Offshore Outsourcing

By Rob O’Malley

There has been much discussion lately about the outsourcing of call center services to countries such as India and the Philippines. Rather than concentrating on the pros and cons of offshore outsourcing, this article examines what is actually happening now and where these trends will lead us in the next five years.

Almost all such outsourcing originates in the United States. Other countries, including the U.K., are waiting to follow our lead. Exact data is hard to find because few companies admit to outsourcing overseas and many vendors are well known for inflating figures. In reality, there are about 6,000 call center seats in the Philippines with many more in India and growth is close to 100 percent per year. Although there is hype about outsourcing to other countries such as Malaysia, South Africa, and some Caribbean countries, they account for minimal amounts of traffic.

Domestic providers of call center services will be affected, but to what extent depends on the type of service they provide. The overall demand for call center services is still increasing but the offshore market is absorbing most of this. There is already over-capacity in the domestic outsourcing sector and the growth of offshore call centers will continue to squeeze margins and force consolidation. As a result, some vendors will be forced to downsize or go out of business.

India poses no threat to high-value call center work, since many agents there simply don’t possess the ability to communicate in English at a high level. The Philippines offers more of a threat in higher-value work as Filipinos generally speak English in a clear accent.

With the advent of IVR and the Internet, many predicted the downfall of live agents in American call centers. Those same people are now predicting the demise of the live agent call center industry because of offshore outsourcing. They were wrong before and they will likely be wrong this time. Vendors who are willing to transform and move up the value chain will continue to prosper.

One thing is clear: very few small operations are moving offshore. But as the market matures, smaller clients who tend to be cost-conscious will move. The growth will vary hugely from industry to industry. Some industries, such as publishing, are making significant moves offshore. Other industries such as IT, telecommunications and utilities are just beginning to consider overseas outsourcing.

Unfortunately growth in this industry will not meet the expectations of many investors, who have pumped millions of dollars into the offshore market.  The newer call centers have been careful not to spend vast amounts of money on technology; as a consequence they are able to be cheaper than the early players who are trying to pay creditors. These early players may well find the conflicting demands of their investors and clients may force them out of business.

There are essentially three stages of development for the overseas outsourcing industry:

Honeymoon period (until mid-2003): Offshore outsourcing companies are currently experiencing a honeymoon period with their shareholders, employees and governments. For the vendors in these locations, finding good quality staff is easy. Any industry seen as a growing industry attracts an abundance of employees especially when it is seen to be part of the developed world. Investors are still investing large sums of money into call center ventures even though it is not clear when they will start to see a return on their investment.

Decision time (2003-2005): Decision time is already starting on a small scale. Companies are starting to ask the following questions:

  • Is overseas outsourcing an option for my business?
  • Which types of work should I be outsourcing?
  • Where should I outsource?
  • Should overseas outsourcing be part of my long-term strategy or simply a tactic to fulfill a short-term requirement?

An economic recovery limiting the availability of agents here and continued downward pressure on costs will fuel the growth of the offshore industry. A number of Indian-owned companies will go bankrupt or be absorbed by American companies. Many of these will go bankrupt as a direct result of their over-investment in costly IT infrastructures, which are too expensive to maintain with increasingly tight margins.

Consolidation (2006 and beyond): Growth will slow and it will very difficult for new companies to obtain a significant market share. The size of each vendor will be substantially larger than now but there is likely to be fewer vendors. These vendors will operate in a number of locations and possibly across international borders.

There is a very rosy future for the offshore call center industry but it will not grow as fast as many have anticipated, and quality will become far more of an issue than at present. Poor quality call center companies at home and abroad will face extinction within the next three years. The market will become more sophisticated and the level of management needs to improve. Call center companies in the U.S. need to continue to move up the value chain.

Rob O’Malley is chief operating officer for Asian Call Centers, which was formed to offer high quality, English-speaking services from Manila to the United States.

[From Connection MagazineJan/Feb 2003]