What you are exchanging with the customer is key to deciding how to manage outsourcing relationships, according to University of Melbourne’s Erik Mooi, Peter Gahan and Elham Ghazimatin
What you are exchanging with the customer is key to deciding how to manage outsourcing relationships, according to University of Melbourne’s Erik Mooi, Peter Gahan and Elham Ghazimatin
More than ever before, the capacity of a business to generate customer value relies on managing the quality of the customer-firm relationship. Even in those sectors where the production of goods is the core rationale for the business, the ability to service the customer relationship is critical for business to generate value and to compete. This, it has been suggested, reflects a new “service dominant logic” in which relationships, “co-creation” of goods and services, and intangibles lie at the heart of any business model.
Somewhat paradoxically, however, this same shift has been associated with a growing tendency to outsource functions that define the interface between a business and its customers. For example, many airlines have outsourced baggage handling to companies such as Swissport or Aviance. This means that the interaction between the airline and its customer, when baggage gets lost, is typically with the baggage handler rather than the airline. Thus if problems occur, the airline might not be aware or is dependent on the ground handling company for information. Yet this is the very moment where customer experiences can enhance the value proposition of flying with any airline, or diminish it.
This same dilemma also occurs in the finance industry, where many retail customers only interact with financial intermediaries or third party providers, such as comparethemarket.com.au, iSelect, or Aussie Home Loans. These organisations are responsible for working directly with customers to select products and often also undertake risk assessment and brokerage. In doing so, these intermediaries ultimately manage customer perceptions of the service environment on behalf of the business for whom they work.
The fact that critical aspects of the customer-company relationship may not be fully in control of a business may, if not well managed, ultimately undermine customer perceptions of the value that a business is able to create. Perhaps surprisingly many businesses are finding that where such arrangements are well designed and executed the business is able to work together with outsourced providers and customers to co-create a superior customer outcome that both enhances their perceptions of the value provided and the ability of the business to compete in innovative and rapidly evolving markets.
1. When should you outsource the customer relationship?
The most often cited reasons for outsourcing a business activity relates to the potential cost savings associated with doing so. Outsourcing also allows a business to focus on its core activities that define the business, or critical assets such as a brand name, customer base, or IT capabilities that are otherwise not available. Increasingly, some firms have developed strategies for working with outsourcing partners to core business relationships with customers.
The reasons for doing so are economic. Managing customer relationships can, like many business activities, consume a lot of money, time and resources. However, the potential cost-savings associated with outsourcing these activities need to offset against the potential risks associated with losing direct contact with customers, especially where it can be difficult to capture knowledge about changing customer preferences, or manage customer loyalty.
2. How do you exchange with the customer?
Many businesses never “meet” or see their ultimate customers. Large banks often outsource call centre activities, such as to deal with merchant facilities for their business customers, or for handling complaints and disputed payments for the consumer segment. This means that information on customer interaction cannot be had first-hand. There are various structures in which firms allow outsourcing providers to engage with customers.
The fully connected approach. In the 1990s, as many businesses began to depend more extensively on outsourcing, most also retained in-house operations that retained a direct link to customers. In these situations, where the customer may be served by the company or outsourcing provider, customers remain “fully connected” (see ‘Different forms of triads’ box). While these in-house operations might seem outdated in today’s business environment, in practice doing so helped businesses understand how well their outsourcing providers operated. This structure has a number of advantages. It reduces what might become an ‘unhealthy’ dependence on the outsourcing provider by ensuring the business can more credibly threaten the outsourcing provider be replaced when performing poorly. It also ensures that the performance of the outsourcing provider can be easily measured by comparing and benchmarking in-house and outsourced activities.
Outsourcing the customer interface. Of course, the fully connected approach involves the cost of duplication that can become a problem if the in-house operations lack critical mass. Recognising the potential gains associated with stripping these costs out of their operations, some businesses have looked to fully outsource their activities to a single provider. The cost advantages of scale are greater, and duplication is avoided. What were the benefits of being fully connected now turn to disadvantages as replacing the outsourcing provider becomes more difficult – good luck with any future (price) negotiations – and performance becomes more difficult to measure and understand. In this situation the critical customer interface remains out of sight and one “cannot see the customer”.
The power of competition and comparison. An alternative approach is to outsource one activity to at least two providers. While is still means that the customer is invisible to the business, this approach allows a business to compare performance among providers and, critically, reduce the extent to which they are dependent on a single provider. Of course, this approach will only be cost effective where a business is operating with sufficient scale of operations, and where neither outsourcing provider insists on exclusivity.
