Gartner: Customer service outsourcing often fails

Companies that outsource customer service functions to reduce costs may risk reducing their client list as well, Gartner warned Friday.

In fact, the researcher predicted that through 2007 some 80 percent of organizations that outsource customer service projects to cut costs will fail. This is because outsource centers often have high staff attrition rates, of up to 80 percent, and many companies neglect to manage their outsourced operations, Gartner said.

"Companies are not looking at processes from a customer point of view and this is risky," said Gartner research director Alexa Bona.

Companies that outsource internal functions such as human resources and finance don't have the same level of exposure because problems are dealt with by their own staff, Bona said.

Customer-facing processes such as call center services and tech support require specific training and management to prevent client loss, she added.

Gartner predicted that through 2008 some 60 percent of organizations that outsource customer-facing functions will face client defections and hidden costs that outweigh any potential cost savings. And reduced costs are not guaranteed, Bona said. Gartner found that companies that employ outsourcing firms for customer service processes pay 30 percent more than the top 15 percent of global companies pay to do the same functions in-house, she said.

Gartner predicted that the customer service outsourcing market would continue to grow, however, from $8.4 billion in 2004 to $12.2 billion in 2007. But it still represents a small portion of the total outsourcing market, accounting for less than 2 percent this year and growing to just under 5 percent in 2007.

Companies should choose their outsourcing firms wisely, Bona noted, especially since there is a great deal of movement and mergers in the Indian outsourcing market at present. The region has seen rapid growth, and big U.S. outsourcing firms are looking to make buys in the region. Gartner forecast that 70 percent of the top 15 Indian-owned startups that offer call center services will be bought or marginalized by the end of this year.

"When that kind of rapid growth occurs, processes break down," Bona said. Indian outsourcing startups currently have a staff turnover rate at the 55 percent level so companies should look for outsourcers with more stability, she added.

While outsourcing key customer-facing functions carries a high level of risk, successful outsourcing of other non-core operations can reap cost savings of 25 percent to 30 percent, Gartner said.

To make outsourcing work, companies should map their customer-facing processes from end-to-end and dedicate sufficient management to the project, Gartner said. Companies are also advised to develop innovative contracts that tie service levels with compensation, according to the researcher.