In a previous article, Demystifying BPO: Making Sense of Outsourcing for a Successful SME, we talked about some BPO myths. We also, then, talked about some key issues that come up in considering whether or not to outsource. This time, we’ll focus on another set of issues, particularly, outsourcing risks. What risks do you need to consider, for example, in customer service outsourcing? What could you expect in an outsourcing partnership?
In this article, we’ll talk about myths about outsourcing success, risks when hiring a BPO and how to prevent them. Then, we shall see what you need to keep in mind in entering into an outsourcing partnership.
Myths about outsourcing
In his book, The Insider’s Guide to Outsourcing Risks and Rewards (latest edition 2020), Johann Rost compares some myths and realities about outsourcing. The comparisons can be summarized into three themes－namely, cost savings, agreement, and the outsourcing relationship.
Outsourcing leads to immediate cost savings. The cost savings at the beginning of the contract are valid for the entire term. If the salaries in the developing country are 80% lower, one could expect cost savings of 80%. According to Rost (The Insider’s Guide, 2006), these are all myths.
In reality, setting up and beginning the outsourced process does not necessarily lead to immediate savings. There are going to be costs. If the costs are necessarily higher at the beginning, it doesn’t mean that it is going to be the same cost for the entire term. Also, lower costs at the beginning do not guarantee that it won’t go up later on as external factors would also have to be considered. And so, this goes as well with salaries and external factors.
Also, Rost adds, following “best practices” does not always lead to cost savings. For him, “more important than understanding the ‘how-to-do-it’ is understanding the ‘what-can-go-wrong’” (Rost, 2). At best, best practices are guidelines (Rost, 3), not a blanket assurance. Rost suggests starting slowly, e.g., pilot projects, and being risk-sensitive.
In the previous article (Deligero, 21 October 2021), it was mentioned that, for SMEs to scale quickly and for some other related issues, BPO could be the turnkey solution. An outsourcing deal, on the other hand, is not a turnkey agreement (Rost, 2). Rost writes,
“A rule of the thumb says that about four to ten percent of the entire project team in offshore scenarios is needed for governance of the relationship. That is, if the customer wants to outsource an internal team of 100 programmers, it has to retain between four and ten IT professionals in-house to manage the relationship with the vendor.” (Rost, 81)
Especially that outsourcing contracts are lengthy and complex documents, a committee must be set up to monitor the agreement. Rost continues that such “steering committee has to gain insight into the wording and spirit of the agreement and verify that the vendor delivers according to the contract.” (Rost, 85)
It is also wrong to assume that the customer is the stronger party in the outsourcing relationship. Also, the customer cannot just easily end the relationship. And, finally, outsourcing is not always a win-win situation.
First, since the customer is usually new in the scenario, “the vendor usually has the clearer vision of how the relationship will develop” (Rost, 2). Second, the customer usually gets into the relationship starting with a cheap price. Then, there is the “Golden Rule of Outsourcing,” i.e., when the customer reaches a point where she can’t get out easily, the vendor increases the margins. “That is why the rule is called ‘Golden’” (Rost). Finally, it’s not a win-win since, in many respects, they both have conflicting interests preventing the scenario to be a win-win relationship.
A good example of such a scenario with conflicting interests is the scope of contract. On one hand, the vendor wants a clearly defined scope of services so there will be no extra costs for additional services. On the other hand, the customer wants to have a contract that includes as many “general services” as possible. Those general services, perhaps, are intended so as not to incur additional fees.
Two of the most common problems discussed in various articles available online are privacy issues and doubts on service quality. These, among other things, hinder many organizations from experiencing the benefits of outsourcing. Now, let’s go deeper and know more about those things. Below are themes showing up in the results of case studies and researches regarding outsourcing risks. The following themes also summarize the risks Rost wrote about in his book, The Insider’s Guide to Outsourcing Risks and Rewards.
If you’re thinking about outsourcing and the cost savings you can get out of it, you first have to consider the costs going into outsourcing. Some client companies have underestimated some costs, especially communication costs. Well, surely you can communicate through the Internet which is already widely available. That won’t cost much, right? Well, not exactly.
Stability of communication lines with long distances already means higher expenses. That, plus the need for synchronous communication despite different time zones, already requires a completely new set of management techniques.
Along with those, one must also anticipate other dynamic costs. One would be alternative means of communication in place should there be unforeseen events or circumstances. This goes for the main line of communication between the client and the provider. This goes as well for the provider’s team, such as when employees during this pandemic had to work from home. And so, already, those mean additional costs.
Governance and control
There are also risks when governance is inadequate. This you can control if you keep in mind the rule of thumb mentioned earlier in the section on Agreement. First-time clients often underestimate the importance of governance. Rost observes that what they do instead is, “either assign too few people to this task or choose staff lacking in adequate skills” (Rost, 81). Beyond provider selection and contract negotiation, one should give more importance to the management and governance of the actual partnership.
