The Global Back Office: Beyond the Hype

  U.S. card-industry firms began moving call centers to India and other nations several years ago to cut costs. But now, familiar and not-so-familiar problems are appearing. Is an offshore back office still worth the effort?
  That customer-service representative you're talking with may sound like she's from the deep South, but it's just as likely she's in New Delhi, Manila, or Panama City. That's because more and more, issuers, merchant acquirers and other card-industry companies are outsourcing back-office operations.
  Offshore outsourcing holds a certain allure: Employees are better educated but willing to accept salaries substantially lower than their counterparts in the United States. They also allow a U.S. company to offer 24-hour, seven-days-a-week service without the cost of the higher salaries that must be paid to employees who work evenings and overnights in the U.S. And foreign workers are perceived as more motivated than American workers, viewing the job as the start of a career rather than a dead end.
  Financial-services firms, including U.S. banks, are expected to move more than 500,000 jobs offshore over the next five to 10 years, says Andrea Bierce, managing director in the New York office of A.T. Kearney. The relocations are expected to reduce annual operating costs for the companies by more than $30 billion.
  By 2008, one in 15 agent positions serving U.S. citizens will be outsourced to a foreign market, up from one in 24 today, says Daniel Hong, customer relationship management and call-center technology analyst at New York-based Datamonitor USA.
  But offshore call centers also pose some unique problems. Many of the agents, while English speaking, have accents that U.S. consumers often find difficult to understand. And foreign agents unfamiliar with American customs can offend consumers. That can be a fatal flaw if the agent is involved in activities, such as collections, that require finesse.
  What's more, while most offshore operations report attrition rates sharply lower than those found at U.S. operations, there are signs that some foreign workers are beginning to experience the burnout so common in American call centers.
  Be that as it may, there is no shortage of people willing to sing the praises of offshore outsourcing.
  Going offshore can save a company anywhere from 4% to up to 80% in direct labor costs, says Molly Cashman, director of self-support operations at Deerfield, Ill.-based APAC Customer Services. APAC, one of the largest teleservices firms serving the card industry, has a call center in Manila and 32 call centers in the U.S.
  For call-center agents in India, labor is up to 90% cheaper, Hong says.
  And A.T. Kearney found that companies typically paid call-center employees in India an annual salary of $2,000, compared with $28,000 in the U.S., Bierce says.
  Labor accounts for the majority of outsourcers' overhead costs and nearly 66% of call-center costs, Hong says.
  But lower labor costs aren't the only attraction. Companies are moving abroad in search of lower employee turnover rates.
  "You can't really blame the companies (for going offshore) if they're losing ... 40% to 50% of their (U.S.) call-center work force," says Elio Evangelista, senior analyst at Cutting Edge Information. "It gets tough to continue staffing when you know that overseas the turnover rates can be as low as 5% to 10%."
  Moreover, offshore workers tend to be better educated than in the U.S. "Better screening goes on a lot of times overseas because companies are more sensitive to a customer reacting to an overseas speaker," Evangelista says. "When you look at American call centers ... people are just looking to fill the seats."
  Locating call centers abroad also allows card companies to employ a "follow-the-sun" strategy. That's when calls made by American consumers during the overnight hours in the U.S. are routed to an agent in the Philippines, where it's daytime. The company "is not only paying cheaper for the agent just because it's the Philippines, but cheaper because they are operating in the daytime, prime time hours in that region," Hong says.
  Expectations
  But opening an offshore call center can be challenging, says Charles D. Bertrand, principal at Houston-based Marion Financial Corp. Marion Financial is a merger and acquisitions firm serving the accounts-receivable management industry. For one thing, although many in the labor pool speak English, they still have to be "groomed to approach the effectiveness of the American work force," he says. "It's a development process, because there's so much the typical foreign worker needs to learn about the American culture in order to effectively interact with American consumers."
  For example, offshore workers need "a working knowledge of the credit-granting system here," or collection strategies for past-due accounts, Bertrand says.
  "Consumers have certain expectations of how they'll be dealt with, certain types of courtesies, certain types of phraseologies. (Offshore agents) have to learn how to phrase their request in such a way that's acceptable to the American listeners," he says.
  Meeting consumer expectations is especially important in areas such as collections.
  "You've got somebody that's overloaded with debt and ... they can't pay everybody, yet the (offshore) collector can't accept that," Bertrand says. "You can see the potential for friction."
  The use of heavily accented English by offshore agents also can present problems.
  "Americans aren't adverse to accents, per se," Bertrand says. "We're a nation of immigrants. That's not a problem. But if you can't understand the other person very well, then that's a problem."
  However, others say that language differences don't necessarily create problems between a foreign call-center rep and an American consumer. "As a long as a solution is reached (for the customer), that's the main thing," Evangelista says.