3. What to do when you cannot see the customer directly
The academic research on outsourcing suggests a few ways of reducing problems of not being able to “see the customer”. While there is unlikely to be a “cure all” solution, deploying a combination of these strategies helps avoid the worst.
Select the “right” outsourcing provider. Outsourcing providers come in different forms and shapes. Some are highly motivated by the economics of the deal – something academics have termed “business people”.
Others might want to build long-lasting relationships and could be considered “friends”. Selecting “friends” is not easy. Just about every service provider claims to put weight on building relationships and to be your “friend”.
How can you tell these two different partner types apart? Work by Heide and Wathne (“Friends, Businesspeople, and Relationship Roles: A Conceptual Framework and a Research Agenda," Journal of Marketing), suggests such friends can be selected, created through socialisation, or through monitoring.
Selection can occur through trial programs and supplier or outsourcing qualification programs. Most large companies have such programs but they are rare for smaller companies.
Socialisation can occur through (mandatory) training programs or by getting the outsourcer to invest in the relationship – for example, by investing in technologies that cannot be transferred to other business relationships it may have. If such investments are substantial and cannot be used easily in other outsourcing arrangements they function as ‘hostages’ that induce the supplier to focus on the long term.
Monitoring is a third strategy and relies on the outsource provider being open to inspections, site visits, (financial) audits that allow companies to “meter” activities and outcomes of outsourcing providers.
Strategic information sharing. Because outsourcing providers are directly in touch with customers, they know things about customers that others don’t. These information “blind spots” may extend beyond knowing whether customers were provided with quality service by the outsourced provider, through to whether the provider is meeting regulatory requirements (for example, relating to product fee or other disclosures). Where these occur they can be costly to remedy, and difficult to reverse.
Such information blind spots require strategic information sharing between the company and outsourcing provider. Sharing information is often difficult. Outsourcing providers may not want to disclose problem situations that undermine their own undertakings. Meeting information sharing requirements may also require additional information collection and be costly to compile or manage on an ongoing basis. Or the advantages of sharing information may be long-term without clear immediate benefits to the outsourcing supplier.
Where information is shared, plans between the company and outsourcing provider can be coordinated and these blind spots avoided.
Managing the relationship. Building ongoing relationships with customers based on loyalty and value are critical elements in maintaining competitive advantage. The same philosophy has been found to underpin viable and resilient relationships with outsourcing providers. Depending on the value proposition associated with these relationships, investing in and managing the relationship are critical to aligning interests between the business and its outsourcing partners.
However, at its core, these relationships need to be built on shared values about how the relationship is to work for both partners – and to the benefits of customers. These values and outcomes also need to be reflected in the ways that the performance of relationship is measured and incentivized.
Perhaps most importantly, where these relationships are expected to operate and evolve over time, then a clear understanding of how the parties will make decisions, solve problems, negotiate any conflicts or go about planning and implementing any change to the relationship need to be clearly articulated at the outset of the relationship.
Gain direct access or handle select elements directly. As we have noted, retaining exclusive access to your customers has several benefits and drawback. However, it is also possible to retain direct access through insourcing some activities – particularly complaints handling – and handle these directly, leaving service delivery to an outsourcing provider.
Why is this approach proving successful? Having a direct view on customer complaints allows companies to monitor outsourcing providers in a cost efficient way. As the outsourcing provider cannot rectify problems without such information problems cannot be easily hidden, thereby giving companies a clearer view of what is going on.
This also puts the outsourcing provider in a position of dependence and allows companies to detect issues early on without relying on the honesty of the outsourcing provider. In the long run, this also helps maintain more commitment towards the customer. This last point was emphasised in a Forbes report (Outsourcing Customer Service May Be Penny-Wise and Pound-Foolish)which suggested a strategy of complete outsourcing customer service is pennywise and pound foolish; as complaints handling is outsourced customers face increased scripting, fewer solutions, and company learning is reduced.
Overall, then, the experience of many businesses is that outsourcing can be extended to many areas of the business’s operations that traditionally might have thought to be core business – activities which were viewed as potentially risky to outsource. However, as we have indicated, it does represent a double-edge sword: it may reduce costs, but this may come at the expense of maintaining control over strategic relationships with customers and outsourced providers. Yet, the evidence shows there are solutions to many of these challenges. With careful management even these strategic relationships can be maintained throughout outsourcing – to the benefit of the customer and the business.
Erik Mooi is a senior lecturer at the University of Melbourne and works on topics such as outsourcing, inter-firm contracting, technology licensing, and franchising.
Peter Gahan is director of the Centre for Workplace Leadership and professor of management in the Department of Management and Marketing at the University of Melbourne.
