American Outsourcers Revamp to Compete with Offshore Suppliers | Article

cakeWhether it’s jingoistic patriotic or just election-year rhetoric, Americans profess to prefer doing business with Americans. Yet they are pragmatic enough to know they need the cost savings offshoring provides to complete in a global economy. How can they have their cake and eat it too?

Here is the story of two American outsourcers who developed value propositions to allow them to compete with their Indian counterparts. Corporate Solutions, an IT supplier, revamped its process to wring out enough cost to be able to compete head-to-head with the Indians. Alpine Access, a call center service provider, tweaked its value proposition to offer services its Indian counterparts couldn’t at a low price. As its CEO Reginald Foster says, “Our goal is to create jobs in America. We are reinventing outsourcing.”

Corporate Solutions’ US Source Program

Steven Richard, President of Corporate Solutions, says the company enjoyed the good old days which he calls “the time of the fatted calf in IT.” Then he watched the company’s application development and maintenance (ADM) business slacken as customers preferred to use an Indian service provider because of the price.

The company decided to fight back. “Our goal is to keep IT and back-office accounting jobs in the US while still enabling companies to achieve aggressive cost cutting,” he says.

To do that, the company understood it had to do things differently. “We decided we would have to think like an American manufacturer in the 1980s because they faced a similar situation. We asked ourselves, ‘How can we cut costs?'” says Richard.

Corporate Solutions started the process with research. In 2003 it held focus groups in western Pennsylvania, (it’s headquartered in Pittsburgh), inviting large companies that were currently offshoring some part of their IT. “The focus groups discovered there were hidden costs of offshoring,” Richard reports. “Companies using offshore service providers were not getting the savings they expected.” The executive says the focus group participants initially believed offshoring could generate savings anywhere from 50-70 percent. But when they factored in the overhead of travel costs, long distance communication costs, quality shortfalls, rework, and the internal infrastructure needed to manage the project, these companies were achieving savings of only 20-25 percent.

Richard says when he added in the hidden costs, the Indian labor rate was not $20-$25 an hour (blended rate) as advertised, but closer to $45-$55 an hour.

Knowing the true target they had to hit, the executives at Corporate Solutions asked this question: “How can we reengineer internally to get our costs to that level?” Tom Devane, author of “Integrating Lean Six Sigma and High-Performance Organizations,” says combining the best parts of lean enterprise, Six Sigma, and high-performance organizations create a blueprint to do that.

Fortunately, the tough economy for American IT developers also came to the rescue. Many American developers were unemployed or underemployed because of offshoring. “There was a lot of talent available,” Richard reports. The lack of jobs also led to a decrease in salaries. During the dot-com boom, Richard says a good programmer could earn $100,000 a year. “Today they will take $70,000 or less,” he says.

The company also reengineered its other internal costs. First, it decided to take a smaller profit margin. “We learned that lesson from the manufacturers. They decided to make their money on volume not margin,” he notes.

Corporate Solutions also automated some internal processes to keep administrative costs low. “We developed an internal system to do a better job of aligning resources with the appropriate cost of a project,” Richard reports. “We got more careful because we couldn’t be wrong on either quality or cost. Back in the days of the fatted calf, you could afford to make a few efficiency mistakes. No more.”

Corporate Solutions calls its all-American development solution US Source. He maintains the program provides equal or better service and quality as the Indian suppliers offer. In addition, being in Pennsylvania means time zones are easier to manage. He also points out US law protects his buyers’ intellectual property. “And we understand American culture,” he says.

Currently five buyers are using the US Source program. “We hope to save hundreds of US jobs with this program,” Richard reports.

Alpine Access Elects to Handle the Complicated Transaction

If you own a consumer item that’s gone on the fritz and you called the help line, chances are you’ve talked to an Indian-based customer service representative. Call centers, along with IT programming, were among the earliest processes to go offshore.

Alpine Access runs call centers in the US. However, it owns no real estate and pays no utility bills. Instead, Alpine Access employs an army of 3,800 home-based call center agents who use their own telephones and local Internet connections. The company’s infrastructure routes a call to a free agent and sends a script or an order form to the computer screen. The software can match the call to an agent’s background for a better interaction.

Foster maintains he enjoys a 20 percent cost advantage over companies operating bricks and mortar call centers in America. “We provide a better value than onshore centers but are not as cheap as offshore,” he says.

Foster maintains his workers provide a better experience than his Indian competitors and traditional US-based call centers. “We attract top quality across America because we don’t have to worry about recruiting people within a 50 mile radius of a bricks and mortar call center,” he says. A majority of his workers are stay-at-home moms who are supplementing their income. Two-thirds are college educated and over 35.

Because of their education and maturity, Alpine Access’ agents specialize in complex transactions. The company trains them to cross-sell other products using scripts.

“As far as I’m concerned, we don’t really compete with offshore call center providers. If an outsourcing buyer pits us against them based only on price, they can have that business. Offshoring works with simple transactions. That’s not our strength. We handle the tough stuff.”

A Case Study: 1-800-Flowers.com

1-800-Flowers.com wanted to test call center customer service from India since the price was so attractive. So the company did a small test pilot there; it outsourced to an Indian supplier who had 20 people answering phones from 8 am to 10 pm.

Lou Orsi, Director of Vendor Relations and Strategic Projects, says the results were “fair at best.” The biggest challenge was seasonal scalability. Orsi says 1-800-Flowers.com experiences “a tremendous spike” in business on Valentine’s Day and Mother’s Day. “Our business goes up 10 times over normal during those times,” he says.

Orsi couldn’t find an Indian supplier whose business model could accommodate those seasonal spikes. “They didn’t have the ability to handle our increases in volume,” he reports. But seasonality is a pillar of Alpine Access’ business model. Orsi says he pays for 10 full time Alpine Access employees (FTEs) all year round (concurrent seats.) But during the holiday spikes Alpine Access adds another 250 people — “a significant increase in bodies,” he points out.

Second, Orsi was not convinced he could find enough Indians to work during these busy times. “If I was having difficulty finding 25 FTEs with good American English skills, how was I going to find another 235 for the Valentine’s Day rush? I didn’t want to take the chance and compromise my business. Those two holidays are a significant portion of our revenue,” he says.

As for the savings, Orsi says the Indian option was definitely cheaper. But Alpine Access “is a lot cheaper” than the brick and mortar call center outsourcers in the US. He says he’d rather pay more to Alpine Access knowing he’s eliminating all communication problems. For him, onshoring is the only way to go.

Devane says US outsourcers need to remove the blinders that have kept many narrowly focused on cost only if they are going to keep the work onshore. “By also systematically addressing speed, quality, teamwork, and the entire range of a customer’s requirements, it’s entirely possible to have one’s cake and eat it too,” he says. However, achieving this takes a strong commitment from senior management to allot time to get better. The author reports it takes a formal improvement process to engineer out waste and errors and ongoing vigilance of service quality and shifting customer requirements to make that happen.

Is it worth it in the end? Companies like Corporate Access and Alpine Solutions that have changed their businesses to keep work onshore and make healthy profits would answer an emphatic yes.

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