "call center," we're not talking about a single kind of business. A "call center" can handle anything from outbound telemarketing for businesses, political causes, and charities, to technical support for complex products.

There is -- and will continue to be -- a strong niche for contract telemarketing call centers that handle telemarketing functions, whether on the outbound, "We call you during supper" side or on the inbound "Call now! Operators are standing by!" side of the business. Many telemarketing campaigns are short (examples: political campaigns and special product promotions backed by blitz TV advertising), and it's easier and cheaper for those running a limited-duration campaign to contract with an existing call center than to set up their own.

But there was always a question about whether it was a good idea to give up control by contracting out vital customer relationship functions. Many companies resisted the idea of allowing outside companies to deal with their customers instead of doing it themselves. For example, isn't it better for an insurance company to have its customer-service people work for experienced agents and claims adjusters who have an intimate understanding of the company's policies, and may even have helped develop them? For a company concerned about having the best possible relationship with its customers, this is a sensible thought pattern, and in IT companies that handle technical inquiries by phone, it makes even more sense. This is because a direct and easy "escalation" chain that goes from tier one "Where's the 'any' key?" question-answering all the way up to the engineers who designed the product not only gives the best possible customer service but also provides valuable input for product designers, QA personnel, documentation writers, and marketers.

When you take this kind of corporate global view of customer contact, suddenly outsourcing any of it (other than temporary campaigns) makes no sense. If you are running a customer-driven company, you want to be as close to your customers as possible and get as much feedback from them as you can.

Why offshoring call centers is a bad idea

The biggest argument against offshoring call centers can be summed up in one word: Accents.

An additional major reason to keep customer service in your home country: Cultural context.

If you are running a company in Russia, you want your phone customer service people to have the most easily understood Russian speech patterns possible and to be able to understand as many Russian accents as possible. You don't want to subject your customers to Czech or Chinese accents; you want native Russian speakers. Not only that, if you want your (Russian) customers to feel your company understands them and their concerns, you want to have customer service people who live in their culture; who watch the same TV shows and are familiar with the same sports; who know the names of the same celebrities. These little "warm fuzzies" may not be obvious on balance sheets, but they are an essential part of making a company appear friendly to customers.

When a company not perceived as friendly is faced with competition from one that is, you can guess which one will get more business.

Smart British companies hire customer service people with mass-average British accents. Smart German companies hire customer service people with mass-average German accents. Smart American companies, at the least, hire customer service people who sound like what we hear on popular TV shows and are correspondingly easy to understand and obviously part of "middle-American" culture. Less-savvy companies choose to save money by outsourcing their customer service work to outside companies in their "home" countries that will not be as responsive as their own people.

Only the least-savvy companies of all contract with out-of-country customer service providers. They are not only ceding responsibility for their all-important customer relationships to a disinterested third party, but also using representatives their customers may find harder to understand -- and less likely to comprehend their needs and desires -- than if they'd hired people from the country where they're doing most of their sales.

Outsourcing software development

Hiring a freelance software developer or a vendor across the street to make an online ordering system is "outsourcing," and there are times when this makes good business sense. For instance, when OSDN (which owns NewsForge) wanted a particular online graphics manipulation program written, it was logical to turn to someone who had worked on the open source base for what we wanted, and had also developed something similar to what we wanted for his own use. He was able to produce our required application faster -- and for less money -- than our staff programmers.

But since our staff programmers were (and still are) responsible for maintaining this software and any future modifications to it, one of them worked closely with the subcontractor to learn how he did it, so that his work could be continued after his contract was over instead of depending on him for maintenance forever.

This is an intelligent way to deal with outsourcing, whether your subcontractor is one person or a large company -- and whether it's across the street or halfway around the world.

The biggest question on software outsourcing becomes: "How important is this piece of software to my business?" The second is: "Assuming it's important, how do I keep the vendor from suddenly jacking up the price or otherwise becoming an unpalatable business partner?"

Contracts don't necessarily provide an answer to the second term. What if your software contractors go out of business, or the quality of their work starts slipping? It's your software and your business that suffers, and you need to protect yourself against this kind of problem by making sure you have enough staff programming muscle (or a backup contractor handy) to take up the slack. Naturally, you'd better make sure you own (and have copies of) source code for all software you have had written, which is a rule that must be followed whether your contractor is in Chicago or Calcutta. This rule must also be -- but often isn't -- followed religiously when your developers are on staff, because a staff programmer who quits in anger and wipes out all copies of whatever code he or she wrote for you can create just as big a disaster as a contractor on the other side of the world doing you dirty.

Offshoring software development

How much do you really save? And are the savings worth the cost?

I have met a number of Indian software developers who are as competent as any in the U.S., and I mean they are excellent at all-the-way-up, starting-from-scratch software design, including architecture -- not just for banging out routine code and making little forms for users to fill in.

I have also met Indian programmers who got into the business because they heard it was easy indoor work that paid well, just as I've met U.S. programmers who got into the business for this reason. The difference is that a local programmer -- wherever you are -- can sit down with you, and the two of you can figure out how to do things in person. If it turns out that the local programmer is unable to understand what you need done or can't do it competently, this will be immediately apparent. When you're dealing with someone half a world away, communications lags can make it harder to evaluate competence -- and harder to make sure the work you get is exactly what you need.