Elham Ghazimatin is a doctoral researcher at the University of Melbourne.
More than ever before, the capacity of a business to generate customer value relies on managing the quality of the customer-firm relationship. Even in those sectors where the production of goods is the core rationale for the business, the ability to service the customer relationship is critical for business to generate value and to compete. This, it has been suggested, reflects a new “service dominant logic” in which relationships, “co-creation” of goods and services, and intangibles lie at the heart of any business model.
Somewhat paradoxically, however, this same shift has been associated with a growing tendency to outsource functions that define the interface between a business and its customers. For example, many airlines have outsourced baggage handling to companies such as Swissport or Aviance. This means that the interaction between the airline and its customer, when baggage gets lost, is typically with the baggage handler rather than the airline. Thus if problems occur, the airline might not be aware or is dependent on the ground handling company for information. Yet this is the very moment where customer experiences can enhance the value proposition of flying with any airline, or diminish it.
This same dilemma also occurs in the finance industry, where many retail customers only interact with financial intermediaries or third party providers, such as comparethemarket.com.au, iSelect, or Aussie Home Loans. These organisations are responsible for working directly with customers to select products and often also undertake risk assessment and brokerage. In doing so, these intermediaries ultimately manage customer perceptions of the service environment on behalf of the business for whom they work.
The fact that critical aspects of the customer-company relationship may not be fully in control of a business may, if not well managed, ultimately undermine customer perceptions of the value that a business is able to create. Perhaps surprisingly many businesses are finding that where such arrangements are well designed and executed the business is able to work together with outsourced providers and customers to co-create a superior customer outcome that both enhances their perceptions of the value provided and the ability of the business to compete in innovative and rapidly evolving markets.
1. When should you outsource the customer relationship?
The most often cited reasons for outsourcing a business activity relates to the potential cost savings associated with doing so. Outsourcing also allows a business to focus on its core activities that define the business, or critical assets such as a brand name, customer base, or IT capabilities that are otherwise not available. Increasingly, some firms have developed strategies for working with outsourcing partners to core business relationships with customers.
The reasons for doing so are economic. Managing customer relationships can, like many business activities, consume a lot of money, time and resources. However, the potential cost-savings associated with outsourcing these activities need to offset against the potential risks associated with losing direct contact with customers, especially where it can be difficult to capture knowledge about changing customer preferences, or manage customer loyalty.
2. How do you exchange with the customer?
Many businesses never “meet” or see their ultimate customers. Large banks often outsource call centre activities, such as to deal with merchant facilities for their business customers, or for handling complaints and disputed payments for the consumer segment. This means that information on customer interaction cannot be had first-hand. There are various structures in which firms allow outsourcing providers to engage with customers.
The fully connected approach. In the 1990s, as many businesses began to depend more extensively on outsourcing, most also retained in-house operations that retained a direct link to customers. In these situations, where the customer may be served by the company or outsourcing provider, customers remain “fully connected” (see ‘Different forms of triads’ box). While these in-house operations might seem outdated in today’s business environment, in practice doing so helped businesses understand how well their outsourcing providers operated. This structure has a number of advantages. It reduces what might become an ‘unhealthy’ dependence on the outsourcing provider by ensuring the business can more credibly threaten the outsourcing provider be replaced when performing poorly. It also ensures that the performance of the outsourcing provider can be easily measured by comparing and benchmarking in-house and outsourced activities.
What can we learn from Fast Moving Consumer Goods?
Unilever and Procter & Gamble have always relied on retailers to sell their products to the end customer. This is in many ways similar to outsourcing customer contact. How have these firms tried to deal with a lack of direct customer contact? Both firms rely on strong downstream relations to get insights from the market and to exchange information that is of strategic importance. In addition third parties, such as the Nielsen company, provide market data that allow Unilever or Proctor & Gamble to see how well they do compared to the competition. Lastly, primary market research such as through experiments, focus groups or test markets (where products are trialled) help gain direct understanding of the customer.
Unilever and Procter & Gamble have always relied on retailers to sell their products to the end customer. This is in many ways similar to outsourcing customer contact. How have these firms tried to deal with a lack of direct customer contact? Both firms rely on strong downstream relations to get insights from the market and to exchange information that is of strategic importance. In addition third parties, such as the Nielsen company, provide market data that allow Unilever or Proctor & Gamble to see how well they do compared to the competition. Lastly, primary market research such as through experiments, focus groups or test markets (where products are trialled) help gain direct understanding of the customer.
