The Outsourcing Dilemma

Corporate America has been using cheap overseas labor for years. Does it make sense for your company?

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When Michael Calderone launched his online coffee business in 2002, an in-house customer-service department was out of the question. Not only had Calderone never run a call center, the cash-strapped founder of SmilesCoffee.com, based in Henderson, Nev., couldn't afford one. So he outsourced the operation.

It was a disaster. SmilesCoffee's selling point is freshness: Beans are shipped only 95% roasted; customers complete the process in their microwaves, which makes for an extra-tasty brew, Calderone says. It's not exactly rocket science, but newbies sometimes find the process confusing and require some handholding. Unfortunately, Calderone's contractor wasn't up to the task. "My customers couldn't even get through," he says. "And when they were getting through, they weren't getting the right information."

So Calderone found another contractor. Now, nine dedicated and friendly reps assist SmilesCoffee customers with roasting issues, shipping questions, and account information. What's more, the better service comes at half the price. How did Calderone score such a bargain? By using a call center in the Philippines, where the average rep earns about $3,600 a year--a fraction of what his former contractor, based in Utah, paid. (The average Filipino earned $1,050 in 2003, according to the World Bank.) Calderone, 43, has mixed feelings about using offshore labor. But if SmilesCoffee is to remain competitive, he figures he has little choice. "If I didn't have this level of service at this cost," he says, "I couldn't grow the rest of my company."

Corporate America, of course, has been outsourcing overseas for years, often shipping entire divisions to vast call centers and programming facilities in low-wage countries. Only recently has it become possible for entrepreneurs like Calderone to move as few as half a dozen positions to places like China, India, and the Philippines--where a growing number of contractors are set up specifically to work with small companies. And more small outfits are taking the plunge. In a recent survey of U.S. companies with fewer than 200 employees, a surprising 20% admitted outsourcing part of their work overseas, says Babson College professor Shaker A. Zahra. No wonder the issue has become such a hot-button topic on the presidential campaign trail.

But if outsourcing is politically controversial, it's economically tricky, as well. "You learn a lot from making a product, getting customer feedback, and generally doing things yourself," Zahra says. "The more you outsource, the more detached you can become from your actual business." So when deciding whether to make the shift offshore, business owners need to be certain how much they actually can save, advises Atul Vashistha, chief executive of NeoIT, a consulting firm in San Ramon, Calif. Don't even think about it if you can't cut costs by at least 20%, Vashistha says; in fact, he says, you should be saving about 40%: "Otherwise, you will be spending too much energy trying to manage the process."

Even when it makes bottom-line sense, outsourcing is not something you can rush into. The tiniest details have to be spelled out. If you're handing off customer service, for example, will you want your reps to sound formal or chatty? What makes the chore especially burdensome for small companies is that many lack established processes that can be easily taught through a training manual, says Jai Shekhawat, CEO of Chicago-based Fieldglass, which makes software to help manage outsourcing. "If you are not crystal clear about what you are asking, small errors will be compounded by time, distance, and language," he says.

That's Calderone's biggest fear. He went so far as to hire a Manila-based manager with extensive customer-service experience to oversee the operation and smooth out any problems between the call center and U.S. headquarters. "You've got to have somebody there as an intermediary," he says. Even with the on-site help, outsourcing still means work for Calderone. He spent months developing a 100-page training manual for the reps to use. He spends about three hours a week on the phone with the manager working out any kinks. And despite his confidence in outsourcing, he accepts its limitations. He has kept the order-taking part of customer service onshore, in Maine, for example, rather than sending it off to the Philippines. "There is a little bit of a language barrier on the sales side," he says.

Even if you think you're being clear, your message may not register. Two years ago, Todd Hodgen, CEO of Misiu Systems, a Bothell, Wash., alarm systems manufacturer, learned he could save some 65% in design costs by hiring a Taiwanese firm to handle some engineering tasks. What's more, the Asian engineers would be working after Misiu's U.S. staff had gone home, accelerating the development cycle. For a start-up funded with money from friends and family, such efficiencies were irresistible.

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