Outsourcing Is Not the Answer

Certain aspects of a business (call center, customer service, etc.) should be kept close to home. Pro or con?

Pro: For Business Operations, There’s No Place Like Home

In the midst of a shaky economy, many organizations turn to outsourcing as the be-all-end-all. Yet I find when it comes to good business, some aspects are better kept close to home. Recent research conducted by Lyda Bigelow of the University of Utah’s David Eccles School of Business shows that if companies outsource critical components of their business, they are more likely to fail.

With my wife, I own a direct market tour operator that provides overseas vacations to 115,000 older Americans each year. We operate a call center in downtown Boston, in the same space as our day-to-day operations. Our call-center associates answer 11,000 calls a week from our customers—to book trips, arrange flights, raise an issue, or pass along a compliment.

We have invested millions in technology to maintain the center and train our associates, including sending them on international trips so they can address calls with expertise.

Keeping our call center in Boston has enabled us to grow because we offer personal attention—the "high touch" vs. today’s popular "low touch" approach. But beyond that, it has strengthened the culture of our company. Having our call-center associates under our roof has allowed them to be part of our team, not just an extension of it. We empower them to make decisions based on the core values of our company and to share valuable feedback.

We’ve done the math and realize outsourcing could likely save us $3 million each year. But we ask ourselves: Could we give our customers the same service if we outsourced? Could we sustain our community of travelers? In our case, the answer is no.

Con: Companies Must Take Advantage of Outside Talent

Think you have everything you need to run your business within your walls? Think again. There’s one area where outsourcing is critical today—innovation.

"Open innovation," a term pioneered by Henry Chesbrough, illustrates the need to look to outside talent for innovative ideas, and global companies from various industries have demonstrated that it is the right strategic choice.

Just look at an example from the oil industry. Following the Exxon Valdez oil spill, there was an immediate need to separate the oil from seawater. The issue wasn’t resolved until 10 years later—not by an expert from within the oil industry but rather by a person with expertise in the construction industry with insights into the manipulation of near-solid cement during large pours. Ultimately, this demonstrates that more and more successful innovations utilize know-how originating beyond industry boundaries and that companies need to go beyond simple outsourcing (e.g., just asking an industry expert) to harness expertise from outside areas.

Engaging with an even larger number of external experts can be very expensive. Yet open innovation may economize on these costs along two dimensions.

First, it can offer a cost-effective approach to managing a company’s R&D budget. Open innovation competitions, such as the X Prize, and similar activities allow businesses to pay for a proven solution rather than incurring huge R&D expenses that may in turn fund failed innovation efforts. Research shows that capital efficiency is a key challenge because the returns on innovation are highly skewed, such that larger R&D budgets don’t necessarily result in high-quality innovative output. The shift from internal R&D to open innovation in the pharmaceutical industry underscores this point.

Still not convinced? Consider the second dimension—the open source phenomenon, where scores of talented software engineers, coders, and hackers develop operating systems and applications with no immediate monetary rewards. The open source phenomenon teaches us there is a wide spectrum of motivational needs for talent: A firm can harness outside talent not only through monetary rewards, but also by appealing to social recognition or intrinsic motivation needs.

While outsourcing has been shunned by some business gurus, the open innovation motto, "The world is my lab," has never been more relevant. Bottom line: It’s time to rethink the value of outsourcing, at least when it comes to innovation.

Opinions and conclusions expressed in the Debate Room do not necessarily reflect the views of Bloomberg Businessweek, Businessweek.com, or Bloomberg LP.

Reader Comments

czander

What about jobs and a sense of community? We see ample evidence as executives and stockholders are the ony ones to benefit from outsourcing, off-shoring, and other cost-cutting activities as the American worker becomes unemployed and the ranks of the poor swell. Income inequality in America is greater than Egypt’s and closer to that of developing countries like Africa’s Cote d’Ivoire and Central America’s Nicaragua.

Kary Benton

The "pro" outsourcing comments go on and on about the benefit of innovation when involving outsiders, but how much innovation can you get out of call centers and customer service? Did Gary Dushnitsky even read the question? He's talking about outsourcing of IT projects like software development, while the question is "Are some functions better off kept onshore like customer service and call centers?" Dell computers and Microsoft customer service quality went down the toilet after they offshored the service to India. So I would absolutely agree with the first statement. I want to speak to an American when I call for customer support, not some guy named "Sam" with a heavy accent. The only people who like outsourcing are those who are completely clueless about technology like journalists, politicians, academics, and top-most company execs, who think anyone who can write a single line of HTML code is "highly skilled." Now that salary in the US has come down so much, there's really no more excuse to offshore any IT job to India. It's also time we clamp down on all H1-B, L1, and B1 visas used heavily by Indian outsourcing companies like Infosys and Wipro who are basically bodyshops used to import Indian workers on the cheap. We need to boost the fees of these visas to $100,000 and use the money to fund scholarships to encourage American citizens to major in STEM fields.