Outsourcing the customer interface. Of course, the fully connected approach involves the cost of duplication that can become a problem if the in-house operations lack critical mass. Recognising the potential gains associated with stripping these costs out of their operations, some businesses have looked to fully outsource their activities to a single provider. The cost advantages of scale are greater, and duplication is avoided. What were the benefits of being fully connected now turn to disadvantages as replacing the outsourcing provider becomes more difficult – good luck with any future (price) negotiations – and performance becomes more difficult to measure and understand. In this situation the critical customer interface remains out of sight and one “cannot see the customer”.
The power of competition and comparison. An alternative approach is to outsource one activity to at least two providers. While is still means that the customer is invisible to the business, this approach allows a business to compare performance among providers and, critically, reduce the extent to which they are dependent on a single provider. Of course, this approach will only be cost effective where a business is operating with sufficient scale of operations, and where neither outsourcing provider insists on exclusivity.
3. What to do when you cannot see the customer directly
The academic research on outsourcing suggests a few ways of reducing problems of not being able to “see the customer”. While there is unlikely to be a “cure all” solution, deploying a combination of these strategies helps avoid the worst.
Select the “right” outsourcing provider. Outsourcing providers come in different forms and shapes. Some are highly motivated by the economics of the deal – something academics have termed “business people”.
Others might want to build long-lasting relationships and could be considered “friends”. Selecting “friends” is not easy. Just about every service provider claims to put weight on building relationships and to be your “friend”.
How can you tell these two different partner types apart? Work by Heide and Wathne (“Friends, Businesspeople, and Relationship Roles: A Conceptual Framework and a Research Agenda," Journal of Marketing), suggests such friends can be selected, created through socialisation, or through monitoring.
Selection can occur through trial programs and supplier or outsourcing qualification programs. Most large companies have such programs but they are rare for smaller companies.
Socialisation can occur through (mandatory) training programs or by getting the outsourcer to invest in the relationship – for example, by investing in technologies that cannot be transferred to other business relationships it may have. If such investments are substantial and cannot be used easily in other outsourcing arrangements they function as ‘hostages’ that induce the supplier to focus on the long term.
Monitoring is a third strategy and relies on the outsource provider being open to inspections, site visits, (financial) audits that allow companies to “meter” activities and outcomes of outsourcing providers.
Strategic information sharing. Because outsourcing providers are directly in touch with customers, they know things about customers that others don’t. These information “blind spots” may extend beyond knowing whether customers were provided with quality service by the outsourced provider, through to whether the provider is meeting regulatory requirements (for example, relating to product fee or other disclosures). Where these occur they can be costly to remedy, and difficult to reverse.
Such information blind spots require strategic information sharing between the company and outsourcing provider. Sharing information is often difficult. Outsourcing providers may not want to disclose problem situations that undermine their own undertakings. Meeting information sharing requirements may also require additional information collection and be costly to compile or manage on an ongoing basis. Or the advantages of sharing information may be long-term without clear immediate benefits to the outsourcing supplier.
Where information is shared, plans between the company and outsourcing provider can be coordinated and these blind spots avoided.
Managing the relationship. Building ongoing relationships with customers based on loyalty and value are critical elements in maintaining competitive advantage. The same philosophy has been found to underpin viable and resilient relationships with outsourcing providers. Depending on the value proposition associated with these relationships, investing in and managing the relationship are critical to aligning interests between the business and its outsourcing partners.
What will happen to outsourcing providers?
The globalisation of service outsourcing began to take off in the late 1990s. Finance and accounting (FAO) were one of the first processes to be outsourced. The outsourcing of these services is directed mostly to India, followed by Sri Lanka, China, and the UK. The largest Indian players, mostly based in Mumbai and Delhi, for FAO are Accenture, Capgemini and WNS.
Despite enormous growth, Hackett, a Florida-based firm that advises companies on outsourcing, predicts that the migration of services to India and to other offshore locations will slow this year and that further migration will stop entirely by 2022. The reason for this startling prediction is that by 2022 about 80% of the FAO tasks that can be outsourced, will be outsourced by then.
The globalisation of service outsourcing began to take off in the late 1990s. Finance and accounting (FAO) were one of the first processes to be outsourced. The outsourcing of these services is directed mostly to India, followed by Sri Lanka, China, and the UK. The largest Indian players, mostly based in Mumbai and Delhi, for FAO are Accenture, Capgemini and WNS.
Despite enormous growth, Hackett, a Florida-based firm that advises companies on outsourcing, predicts that the migration of services to India and to other offshore locations will slow this year and that further migration will stop entirely by 2022. The reason for this startling prediction is that by 2022 about 80% of the FAO tasks that can be outsourced, will be outsourced by then.