Important questions to ask about offshoring

If you're in a high-overhead country and have some of your programming work done in a low-overhead country, you are going to save some money. But is the saving in direct cost worth the risk of getting poor work or spending time and money on work that isn't done on time? Is it worth the potential of long, laborious debugging sessions that might last days or weeks instead of the mere hours they might take with a programmer who is local to you -- or at least in the same time zone or one that's only an hour or two different from yours?

If your business depends on this software, how much does a delay cost you? What about the time/cost of staff people who work with your contractors? These factors need to be considered when you're trying to compute the total cost of outsourcing a software solution. You can obviate some of these costs if you're IBM and open your own programming center in Bangalore, but for most businesses the cost of airfare, shipping, and telecommunications can (and often do) easily eat up any labor savings gained by hiring programmers in far-off places.

A final question to ask yourself about outsourcing vital programming -- especially to people in other countries: "Aside from the potential pitfalls, are my savings really worth the inconvenience?"

Offshoring and outsourcing at the same time

You have decided to take advantages of the low wage scales in (choose a country), but you don't have time to go there and decide who to hire, let alone rent offices and get telecommunications facilities set up and all the rest of the rigmarole -- including government permits -- needed to set up an overseas operation. So, instead, you hire a local company that has all this in place to run your offshore operation for you.

In the U.S., outsource companies and temp agencies charge substantial markups over what they pay employees. This pattern is repeated elsewhere. But this isn't the only reason to be leery of contracting with outsource companies. Put yourself in the shoes of a high-end Indian programmer: Would you want to work at a contract shop, doing random projects as assigned, instead of working directly with clients on projects you selected? (Note that the answer is probably the same if you are a high-end programmer in the U.S. -- there aren't all that many truly top people in the field anywhere in the world.)

The same thing applies to customer service work, but not as strongly. In the U.S., a telephone customer service or tech support job isn't looked upon as fit long-term work for smart college grads. On the other hand, Indian grads may take it because it's the best thing available for them, then use fake American names and accents so your customers (theoretically) don't know you're sending work overseas instead of hiring their neighbors. Your Indian customer service rep probably has more education than a U.S. one who costs 30 percent to 50 percent more (total, including the offshore contractor's cut); but if you hire an American named John, and John lives in Dubuque and says so, you are being honest with your customer.

If, through a contracting service, you hire Tashar in New Delhi, who tells your customer his name is Terrance, you have introduced a basic element of dishonesty into your relationship with your customer. And by allowing your customer to think Tashar/Terrance works for you when he really works for an Indian company, you become doubly dishonest.

By outsourcing customer service to an offshore company, you may get (theoretically) higher-quality workers than you'd get by running a U.S. call center, and you may save a significant amount of money. In return, however, you run the risk of significant customer alienation, just as an Indian company would risk customer alienation by outsourcing its customer service work to a U.S. company whose employees used names like Sangita to sound more Indian, even if their real names were Julia or something similarly American-sounding.

At least on the programming side this sort of falsehood is not a big part of the offshore outsourcing picture. When you come right down to it, no one cares whether a talented programmer's name is Raji or Ronnie as long as the work is up to par. But it is still inconvenient and risky to deal with worker far away from your home base, even if the relationship is totally honest on both sides.

Will there be any IT jobs left in the U.S. in 10 years?


This is the big fear surrounding offshoring -- in the U.S., anyway.

All over America, programmers and other IT people get together and worry about when all their jobs will move to India, China, or another low-overhead country. Many of these worriers drive to these meetings in foreign cars, and almost all of them wear foreign-made clothing. (Sadly, you can't really blame them for not seeking out "Made in USA" clothing labels; there are hardly any left to be found.)

Life has not been easy for U.S. autoworkers and garment makers whose jobs have moved overseas. Some have ended up working as Wal-Mart clerks or in equivalent service or retail positions for 1/4 or 1/5 their previous wages. Many have lost their homes. And some have entered government-sponsored or corporate-sponsored training programs to retrain for jobs in the high-paying IT industry -- which is now moving offshore as fast as manufacturing was a few years ago.

Maybe, if there is enough backlash, some U.S. companies will send fewer jobs offshore, but since most large corporations now call themselves "multinational" rather than associate themselves with a single country, the number that chooses to bring jobs back to the U.S. or keep them here in the first place is likely to be small. Even if protectionist anti-offshoring legislation gets through Congress and is signed into law by President Bush or his successor, how could it be enforced? The U.S. government has a dismal record at preventing the import of tons of marijuana and other illegal drugs, all of which take up physical space and require physical shipment. Does anyone half sane believe the same law enforcement agencies that are supposed to keep drugs from crossing U.S. borders will have any luck with something as ephemeral as software?

Even restrictive import duties are unlikely to halt the offshore job flow. No matter how they are levied, corporate lawyers are sure to find ways around them.

Many economists are sure to tell us that in the long run free trade will make everyone -- including displaced U.S. workers -- more prosperous. But economist John Maynard Keynes reminded us that "In the long-run we are all dead," which is one prediction from an economist that is certain to come true through the ages, even as economic theories change to match the prevailing will of the universities, companies, and governments that pay economists' salaries.

The real question now seems to be: "What can American workers do to justify salaries that are much higher than those in countries where half the population is begging for a job that pays 1/10 of U.S. minimum wage?"

I'm sorry, but I have no good answer to this question. If you do, please post it. I'm sure I'm not the only one who is trying to find that answer, although -- sadly -- I'm also sure that those who need to hear it most are the least likely to listen to it.

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