V Shets

@ Kary: While Alan does talk about traditional outsourcing, Gary is referring to outsourcing, for example R&D, not to countries like India but to smaller specialist companies (presumably with lower overheads) within the US to effectively lower costs & risks. There is no debate at all going on here between Alan & Gary: They are talking two different things.

Don't be so disgruntled about jobs being outsourced. Get on and learn new skills or if you really want to hang on to the job you were doing before, emigrate to India and apply with the thousands you will be competing against. Chances of landing one will be grim since the same thousands will be much better than you.

Peace out,
V

Sam Stein

I hate doing business with companies that outsource call centers. While these call centers might have people that speak English, they do not understand it very well. I have stopped doing business with all of the companies that I can if their call centers are outside of North America.

Strategery

I've never understood the logic of outsourcing--even when the operations stay in the USA. Not only do you pay for all of the costs related to the work you outsource, you also pay for the contractor's profit. When you outsource overseas, you risk industrial espionage plus you are at the mercy of foreign governments and international tensions. Of course, there are the social costs. When you pay workers in India, they are not able to contribute to the US economy or buy your products and services. Outsourcing to other countries increases the need for government services, and eventually it will raise your taxes. It all looks good for the quarter end numbers--that is what it's all about so you get that big bonus--but eventually the house of cards will fall--taking the US economy and your company down.

spounder

Speaking from within a very large organization, I believe "innovation outsourcing" would usually come not at the expense of current employees, but rather to their benefit. Organizations that can most stand to benefit from such a move are often not truly paying their employees for innovation now, but rather are suffering at every level from stagnation and low morale; innovation could add vitality and perhaps even save them from lay-offs resulting from decline.

Brijesh

Funny. This article should have been written about 15 years ago!

Squeezebox

I think the "Pro" side of this argument is really arguing in favor of virtual corporations, in which only the people with the money actually belong to the corporation. The rest are contractors and freelancers who are hired just long enough for the company to get what they want before cutting them loose. The downside of a virtual corp is that the contractors build in a profit and the freelancers price themselves to include health care and pension costs the VC isn't paying their employees. You just can't get around the cost of human labor.

STOP H1B, L1, B1 visas now!

I work for a financial firm in the IT field. I see that more and more jobs are being outsourced! To add insult to injury, whatever few jobs left here are gobbled up by "cheap" H1Bs, L1s, and B1 visa holders. What nonsense. I simply cannot understand the need of these visas at a time of high unemployment. There are plenty of highly skiled Americans out there simply waiting to be hired. But these companies like Infosy, Wipro, Comsys, and Accenture want "bonded labor." It is time that all these visa fees should be raised to 100K/year as one of the readers suggested. If anybody wants to hire that "Einstein," they will glad to pay the 100K fee.

Our politicians and greedy executives are destroying the middle-class of America.

Nyaya

Americans don't have time to innovate these days as they are busy fighting wars, disrupting the world peace, and spending all taxpayers' money. Americans are so busy stuffing their face with food that they need more money to buy food. So increase wages to pay for a 4th plasma TV third car, and a virtual dog. Once the wages rise to pay for people's lazy habits, productivity goes down and costs go up. Hooray, now they have to outsouce and exploit someone else so that they can keep stuffing their faces. Keep going, America. Very soon you will sink your country not just finanacially but by your total body weight.

Ransome

I worked in the outsourcing world. If you need a special skill, the best is not often close by, and there is no need to hire permanently if the skill is needed only for a short time.

Another reason to outsource is for resource leveling, the temps are laid off during a drought and the permanents have greater security.

Ultimately, outsourcing for labor arbitrage is a bad deal. If institutionalized, labor quality declines as the chain of middlemen lengthens or increases their slices of the pie.

If outsourcing is done to excess, internal management experience and skills decline resulting in some very nasty surprises or unmet assumptions or expectations.

Frequently business consultants canvass the workers (who's input nobody wants, a management problem) and are able to assemble a whole package of innovation. The consultants are frequently tech savvy and can implement the innovation cost effectively and timely having the CEO's backing which defeats the entrenched silo management mentality.

lynnlynnhan

Operating the businesses by outsourcing is a nice deed. Outsourcing should be in the world of business. Great businesses can reduce their expenses and duration of working by outsourcing. Every thing has merits and demerits. So,it depends on one's opinion to say whether outsourcing is good or bad.

Shawn Thelen

My co-authors and I have done five different studies about consumer sentiment towards services offshoring. In summary, consumers are concerned about data security, loss of U.S. jobs, communication, and cultural disconnect when a service is sent offshore. We have also explored ways that firms can address these issues. It appears that most firms are looking at cost only and not what their customers think about being provided a service from abroad.

Crooked business ...