  U.S. companies can minimize language problems by selecting countries that are heavily exposed to American culture.
  "There are some companies that have opened in the Philippines that swear that Filipinos have much more of an American-type accent than the Indians and ... been more exposed to American culture because it is a former U.S. colony," Bertrand says.
  That exposure is why APAC chose to open its call center in Manila. "We wanted to make sure our clients didn't have any issues with pronunciation or enunciation, that we could get a higher class of worker," Cashman says.
  In the Philippines, all business is transacted in English, she says, adding "they've been Americanized for about 50 years."
  APAC requires offshore workers to speak in the "tone and quality of voice of American broadcasters," she says.
  Some companies are going so far as to teach offshore agents to speak with accents of various U.S. regions. For example, a caller from the South would be directed to an Indian agent speaking with a regional Southern accent "just to provide the added comfort," Hong says.
  That's not to say that only the U.S. companies are schooling foreign call-center workers in English. The governments of India, where the British form of English is spoken, and the Philippines both are "spending a significant amount of investment in terms of getting the people used to speaking to Americans," says Paul E. Weitzel, executive vice president of corporate development and international operations for Horsham, Pa.-based NCO Group, a collections agency that has centers in India, Canada and the Caribbean. "There are a lot of language programs that are going on and a lot of it is state-sponsored."
  'Americanization Training'
  But schooling offshore workers in the fine details of American-style English is not enough. "You have to talk to them about the culture too," says Steve Leckerman, chief operating officer of accounts receivable outsourcing for NCO Group. "Part of your communication with the consumer on the telephone-the dialog and building the relationship-helps when you understand how that other person on the phone lives."
  Leckerman says NCO's education for call-center agents includes "cultural and environmental training-how does a family live in the U.S. compared to India, what do they do on holidays, how does the family structure work?" He notes that in India, three or four generations live in the same household. "It's unlikely that you're going to see that in the U.S.," he says.
  APAC requires its workers to "pass at 100% what we term Americanization training," Cashman says. "It allows them to understand the customers they will be interacting with and it allows them to understand a little bit more the slang."
  American Express Co., too, demands that offshore workers meet certain standards. "Our service reps have to meet a high level of service," a spokesperson says. "That's what our customers demand."
  Because it is a global brand, AmEx has had operations, especially travel agencies, around the world for more than 150 years, the spokesperson says. It has been in India since 1921. "We have expanded in India over the years as well as in other locations," she says.
  Offshore centers often require a different management style than found in the U.S.
  Such is the case in the Philippines. Filipinos prefer to receive feedback, whether negative or positive, in private rather than in front of their co-workers as is typical in the U.S., Cashman says, adding "all coaching, even answering questions, is done behind closed doors."
  While it's true that labor costs are generally lower in an offshore center, labor is only a part of call-center expenses. There also are what Bertrand terms "soft costs" that must be factored into the equation. For example, to ensure quality service in offshore centers, companies must send executives and trainers abroad on a regular basis. That means higher travel costs.
  "Traveling 10,000 miles and staying somewhere is expensive, but it needs to be done," he says.
  U.S. companies also may encounter unexpected costs in the form of severance pay, Bertrand says. In the U.S., an employer can terminate a worker at will with little financial consequence save for a possible increase in unemployment insurance rates or a small severance package. That's not necessarily the case abroad. In India, labor laws mandate that a company give severance pay equal to six months of salary, he says.
  In addition, how offshore employees are compensated differs from the U.S. in many cases. For example, while call-center workers typically are paid on an hourly basis in the U.S., agents in India are paid a monthly salary.
  "You're obligated to pay that salary whether the people work or not," Bertrand says. "If your communication link is down, you have to pay the people anyway."
  Companies also must offer to employees special services, such as transportation to and from work, especially for those who work at night, Bertrand says. "They expect the company bus to pick them up at their home and bring them to work and take them home," he says.
  And U.S.-based companies have to budget for back-up communications lines to ensure no breakdown in service, Bertrand says. "The physical distance separating the countries means that the telecommunications link is more fragile," he says. "There are more places it can break down."
  Geopolitical Risks
  In an era where terrorist activity is almost a daily occurrence, companies must be aware of the geopolitical risks, observers say. India has had ongoing run-ins with Pakistan over the Kashmir region, with both sides threatening to use nuclear weapons. And the Philippines has seen its share of kidnappings and terrorist attacks from Muslim insurgents.
  APAC took security into account before selecting a site in Manila, Cashman says. "The area we've been located in has been unaffected by any political activities, but we do have guards and heavy security in the centers to make sure" employees are safe, she says.
  But the threat of unrest isn't enough to discourage card companies from setting up offshore call centers, Bierce says. "What's been happening is companies are deferring some of the decisions," she says. For example, during the height of the Indian/Pakistani conflict, "people didn't want to travel there, and decisions got deferred ... but companies are still moving forward because they feel it's the right thing to do" to maintain profitability.
