The Outsourcing Dilemma
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.
Hodgen did everything he could to make his first foray into outsourcing a success. After several months of discussions with the contractor, he flew to Taiwan to meet the team. Back home, he checked in regularly, promptly responding when the engineers in Taiwan sent documents. What Hodgen didn't know was that the engineers, who were supposed to be working solely for him, were serving other clients as well. Feedback, he found, often went unheeded. By the time the design was delivered, it was eight months late and the quality of the work "fell way short of expectations." Hodgen ended up ditching the outfit in Taiwan and hiring a U.S. firm to finish up the project. But he'll still keep his costs down: The new contractor is doling out some of the work to an associate in India. Only this time Hodgen will have somebody--the American firm--to manage the process for him.
Hodgen could have avoided a lot of pain by hiring a U.S.-based company, or at least one with a U.S. office. It's also important to find a contractor who works with smaller companies. After all, an outfit that handles calls for an airline may not be the right fit for a small firm. "For the bigger suppliers, it is a volume game," says Shekhawat. More modestly sized clients often find themselves neglected.
And on top of the operations risks, there are image risks as well. After all, moving work abroad may not win you any popularity contests with customers or employees--particularly when the loss of white-collar jobs to other countries is shaping up as a major political issue. Dan Sanker, founder of the logistics firm CaseStack, based in Santa Monica, Calif., uses a contractor in the Philippines to fill 15 bookkeeping, accounting support, and other jobs that have come open as his company has grown. The move significantly strained a few friendships. But Sanker makes no apologies. Outsourcing noncore functions, he says, has enabled CaseStack to hire 11 highly skilled employees here in the United States, and Sanker plans on adding at least 10 more before the end of the year. "The future of America is not, 'How do we stop people from taking our administrative work away," he says. "The future is pushing off work that is not high level so we can continue to move up the scale in capabilities." Besides, there's at least one political benefit that may help balance the political risk: being able to offer your customers lower prices.