The Call to Outsource – It’s Not just About Cost Reduction

Major point why most big companies Outsource is not always cost reduction. It is the diversified approach brought about by culture differences, the need and the possibilities. The cause and effect it may bring forth in a business which may open doors for innovation and change. Most importantly, it gives a difference, to a somewhat complacent experience of consumers or patrons.

Not always cost reduction

It highly depends on the need at present. If the company is planning to expand its market, plans to have a telemarketing division to push the sales of the product – This is considered as expansion and not cost reduction. If the company wanted to outsource that division, is it because they wanted to reduce cost? – No. It is because a new division for telemarketing or “business process” means a new “business structure”. They are considering to outsource their sales campaign because they do not want to meddle with the technicalities and set up of their telemarketing plans. Therefore getting an outsourcing service to run this business process is a better option for them.

Exhibit 1

The scenario is since the company is an apparel industry who exports their line .  A phone business structure or telemarketing is something that they don’t understand, if they consult their business analyst, he may find the idea feasible. Just feasible, because he is required to give a solid yes or no – only if he understand what Outsourcing is. Apparently, he is a business analyst, experienced in the apparel industry and the economics surrounding it. Businesses follow a pattern of conservative and traditional approaches that worked for so many years. It makes Outsourcing risky because of its liberated structure. So the board has come into a conclusion that they will look for someone who can do it for them – who can do the Telemarketing project they aim to materialize soon which is common in Outsourcing. Companies often seek Outsourcing Advisors or Consultants before going into a Provider, BPO or Call Centers. It is necessary to get a full-scale layout of the business process because a rise in the number of sale of products  is an increase in the demand for support and production – it means an increase in the number of laborers or overtime hours.

Why Outsource?

1. Is the cost of their operations the main reason why they have to do it?
2. Is this their first time to consider outsourcing?
3. As a company who has a solid and credible product and service – what will be your major agenda or objective while promoting your product into a new market using a new business process?
4. When do you think they will start considering cost?

The first issue is to expand their market and to cover a different territory – fast but efficient. Build a reputation, and gain consumers – this is the agenda or objective.

Other Options other than Outsourcing

1. Indirect – very common is advertising i.e print ads, tv commercial, radio commercial, posters etc
2. Direct – i.e sales man, sales representatives, promotions, telemarketing

In order for them to prioritize these options, they categorize it based on its possible result. Indirect mode is a good product exposure, it gives a positive “branding” effect. People go for what’s “in” and “known brand”. So this is something they will definitely go for – even the cost is outrageously huge. If they want this done and results is on a time line – they will go heavily on their Direct approach, unfortunately, they know that sales rep and sales man don’t cover and touch base with so many people in one day – most probably out of 10 stores they spoke with, only 5 will say yes after a week. Not really helping much, so they just opted to go for telemarketing which will cover a lot of stores, and will definitely yield a better conversion on contacts.

Based on these inputs, the idea of telemarketing was brought about by certain needs in meeting the target market and its urgency. The company who is willing to expand, knows they are liquid enough and wants more, so they will invest on it. Their main objective is not just to gain new market, but build a reputation within that market. Building a reputation takes time, and a good company representation is required. It costs. And they know that – sure they need to know they are working on an allotted budget for the project, but the costs is the last thing that will be a hindrance. At least for this case. They opted to go for Outsourcing – why? Because they don’t know how they will apply its concept on their industry. Since they want to start the expansion right away, they don’t have time to “set up” a full division of this new business process – as it requires time, a lot of work and most of all expertise.

The only debatable point here is, who is the best outsourcing company for them? Are they suppose to get an outsourcing company within their locality (where the business is located)? Or their target market’s locality (where they want to expand their business)? Or where most outsourcing companies are located (India, RP, etc)? The bottom line for this scenario is – who can do it the way they want it done? They still want to maintain their usual business practice which had earned them years of loyal customers – good company representation and the acceptance (reaction or feedback from consumers who will get calls from telemarketers) of the market, and the percentage of the expected sales produced – so to say the quality and the conversion.

It is not about cost reduction

Let’s not make cost reduction as one of the reason companies will call to outsource. One is every company’s need or objective is different. Second is outsourcing is not really cheap at all – especially if you are looking for a quality package  such as  infrastructure, location, technology, scope, experience etc. Third, and I think business owners and companies will agree with me on this, – this is not the reason or cause to outsource. Cost reduction is the effect or what you can get as a result of a proper outsourcing implementation. Otherwise, if outsourcing failed to meet the company’s objectives (target quality and sales) – it is a loss not a profit – and definitely not cost reduction for them.

Major Misconception about companies who outsource. The current operations cost is too high and they are making outsourcing as an alternative to their man power.

Maybe but highly unlikely. It’s probably because they are running 200 employees for the past decade. All of a sudden the economic turmoil affected their production and revenue – not enough to reach their margin (lowest). So they will choose to just cut down their staff to 50%, and then outsource it. Is that it? But what if this is a chemical company? And 75% of their employees are engineer? How do you expect this company to adapt to the outsourcing realm? If this happens – this chemical company won’t have any chemical solutions to experiment on, they won’t have any product or services to sell. Yes, they won’t have too many staff to pay wages, but they won’t have any service to sell either. So let’s take that off of the equation, probably they can outsource their administrative staff, as back office support. It’s about 10% of the total employee number. Survey states that companies will not go through the hassle of turning a hair, and experiment on what will happen. If the insignificant number of employee will be relieved all because of the cost friendly promise of outsourcing – It is not worth it. Most especially if they are outsourcing it within their same locality, through a local outsourcing company. Where is cost reduction there?

Let’s take a telco company for example, they operate nationwide. As a phone service company, they are required to have hotline numbers to support customer inquiry, sometimes in every area – taking US for example that has a lot of state. Yes, outsourcing can work. But how can they reduce cost? Some branches are already outsourced – within a local outsourcing center. Will that save them a penny? Wage rate are almost the same – local. They probably will save on – a. rent (2nd in the list of over all operational expenses) since they don’t have to pay for the office of their in-house call center, b. electricity, c. VOIP and phone services, d. water and equipment plus its maintenance. But they won’t save on salary which is actually at 72% of overhead expenses. That is because they are paying for a local outsourcing company. However, they will save if this is done through Offshore outsourcing where the value of the dollar and other currency has an advantage.

Reality of Outsourcing

Outsourcing is a structure used as a tool not a solution. It becomes a solution once results are favorable. It aids in attaining goals and targets with mitigated risks. Outsourcing companies are present in almost all countries. The relevance of outsourcing for businesses is the amount that they will save not on employee salary, but on the maintenance and set up of an added or required facility or office. If this company wants to save a substantial amount, they will consider outsourcing but – offshore, to level the wage rate value and take advantage of the currency rates.


3 thoughts on “The Call to Outsource – It’s Not just About Cost Reduction

  1. Good to see a discussion like this get started. It’s often assumed outsourcing is always done for labor cost advantage. But proximity to markets, regulatory regimen, tax codes, labor rules, workforce skill level and exposure to litigation can also play a role.

    • Thanks for your positive reaction Joe 🙂 You and I would agree, it takes a company years of foundation building to attain what they have now, and yes they need a “tool” to sustain and maintain their service level and growth. But a tool is never a solution, it is there to support, but can never be a replacement or alternative. Outsourcing is healthy – and it needs to be promoted and interpreted base on its purpose.

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