While those are taken care of, there may also be some other things that could escape your line of sight. Under this theme, we include the following risks: loss of control over key information, crucial knowledge, and technical staff (Rost, 7). These do not only mean privacy issues but also, and more importantly, the drivers crucial in the decision-making process.
Of course, you want to outsource experts－perhaps even the main reason why you want to outsource. However, it is also important to have in-house experts, or technological drivers, to be on top of those. Should there be problems along the way, you would be safe if those with the business know-how and the strategic knowledge are with you in-house.
Now, while we are with in-house, there are also risks of backlash and resistance of the existing in-house team when you’re planning or transitioning to outsourced jobs. For businesses, cost reduction is a common motivation for outsourcing. What this means for your existing in-house team is employee reduction－unless there are also plans for a simultaneous expansion. Consider this, also, in drawing up a transition plan.
Leadership and dependency
Deep into the partnership, outsourcing relations tend to expand. As this happens in time, the client’s dependence on the provider grows and before realizing it, the provider has taken over leadership in some business relations. Either that or the client, later on, decides to try out another provider. If there is already too much dependence on the current provider, the client may have difficulty transitioning to another provider, and so would hamper business continuity.
Thus, make sure to balance leadership, dependence, and also autonomy, especially in considering business relations and business continuity.
There are projects that can be easily outsourced, but there are also some that can be unsuitable for outsourcing. Rost lists some projects that are less accessible to offshore outsourcing. In these cases, outsourcing is simply not the solution for some companies.
- Projects with high consequential damages due to project failure
- Projects that include valuable intellectual property, confidential data, or technologies subject to export regulations
- Those projects that lack clear written specifications
- Innovative projects for which complete requirements are hard to specify in advance
- In some organizations, anticipated cost savings are limited and do not justify the investments and risks of the transition period (Rost, 164)
There is also the risk of failed projects. No matter how you put it into writing, you would still suffer consequential damages when a project fails or is not delivered on time. With the long distance between client and provider, between the development team and the experts, distributed projects may also turn out to be more difficult than anticipated (Rost, 9). Be sure to be on top of those projects so they can be well managed and the risks well distributed.
Issues with the Provider
Finally, be careful in outsourcing a provider. Avoid sly and unfair providers by carefully looking into their background, previous projects, and client testimonials. There are those who are really good at what they do. They could really be so good at it that they could also get to have projects with your competitors. Make sure that the processes and business know-how you entrusted to them won’t be used competitively for your competitors. Or should, in time, your provider becomes your competitor, those that you entrusted to them won’t be used for their advantage.
Preventing Outsourcing Risks
Here are three things you can do so you can prevent outsourcing risks.
1. Think through why you’re outsourcing.
As mentioned in a previous article, outsourcing is not about doing away with responsibility. Also, in an article (October 2020), Forbes listed the mistakes to avoid in outsourcing. One of them is that of refusing to do the bare minimum. This means that, in outsourcing, you can’t afford to be completely hands-off.
In looking for a provider, listen carefully about the vendor’s expertise and be able to assess it. If you have a clear understanding of why you are outsourcing, then you will be able to evaluate the vendors’ expertise. There are pros and cons of outsourcing, know what they are in individual prospects.
2. Calculate the costs and analyze the risks.
Again, as already mentioned in the same previous article, the main motivation to outsource should not be about cost reduction. On top of that, it should be about quality, namely quality of process and quality of output. Now, to do that, you need also quality input. Calculate the costs and analyze the risks early so there will be no sudden and unanticipated increases.
3. Think and decide wisely.
Finally, as said before in the previous article, what you need, primarily, is not a quick solution, but a plan. Now, you must also balance all of the above considerations with a quick, but wise decision. Thinking and deciding should not take too much nor too little time.
Let’s end this section with a quote from Daria Leshchenko, a CEO creating meaningful customer experiences, in her Forbes article. “As a leader, you probably understand the value of the decision made just at the right time — not too early, not too late.”
You may also check out related articles for more tips:
8 Tips in Finding the Right Outsourcing Company
Guide to Choosing the Right Call Center Partner for Your Business
It is prevention, therefore, that is most important so you can avoid outsourcing risks even before getting into such partnership. Plan it well so that you’ll have well-thought-out performance metrics for your provider. Plan well so you’ll also have in place process measures to ensure and sustain quality.
Now, to ensure you’ll have the right risk responses every time, make sure to also develop control activities. These include policies and procedures, activity management, data integrity, and information processing: all to ensure minimal variation and accurate reporting.
All these mean only one thing: you need to perfect your input in order to prevent outsourcing risks. The key is to pay attention to the voice of your customer. Get back to it. What do you need to deliver? What are the risks? At what level of the current process? How well are you handling them? Take note of these. Then, redesign your process accordingly. And outsource if you must.
These are all too much to take in. If you need assistance and tailored expert advice, we at StratAccess are here to help you.