  Because of the limitations of offshore agents, many companies will send to them only simple tasks, for instance, follow-up calls on first-payment defaults, Bertrand says. "This is a very, very simple kind of collections, the famous friendly reminder," he says. "It doesn't require a lot of negotiating skill."
  Actions taken later in the collections process "where you have to talk to the customer about possible actions that can be taken against them and the consequences, that's where diplomacy is so important, and nobody offshore that I know of has succeeded in mastering this skill," Bertrand adds.
  That's why call centers in the U.S. "tend to handle higher-value inbound calls such as customer service for large banking customers," Datamonitor's Hong says. "In offshore centers, the lower-end inbound and outbound customer contact services are prevalent."
  Dell Computer learned that offshore centers may not be the best place to handle technical-support calls. After customers complained about the service at its Bangalore, India, operation last fall, Dell began rerouting the most complex calls to centers in the U.S.
  The Exception
  But Dell's experience in Bangalore is the exception, not the rule, A.T. Kearney's Bierce says. Dell "ramped up too quickly," she says. "They went from zero to 5,000 people in just under a year."
  Dell also failed to do extensive training, which includes accent neutralization, so "the agents were very difficult to understand," she says. "And they didn't focus enough on the customer-service requirements."
  A Dell spokesperson declined to comment, except to say that the company "realigned some of the queues to reduce the complexity in Bangalore."
  Meanwhile, there are signs that offshore call-center agents are beginning to experience burnout. A recent study from New Delhi-based NFO World Group found that many Indians are becoming disenchanted. Indian workers are initially happy with the job because it pays better than other jobs, according to the survey of 1,000 call-center agents. But the high education level so prized by U.S. companies leaves Indian agents pining for jobs that are not so monotonous and lacking in challenge, NFO says.
  "Further, although these employees were fully aware of the unique demands of their jobs ... such as peculiar working hours, the need for assuming pseudo identities (and) learning foreign accents. They were not quite prepared for the burnout rates or their ability to handle the 'work-life balance,'" according to NFO.
  Workers also haven't found the personal and professional growth they were seeking, NFO says.
  That's what NCO Group is finding in its India-based centers. "The attrition we are experiencing is just as high in India as we see in the U.S.," Weitzel says.
  Most of the Indian workers are between 20 and 27 years old and "like most 20-to-27 year olds, they don't want to be working everyday from 11:30 at night to 6 in the morning, and then sleeping during the day," he says. "After a period of time, they're growing weary of this."
  Offshore attrition rates can vary greatly, even within a country, says Randy Harris, chief operating officer-offshore, of telemarketing giant Sitel Worldwide. "There are a couple of cities right now in India that are very saturated with contact centers, and you do experience higher than normal attrition rates," he says. Attrition runs between 25% and 50%.
  Companies also may experience higher absentee rates. "When you talk about offshore India, offshore Philippines, you have to look at absenteeism percentages," Harris says. "They're normally higher than the norm you are used to."
  Companies need to understand the offshore work force, Harris says.
  "You have a younger work force, a work force that is working night hours because in the U.S. it's daytime. You have to look at the fact that their holidays don't match up with our holidays," he says. "You have to really have your eyes open going into it."
  Despite these drawbacks, many card-related companies remain enthusiastic about the offshore centers. But there is one wild card-the potential for a backlash for moving jobs overseas at a time when the U.S. unemployment rate is still fairly high.
  Thus far, most of the backlash has been directed at software companies that are outsourcing development and engineering work. But there are many card industry-related companies that are reluctant to go abroad and risk unleashing the wrath of the American consumer, observers say.
  "A lot of companies are hesitant to deal with the P.R. of moving a lot of jobs overseas," Evangelista says. "They don't want to seem like they're taking away American jobs."
  'A Global Footprint'
  No matter what functions are outsourced offshore and which countries are chosen, the card industry will face new challenges. "Any company that wants to groom an offshore work force must put time and effort into it," Bertrand says. "It's not something they can just sign a contract and say 'here, you've got the work.'"
  For now, India and the Philippines are the countries most favored by card-related companies seeking to outsource offshore. But there are other countries seeking offshore business, including China and South Africa.
  "Two million people are studying English in China," Hong says. Eastern European countries, too, are looking for a cut of the business.
  And as the Hispanic population in the U.S. grows, many card issuers are looking to set up centers in Latin America to service the market, Hong says.
  What's more, card-industry companies are beginning to look at offshore outsourcing "not as a single destination, but rather as a global footprint as what's the best offshore alternative," maintaining operations in multiple overseas locations, Bierce says.
  For the time being, it appears the move to offshore locations will continue because of the huge cost savings.
  It's an opportunity many U.S. card companies, struggling to be profitable, are finding hard to resist.