by Umesh Jain

COVER STORY Most observers agree that the US Contact Center Outsourcing market has been going through trying times in the last few years since the dot-com bubble burst. As globalization takes another shot at the survival of the traditional Outsourced Contact Centers, the companies in this industry will be forced to reinvent themselves by merging their core competencies with calculated strategic steps to survive and grow in the new competitive environment.

(Source: Merging Elements Quarterly, 2008 Issue 1)

Customer interactions are a key component of any customer management strategy. Interactions form experiences and experiences drive relationships and brand. Thus, any organization that desires to develop strong relationship based customer management strategy needs to focus on the points of interactions between the organization and its customers.

A quick look at the breakdown of the interaction volumes of most organization shows that a significant amount of these interactions (phone, e-mail, chat, voice self-service, etc.) are handled by the contact center. Consequently, the contact center plays a key role in the customer strategy of most organizations. Furthermore, a sizable portion of the contact centers of large U.S. corporations are outsourced to other companies whose core competency is around contact center operations. This industry, with over a few hundred outsourced contact center players is defined as the US Contact Center Outsourcing industry.

Glancing at the recent performance of some of the larger traditional US Contact Center Outsourcers shows that the industry is going through multiple challenges including financial, performance, growth and profitability.

A further analysis of some of the key players in the sector shows that even though the companies in the industry seem to have different issues dragging their performance down, there is a group of macro level observations that can provide us with a better insight on the underlying challenges.

Figure 1. Five year Operating Margin trend for some of the publicly traded US Contact Center Outsourcers (2002—2006)

So why do I care, you ask? Anyone involved in customer management needs to understand the dynamics shaping this industry. For professionals involved with the outsourcing industry, it is important to understand the picture in order to better plan and prepare for long term success while navigating existing challenges; for organizations that utilize the services of these outsourcers, it is important to understand how their outsourcing partners are coping with market dynamics in order to understand the long term viability of the partner; and, for organizations that do not outsource, it is important to understand the general challenges facing the biggest operators of contact centers in order to learn from the actions of companies that specialize in operating contact centers.

Market Recap

Let’s start with the good news. Most analysts that monitor the outsourcing industry believe that the sector will continue to grow. A recent report from Gartner – “Gartner on Outsourcing, 2007-2008” – predicts a growth of 8.1% in the outsourcing market with an even higher growth for the Business Process Outsourcing (BPO) market that includes the Contact Center Outsourcing space. The research firm's forecast has the BPO segment expanding from $160.7 billion in 2007 to $235.2 billion by 2011, a compound annual growth rate of 10.3 percent.

One trend that started a few years ago and has been picking up steam is the expansion of the service portfolio by the larger contact center outsourcing players. An example of this is the convergence of the Finance & Accounting (F&A) and CRM (sales, marketing and service) outsourcing spaces. Companies like Convergys, Sitel and NCO Group have been trying to stay ahead of the curve in this trend by buying their way through acquisitions. With the growing pressure on margins in the traditional contact center business, this trend of service portfolio growth will continue with a increasing focused on vertical industry specific opportunities like acquisitions of Third Party Administration (TPA) firms in the Insurance sector.

Another interesting dynamic that has been taking place in the market is the steady growth of local presence in the US onshore market by offshore BPO firms. Examples of these activities abound including Essar Group’s acquisition of Aegis and Hinduja TMT’s purchase of Affina, to name a few. Beyond the US, these global BPO players are not afraid to acquire and/or setup operations in other countries. The recent moves by HTMT, Daksh e-Services and Msource to pick up majority stakes in profit-making call centers in the Philippines delivers a strong message to the global companies that Indian BPOs can also function as MNCs outside the country.

Industry observers would agree that in their rush to take advantage of the demand growth, global scale, vertical and horizontal expansion, while adjusting to the new competitive landscape – it seems like a number of the traditional US players have overlooked the benefits of their core competencies and historical strength.

Historic perspective

To better understand the above statement, let’s look at the historical perspective by going back a few years. After the dot com bubble burst, a number of the US contact center players found themselves with the challenge of managing overcapacity that was built due to the forecasted demand from the e-business world. This was the same time that they started seeing the early signs of the emergence of strong offshore players in their core services. They fought the battles with these new competitors by benefiting from the available local capacity.

This opportunity was short lived. Once the capacity started running out, they were now faced with higher capital expenditure to keep on growing the local footprint. It was necessary because having a local presence and industry experience were their primary differentiators. Simultaneously, with the growing gap in cost of service between local and offshore locations, clients demanded more offshore in order to cut costs as they were themselves recovering from the dot com bubble burst.

With full capacity and increasing investment requirements to build new local facilities, the traditional US players started feeling the pressure of decreasing margins while domestic demand was decreasing due to the offshore gold rush. In order to address the growing threat of maturing new competitive players and to address the margin pressures in domestic business, a number of these players decided to grow their global footprint by setting up contact centers in India, Philippines and other offshore locations. This move helped the US players by positioning themselves as a “blended” provider with onshore and offshore locations for their clients to pick from. This global footprint also helped them keep their investors happy by protecting or even growing their overall margins through offshore services, while their domestic margins were being squeezed.

The speed and magnitude of change that was forced onto the traditional operators in order for them to survive was more than most of them had ever faced. Moreover, in coping with this demand, a number of them lost leadership focus on their core business and consequently suffered in both performance and quality.

