Outsourcing’s Impact on Customer Satisfaction: It’s Not Good

Ann All spoke with Jonathan Whitaker, an Assistant Professor of Management in the Robins School of Business at the University of Richmond. Together with co-authors M.S. Krishnan and Claes Fornell at the University of Michigan, Whitaker studied the offshoring and outsourcing activities of 150 large U.S. companies and business units from 1998-2006, and analyzed the implications of offshoring and outsourcing for customer satisfaction using the American Customer Satisfaction Index tracked by the National Quality Research Center at the University of Michigan. Their research paper is titled "Does Offshoring Impact Customer Satisfaction?" and is available on the Social Science Research Network.

All: Your research found that outsourcing of front-office functions – whether performed onshore of offshore – resulted in similar negative impacts on customer loyalty and customer satisfaction. Yet most people I think tend to assume these areas would suffer more if offshoring was involved. Did your research touch on why onshore outsourcing didn’t perform any better than offshoring? Also, was there any sort of a control group to see how customer satisfaction/loyalty ratings compared if front-office functions were performed internally?
Whitaker: While the common assumption is that customers are less satisfied with offshore customer service due to language and cultural issues, this topic had not yet actually been studied using data from a large number of companies over an extended timeframe. Our study includes companies that performed customer service in-house, companies that performed customer service offshore, and companies that outsourced customer service to domestic providers. While we find that customer satisfaction declines with offshore customer service, the decline is similar to the decline with domestic outsourced customer service. This suggests that there may be other reasons why customers are dissatisfied with outsourced customer service, and these reasons may be common to both offshoring and domestic outsourcing.

All: Does this mean, as you mention in your research, that companies may want to consider offshoring vs. onshore outsourcing, if cost reduction is the key objective? Since they will typically save more by going offshore and the effect on customer loyalty and satisfaction is roughly the same?
Whitaker: Cost is typically the initial motivation for companies to send business processes such as customer service offshore, and the difference in labor costs between developed economies and emerging economies is one reason for the growth in offshoring during the past several years.  Companies need to balance multiple considerations (cost, customer satisfaction, risk) when they make offshoring and outsourcing decisions. Companies first need to understand and evaluate their business and operations, and identify the functions that may or may not be suitable for offshoring and outsourcing.

All: Keeping in mind that companies may feel compelled to outsource to reduce costs, I believe you suggest that negative impact on customer loyalty and satisfaction may be minimized, whether the outsourcing occurs on- or offshore. What are some ways of doing so?
Whitaker: If a company is going to offshore or outsource customer service, we believe the company can take at least two actions to facilitate the provider’s success. First, the company can make sure that the provider has access to complete customer information. If the provider does not have access to complete customer information, the customer may be dissatisfied when the provider does not have the necessary information to understand the customer or the customer’s issue. Second, the company can make sure that the provider has adequate decision-making authority to properly address customer issues.  If the provider does not have adequate authority, the customer may be dissatisfied when a provider cannot resolve an issue and needs to transfer the customer to another location.

All: You also mention that companies could, in a sense, recover some customer satisfaction/loyalty by passing along outsourcing cost savings to them and/or using outsourcing to offer improvements such as expedited service times. Wouldn’t a company have to somehow promote or advertise they were doing so to gain the benefits?
Whitaker: Companies will benefit whenever they can deliver to customers greater value compared with the price paid. From an offshoring perspective, there is an interesting example discussed in a 2004 Wall Street Journal article (Jesse Drucker and Ken Brown, “Press 1 for Dehli, 2 for Dallas,” Wall Street Journal, March 9, 2004). In early 2004, the finance company E-loan gave customers the option whether to have their loan processed in the U.S. or India. While the loan costs would be the same for both locations, customers would receive the results from India several days faster. In responding to this offer of greater value from an offshore location, 86 percent of E-loan customers chose to have their loans processed in India during this timeframe. In this case, E- loan used offshoring to generate additional value for their customers, and customers responded in a positive manner.

All: Your research found no negative impact on customer loyalty and satisfaction associated with outsourcing of back-office functions. Does this mean companies can assume there is less business risk associated with doing so? What about the back office’s indirect effect on customer perceptions of a company, such as when a technical system is down, making it impossible for customers to perform self-service transactions, for instance?
Whitaker: Our study focused on customer satisfaction rather than business risk. There are multiple ways in which back office functions could relate to customer satisfaction, such as the management of customer information or the support of systems used by customers. Our results indicate that when firms offshore back office processes, there is no effect on customer satisfaction. In terms of the risk that a customer system may be down, it may be worthwhile to note that many offshore business process outsourcing (BPO) providers began as IT service providers, and have a degree of systems certification and expertise that mitigates some of the potential technical risks from offshoring.