However, at its core, these relationships need to be built on shared values about how the relationship is to work for both partners – and to the benefits of customers. These values and outcomes also need to be reflected in the ways that the performance of relationship is measured and incentivized.
Perhaps most importantly, where these relationships are expected to operate and evolve over time, then a clear understanding of how the parties will make decisions, solve problems, negotiate any conflicts or go about planning and implementing any change to the relationship need to be clearly articulated at the outset of the relationship.
Gain direct access or handle select elements directly. As we have noted, retaining exclusive access to your customers has several benefits and drawback. However, it is also possible to retain direct access through insourcing some activities – particularly complaints handling – and handle these directly, leaving service delivery to an outsourcing provider.
Why is this approach proving successful? Having a direct view on customer complaints allows companies to monitor outsourcing providers in a cost efficient way. As the outsourcing provider cannot rectify problems without such information problems cannot be easily hidden, thereby giving companies a clearer view of what is going on.
This also puts the outsourcing provider in a position of dependence and allows companies to detect issues early on without relying on the honesty of the outsourcing provider. In the long run, this also helps maintain more commitment towards the customer. This last point was emphasised in a Forbes report (Outsourcing Customer Service May Be Penny-Wise and Pound-Foolish)which suggested a strategy of complete outsourcing customer service is pennywise and pound foolish; as complaints handling is outsourced customers face increased scripting, fewer solutions, and company learning is reduced.
Overall, then, the experience of many businesses is that outsourcing can be extended to many areas of the business’s operations that traditionally might have thought to be core business – activities which were viewed as potentially risky to outsource. However, as we have indicated, it does represent a double-edge sword: it may reduce costs, but this may come at the expense of maintaining control over strategic relationships with customers and outsourced providers. Yet, the evidence shows there are solutions to many of these challenges. With careful management even these strategic relationships can be maintained throughout outsourcing – to the benefit of the customer and the business.
Industry view: Wayne Macartney, general manager, Loanworks Technologies
Loanworks Technologies established a presence in Manila in 2008, and our back office is firmly established there. We chose the Philippines as it’s a good cultural fit with Australia, with mature infrastructure, excellent English proficiency and manageable time-zone differences.
Under our Outsource Professional Services brand we also provide outsourcing solutions to industry. These include dedicated staff and bureau options for loan processing, commission processing, outbound lead generation, accounts and marketing services. In 2014 we implemented call centre infrastructure and now offer outbound cold lead generation campaigns. These have proven to be extremely effective, for example one client’s campaign resulted in average cost for a set appointment with a fully qualified lead of $25 per appointment.
We find that the best approach is to start by offshoring straightforward, routine tasks such as data entry, then build on that, progressively adding increasingly value-added services and processes to the mix. Our experience is that Manila provides a pool of highly qualified, experienced and motivated staff – our clients benefit from significant cost savings without compromising on quality.
Industry acceptance has increased dramatically over the past twelve to eighteen months; there are now enough success stories to balance against the experiences of early adopters, and there’s now an established network of Australian companies operating out of the Philippines.
Loanworks Technologies helped pioneer outsourcing within the mortgage third-party channel
Loanworks Technologies established a presence in Manila in 2008, and our back office is firmly established there. We chose the Philippines as it’s a good cultural fit with Australia, with mature infrastructure, excellent English proficiency and manageable time-zone differences.
Under our Outsource Professional Services brand we also provide outsourcing solutions to industry. These include dedicated staff and bureau options for loan processing, commission processing, outbound lead generation, accounts and marketing services. In 2014 we implemented call centre infrastructure and now offer outbound cold lead generation campaigns. These have proven to be extremely effective, for example one client’s campaign resulted in average cost for a set appointment with a fully qualified lead of $25 per appointment.
We find that the best approach is to start by offshoring straightforward, routine tasks such as data entry, then build on that, progressively adding increasingly value-added services and processes to the mix. Our experience is that Manila provides a pool of highly qualified, experienced and motivated staff – our clients benefit from significant cost savings without compromising on quality.
Industry acceptance has increased dramatically over the past twelve to eighteen months; there are now enough success stories to balance against the experiences of early adopters, and there’s now an established network of Australian companies operating out of the Philippines.
Loanworks Technologies helped pioneer outsourcing within the mortgage third-party channel
Erik Mooi is a senior lecturer at the University of Melbourne and works on topics such as outsourcing, inter-firm contracting, technology licensing, and franchising.
Peter Gahan is director of the Centre for Workplace Leadership and professor of management in the Department of Management and Marketing at the University of Melbourne.
Elham Ghazimatin is a doctoral researcher at the University of Melbourne.