This brings us to the present day. The current condition is such that some of the traditional players have perished, some have been merged or acquired, some are in financial trouble and a few are emerging as the survivors. Some of the margin benefits that the operators were getting from their global facilities are eroding due to dollar devaluation and increase cost of resources in markets like India and Philippines due to increased demand and finite supply.

The competitive landscape in the next 12-24 months will be very different with fewer traditional players and a host of new global players who have matured their processes and delivery capabilities and are poised to compete head-on with the key differentiations of the traditional players – experience, local presence and operational maturity. Moreover, the global players will bring competitive advantages of their own, including better technology platforms, process focus and global experience for the global economy.

The Road Ahead

So what’s a survivor to do? First of all, for the survivors, let me say – congratulations! It’s been a tough ride with more external factors impacting the business in a short timeframe than at any other time in the history of this industry. Now that the survivors have come this far, if they have not accepted already, they need to understand the competitive landscape will be very different in 12-24 months then it is today. Once that basic fact sinks in, here are some strategies that will help better position the future players in this market:

Focus on Performance and Quality. The key to success in minimizing client churn will be to perform better with a higher quality and competitive pricing. As simple as this sounds, this is one area that a number of traditional operators have lost focus on while battling the new challenges. Key areas of focus like attrition, operational performance and customer satisfaction (CSAT) has been below par. The whole argument for outsourcing resides on the fact that an outsourcer’s primary competency is in the area of the service being provided and hence they need to be superior in balancing operational performance and quality. Performance and Quality will be a minimum requirement for anyone to stay in business.

Provide more visibility to clients. One of the biggest hurdles facing organizations that want to outsource is the loss of control and visibility. Remember that over 80% of US Contact Centers are still in-house. If an outsourcer can provide better performance, quality and control through visibility while saving cost, the argument for keeping the operation in-house will be more difficult to make. Performance and Quality will enable a service provider to compete and survive in the market of outsourced work, but providing visibility and control to the clients will enable them to attract new clients who might never have outsourced before. It’s one thing fighting for a piece of the same pie, but won’t it be great, if one can get a piece of another pie too?

Become an expert in something! Most of the traditional US Contact Center Outsourcers have come to the point that their services have become commodities. There is hardly any difference left between one operator and the other. Their primary differentiation comes from pricing. The problem with this is that the only way one can grow in a commodity market is through scale and volume. Even though this is an acceptable strategy, the amount of investment required to scale this traditional business does not look very attractive to an outside investor based on the margins that can be generated. Differentiation can be created by broadening the service portfolio with related services, process and industry expertise with a focus on verticals or a combination of the two. Some players have already starting moving towards this through acquisition as in the case of Convergys’ acquisition of Deloitte’s finance and accounting (F&O) practice; through partnering as in the case of ICT Group and APX Logistics to deliver cross-industry applications; and through the carve out of in-house operations to the outsourcer as done by Sutherland Group in the Insurance vertical. Companies that successfully grow their services and/or vertical expertise will see that they can demand a premium price for these services enabling them to grow or at least protect their operating margins.

Back to basics – now Globally. The outsourcers have created a global footprint for service delivery, but most of them have not become “global operators”. There is a significant amount of variation in performance and quality from one contact center to another within the same service provider. Furthermore, there is limited visibility and understanding of the level of difference or the reasons behind the difference. The same metric can dependent on different underlying causal factors depending on the center. Outsourcers need to get a better handle on this in order to provide a high degree of confidence in anticipated performance of a program. This will become critical to the sustainability of the outsourcers business as more outsourcing contracts place a portion or all of the revenues at risk based on performance.

New service delivery models. Homeshoring and other service models have been tested and are here to stay. Traditional outsourcers who have not built these capabilities need to give this a thorough consideration. Examples of home based agent models include pure plays like Willow and Alpine Access, traditional players like West Corp, and in-house operations of JetBlue Airways and 1-800-Flowers. Newer Homeshoring models will also emerge over the next few years. For example, business models that combine creative use of homeshoring with offshoring to benefit from both will be tested. Similarly, a trend toward “Micro Contact Centers” where a group of small contact centers ranging from 2-50 agents will be brought together in a virtual contact center environment, is inevitable. The micro-contact center model will be enabled with the platforms developed for the homeshoring business, but will provide a level of control and oversight that’s lost in homeshoring, with the added benefit of bringing jobs to remote locations.

Increased knowledge on managing outsourced operations. With the lessons learnt over the last few years in service and operations outsourcing, the Vendor Management Organization (VMO) within the outsourcing client organization has become a lot more knowledgeable and developed mature processes. Their ability to create tighter contract terms, monitor performance daily and access to detailed analytics in their outsourced programs will allow them to make the outsourcers more accountable. This will also allow the VMO’s to create compensation models that directly tie the outsourcers to specific metrics based performance and/or actual savings achieved. The availability of relatively low priced analytics and service management tools with ease of usability for everyone will facilitate and expedite this trend.

Summary

The US Contact Center Outsourcing industry has gone through a period of expedited change, increased competition and rapid expansion for survival. As the industry moves further towards market consolidation, the survivors will emerge and the rest will perish or be acquired. The new competitive landscape in the industry will require the service providers to continue their reincarnation towards differentiation and niche positioning from a combination of horizontal service portfolio and/or vertical industry and process expertise. The generic players will continue to fight the commodity market and eventually be no more or become a zero growth player. The drive for market consolidation will continue as global players with their increased purchasing power move towards further acquisitions in the US domestic market. Performance, quality and consistency will become the baseline to be a player in this space. Providing clients more visibility and driving towards a performance based pricing model with tools to monitor “real performance” will become the hallmarks of leaders. ME