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Legislating Customer Choice and

By Larry Dignan  |  Posted 2004-04-01 Print this article Print

Giving customers a choice of where in the world to send work will require more-flexible outsourcing deals.


Meanwhile, politicians are teeing off on offshore outsourcing as they race toward the November elections. Democratic presidential candidate John Kerry suggests that companies disclose where its call centers are located and advocates a "consumer's right to know" effort to be policed by the Federal Trade Commission. Last month, the Senate approved an amendment that would prevent tax money from being used to send work overseas. The legislation, proposed by Sen. Chris Dodd (D-CT), focuses on three areas of government contracting: privatizing of federal work, federal procurement of goods and services, and state-government procurement using federal funds.

Larsen is supportive of Kerry's proposal, adding that whenever customer data is involved there should be disclosure. Offshore coding, however, doesn't need to be disclosed, Larsen says.

According to Maheshwari, the offshore-outsourcing backlash suggests that E-Loan's approach may copied by other business-to-consumer companies in the next three to five years. That timeline could be sped up considerably if Kerry wins in November and his proposals actually become law.

"There's a high probability that this will catch on, but it won't happen quickly without legislation," Maheshwari says. "It's a good compromise politically. This approach would allow Americans to make a choice-just like they did with driving U.S. or Japanese cars."

AMR Research analyst Lance Travis, however, dismissed the idea. "I think it's a clever marketing ploy," he says. "Most people don't think about it. People want lower costs or faster service."

Nevertheless, Travis added that giving customers a choice of offshore or U.S. processing on a large scale could provide some management headaches. "If 85% say they wanted to stay in the States, you might as well stay 100% in the States," Travis says. "Or you'd have to make offshore more compelling to change the percentage and then you'd lose margin."

Larsen says he's been pleased with the response to his pilot so far. About 85% of 4,000 customers have opted for offshore processing in return for two days' faster processing. He says he has been pleasantly surprised that customers haven't asked for price breaks yet, but adds E-Loan will pass along savings if more customers opt out of offshore processing. E-Loan's offshore operations are running at 25% capacity.

E-Loan's pilot is focused on fraud detection and verification of customer data, comparing information entered during online applications against hard-copy documents, such as W-2 forms and mutual-fund statements. These supporting documents are scanned with personal identifiers removed and sent via a secure network to offshore workers, Larsen says. Customer data resides exclusively in the U.S., as do duplicate processing efforts performing the same tasks.

Terms of E-Loan's deal with Wipro are confidential, but it took 6 to 8 months to set up and the lender brought in Indian workers to its Cambridge headquarters for training. The setup involved one operations project manager, responsible for business-process routing, training and execution, working with a technology project manager. The technology manager coordinated hardware and software needs and engineering resources. Now up and running, the Wipro deal requires 2 to 3 hours a day of the operations project manager's time.

Not all companies, if forced to follow E-Loan's path, would use the same approach. Upromise, a Needham, Mass.-based college-savings company, would offer consumers a chance to opt out of offshore outsourcing, but would keep benefits on par with the U.S.-based choice.

"I think E-Loan's program is more about saying to customers: 'We'll give you an onshore choice, but there will be a time or pay penalty unless you stay in the cheaper channel,'" says Jeff Robison, vice president of customer care at Upromise.

According to Robison, a better choice would be to allow customers to choose on equal terms whether to use workers in the U.S. or offshore. He says it would be only a matter of time before backlash press reports detailed how companies offering consumer choice on offshore work were trying to skew results to send jobs abroad. To Robison, the only thing that matters to customers is if the service is good, not where it's delivered from.

Upromise currently has call centers in India and the United States. The company handles all of its calls related to the administration of state-sponsored college-savings programs known as Section 529 plans in the U.S.. Upromise manages New York State's 529 plan, for example, and call-center workers that help investors must have Series 7 broker/dealer licenses-a qualification not easily found in Bangalore, Robison says.

Most non-investment-related calls to Upromise are routed to India and a call center managed by Daksh, a business-process-outsourcing firm. Robison says Upromise doesn't require its Indian call-center workers to adopt U.S. names, but also doesn't reveal where its customer-care staff is located for security reasons. The company doesn't reveal where its U.S. call center is based either.

Robison and other executives say the first move would be to change current business-processing deals. Most outsourcing arrangements are multiyear and based on a minimum guarantee of calls, transactions and work completed. Executives would have to be able to change those thresholds based on whether customers chose U.S. or offshore work.

These deals would have to be reworked to manage risk and ensure companies could outsource and insource on the fly, experts say. What would happen if a company locks into a three-year offshore-outsourcing deal only to find out that 95% of its customers choose to keep work in the U.S.? According to Gregg Kirchhoefer, a partner at Chicago law firm Kirkland & Ellis, if customers were allowed to set the de facto ratio of offshore and onshore work, current deals, which are largely inflexible unless service levels decline, would have to be altered with more exit ramps, perhaps a review every quarter.

Ultimately, offshore-outsourcing arrangements may not save as much money because companies that needed to alter volume guarantees may not get discount pricing, Kirchhoefer says. In addition, offshore labor would have to become more of a variable cost, able to increase and decrease depending on demand.

The catch? Flexible labor isn't likely to be completely dedicated to your operation. And there are also likely to be exit costs if a company chooses to end an agreement or scale it down dramatically, Kirchhoefer says.

Once outsourcing deals are revised to be more flexible, Robison says allocating labor and tasks would follow Upromise's current approach. The company routes call-center work through a customer-service application from Sunnydale, Calif.-based Blue Pumpkin. E-mail and other routing decisions are managed through software by Kana Software.

As for creating redundant operations in the U.S., Robison says he'd evaluate outsourcing a call center to an American company or building a new customer-care unit. One thing Robison says won't change: Location will be driven by costs.

"If we had to bring a call center back in, we'd look to low-cost areas-say Scranton, Pa., or Portland, Maine, where we could get good skills, lower labor costs, cheap real estate and tax breaks," Robison says. What You Should Do To Bring Offshoring Onshore

Think ahead. Assume future legislation will force you to disclose offshore outsourcing to customers and develop an internal contingency plan.

Revise contracts. Many offshore-outsourcing contracts are multiyear with few termination points. Renegotiate flexible terms in case you need to insource.

Forecast reaction. Conduct surveys to get a base assumption of how many customers will opt out of products or services derived from offshore work.

Build redundancy. U.S. call centers that overlap with India operations can double as business-continuity sites. Consider inexpensive rural areas in the U.S.

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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