This is how the H1B mafias operate in the IT field...

Our greedy, un-American companies hire IT contractors via preferred vendors like Comsys, Modis, etc. These vendors take a 40-50% cut straigt away and sub-contract to another cheap vendor. That vendor may in turn sub-contract to another vendor (again after pocketing 20-30% cut) who will hire an H1B for the job! Finally, an H1B will hired for a fraction of the original rate! They prefer H1Bs as they will work like a bonded labor due to the visa regulations. This is a scam that is keeping American IT workers out of the market. Everybdoy knows this except our politicians and Dept of Homeland Security officials (INS comes under this). All the middle-men (I call them pimps) are getting "easy" money and the more H1Bs are getting placed, the more money they make. All these crooks, who manipulate the system should be treated like criminals and sent to jail.

Loyd Eskildson

Assuming business and societal interests are one and the same is a comforting ideology. It might even have been right in 1776. Today it is obvious nonsense!

Prashanth,Bangalore,India

Hey, stop outsourcing! Indian manpower is being wasted by only answering telephone calls. We should have our own Microsoft, our own Google or Apple.

ra

I really pity those Americans who blame the overseas workers or domestic foreign workers on temporary visas for their own laziness towards managing their careers. Instead of building their own skillset and staying current with growing market demands for expanded skillsets, they kept busy buying bigger and bigger houses and other luxurious possessions that they never had the money to pay for over decades...until they suddenly realized that they themselves were the culprits of building the property market bubble that burst so mercilessly and splashed nothing but sh*t on them. More important, where were all these anti-Indian lobbyists when the US manufacturing jobs were being outsourced to China and other South East Asian countries over the last 2 decades? They were frantically buying cheap foreign imports in Wal-Marts, K-Marts, Targets, Sears, and countless other big-box retailers of all kinds of merchandise. Walk into any major American chain store and you will find cheap Chinese goods including the American flags proudly displayed everywhere. So just lick up your wounds, get some meaningful education, and learn to save some rainy day funds before pointing fingers at Indians; will you?

NBB

The thing with outsourcing is that we specialize in a field where you need to spend millions of dollars to enhance your agents.

The truth is, for basic functions like "book trips, arrange flights, raise an issue, or pass along a compliment," you can outsource to a company solely dedicated to customer service.

What you need to do is outsource to the Philippines. Because the average Filipino is friendly of nature, familiar with U.S. customs, and has a very clear accent compared to other outsourcing countries.

Why don't you just try a small number of Filipino's first? The millions of dollars you spend on trying to enhance your call center can be better spent elsewhere.

In-house (land) customer service is a thing of the past, especially for services like booking flights, etc. Also the people that work in call centers in the U.S. will grow tired of their work and will not stay long. Overseas they line up for hours just to apply for a customer service position.

My advice: Talk to a Filipino call center and try a group of 5 agents, pay around $800 dollar per month per agent, and see the results.

joe elector

Whether you like it or want It, the government & Sam Walton have created it (outsourcing/offshoring).

SSN

Hey... If the natives cannot stretch and work on Saturdays/ Sundays/ on national holidays/ not have attitude to work beyond 38.5hrs, someone else willing to work beyond these restrictions, will make hay. This is true for any economy. This will be a pain point. For ages, buy cheap and sell dear has been the process. with technology, companies will still buy time and effort at cheaper rates and sell dear. Case in point,can Americans make a shoes of Walmart quality at USD 16.00. When a Chinese makes it, it is sold at USD 49 at Walmart. Basically Walmart has bagged USD 30 or lets say Americans have made that money. Also Walmart gets most of its products from China. Imagine, without China, Americans would have had to downsize their life style. Dear Sams, rest assured. As more of these developing countries hold more Dollar reserves, it becomes obvious that these countries will always be well wishers of the US economy. Basically your safety is their business!! Enjoy the ride!!

BH Bru

V Sheets is rather simplistic by suggesting "Get on and learn new skills or if you really want to hang on to the job you were doing before ...."

Plenty of Westerners do have the skills. What they can't do is compete with people doing the job on a quarter of their salary.

I have no problem with Tata, Wipro, or Infosys, providing that they agree to pay their people Western salaries.

I've worked with Indians on a few projects. Typically when they find out what we're earning, most of them want to earn something like the same. Their agents typically tell them that if they don't like it, there are plenty of Indians back home who will take the job.

End result: Indians working in the West are being ripped off, capable Westerners are losing their jobs, and the big bosses and shareholders are getting rich.

Oh and if you're an Indian living in the West looking for work, and needing Western money, because of the high living costs here, then you're even worse off than Westerners are. No one is going to take an Indian on, with a Western salary, when they can ship one in for a quarter of the price.

Mformor Bakia

Truly, one size can not fit all, it would eventually depend on the nature of the business. I think the pro is a little bit confused with the nature of outsourcing we are looking at.

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