Researchers from the IT research firm Gartner predict that the market for all types of outsourcing will grow from $8.4 billion in 2004 to $12.2 billion in 2007. Outsourcing can save between 25 to 30 percent, but poorly managed customer services can "reduce the quality of the customer experience, dilute the brand values of the company and fail to deliver cost savings." In fact, 80 percent of projects that are initiated to save money will fail to do so, and the consultants predict that by the close of 2008, 60 percent of firms that outsource sections of customer-facing processes -- offshore or not -- will suffer customer defections and other hidden costs outweighing any possible savings.

Warnings like this have not slowed the offshore outsourcing trend, however. Lisa M. Ellram, professor of supply chain management at the W. P. Carey School of Business, is currently conducting interviews on outsourcing for a research project to be released this fall. She's seeing a rush to hop on the offshore outsourcing bandwagon. "Companies have observed so much cost savings success by other firms which are already engaged in outsourcing that it's influencing everyone to jump on in," she says.

Customer services -- including all types of call centers, reservations management, customer relationship management, help desks, and more -- are a frequent target for outsourcing, especially to India, where third-party call centers are multiplying. Usually offshore outsourcing is defined as one organization turning over ownership and management of a specific function to a third party outside the United States.

The "why" is obvious: companies are attempting to control costs in customer services functions. But while a good chunk of offshore call center business continues to go to India, Gartner warns that 70 percent of the top 15 Indian-owned firms offering call center services will be bought, merged or marginalized by the end of 2005. New customer services outsourcing destinations like South Africa, Pakistan, Sri Lanka, Mauritius, Kenya and Ghana are attempting to enter the international market alongside the established destinations of Canada, Ireland, Romania, Mexico and the Philippines.

Not a perfectly rosy picture

Recent press coverage on offshore outsourced call center failures underscores the challenge organizations face. The biggest involves Citibank, where former call center agents from an Indian call center were accused of stealing money from its customers' bank accounts.

Incidents like this have caused some companies to tread carefully abroad. eBay was looking at outsourcing its customer relationship management, product development, trust and safety, and network management operations to its Indian subsidiary in Mumbai. Because each function is considered critical to eBay's success, the organization is evaluating whether to use an offshore third party, or to manage these functions in house in an India subsidiary.

But caution is not universal. "All of the companies we've interviewed say they are pleased with their offshore outsourcing results. And when asked about customer service issues, they're telling us it doesn't make any difference," Ellram said. She also reports that those interviewed are tapping into third parties that engage in extensive training in speech syntax and even slang to eliminate native accents.

Plan and then plan some more

Anthony Mitchell, CEO of internationalstaff.net, has been involved with the Indian IT industry since 1987 and has a lifetime of company stories in offshore customer services outsourcing. As an organization moves toward outsourcing its customer services, he advocates beginning by a thorough review of the scope of work.

"An outsourcing service provider may not be able to determine the scope of work that needs to be done, unless they send someone on site for an assessment," says Mitchell. "The client organization or its project management consultant would need to come up with a scope of work, level of effort projections, time frames, and most importantly, the performance indicators that will be used to monitor the project."

To help during this beginning phase, W. P. Carey School marketing Professor Mary Jo Bitner suggests that thinking in terms of the "total customer experience" can help organizations avoid customer satisfaction failures. When building the scope of work, projections, time frames and performance indicators, "think about the total customer experience and brand image you intend to maintain" even as the services are outsourced.

Bitner, whose expertise is in services marketing and management and consumer behavior, notes that in many cases customer service is the only real, tangible contact a customer has with a firm. Unless an organization maintains quality service in house or out, it risks hurting the brand. Author of a leading textbook on services management, she adds, "Numerous stories can be recounted of organizations having to bring their customer service operations back in house because they risked their brand with unanticipated poor customer service quality by the third-party provider."

Another expert in this area, Atul Vashistha, CEO of neoIT in San Ramon, Calif., suggests organizations lean on strategy. "Many organizations today let outsourcing lead the process instead of strategy. A clearly thought-out business strategy needs to lead the outsourcing process. And strategy may lead [an organization] to determine not to outsource."

Vashistha's consulting company, whose clients consistently enjoy more than 40 percent cost savings, has found over the years that most companies don't look at their overall business processes and customer processes before they begin to outsource, and this creates a greater opportunity for failure.

Even the big guys in the services business miss the customer orientation at times. Internationalstaff.net's Mitchell coordinated the outsourcing of technical support and customer service functions for one of the five largest global Internet service providers (ISPs). He was surprised to find that the company had not established standard operating procedures to guide their in-house and onshore call center operations. The offshore outsourcing process (to a facility that specialized in supporting ISPs) provided them with the opportunity to systematize and improve their own procedures, a prime example of the third-party provider improving an organization's business processes.

"Don't just move work around," says Mitchell who handles offshore process migration, call center program management, turnkey software development and help desk management. "Take a fresh look at your operations and use the outsourcing process as a way to improve the way you do business."

A serious "review of operations" after the outsourced deal is signed helps uncover problems. "We find with our clients that it's typically not contractors failing, it's the client's not spending time transferring knowledge to outsourcing contractors, in addition to poor governance. This is a recipe for failure," says Vashistha. "Those with a very specific plan to take the contractor to partner and provide a view into the business have better outcomes."

Vashistha's book, The Offshore Nation: The Rise of Services Globalization is due out this fall by McGraw-Hill.

Make your expectations realistic

"Do not expect immediate financial savings," says Mitchell. "In many cases, you will be supporting duplicate efforts until the transition is complete."

He adds, "When going offshore, recognize that your offshore facility and its staff may not have much subject matter expertise or familiarity with how your individual business works. You need to establish a mentoring relationship with the contractor. Don't let this relationship become acrimonious. Expect to have to be patient, expect initial mistakes, and be ready to correct them in a way that does not poison the working relationships that you have with your outsourcing contractor."

As it relates to call centers, Mitchell and others advise looking for call center facilities with live call-monitoring capabilities, enabling U.S. clients to listen in and monitor calls. Such real time monitoring allows U. S. managers to participate in quality assurance and discourages fraud and improper agent conduct.

And taking it one step further, require hot-call transferring capabilities from your call center providers, whereby calls that cannot be resolved offshore can be transferred back to the U.S. client. "This frees the client's staff to concentrate on new product or service rollouts, on the needs of their most favored clients, or on other core business functions," says Mitchell.

"Too often, U.S. clients simply go for least cost in choosing outsourcing facilities, says Mitchell."By starving an outsourcer, it's more likely that the program will be terminated by the outsourcer prematurely, or that they will hire poor quality staff, or that there will be excessive staff turnover."

Avoid the common mistakes

Like any other business process, moving customer service offshore can succeed when companies are deliberate -- at the start and during operation.

Set it up right: Accountability for success rests with the outsourcing organization, says Vashistha. "First, evaluate your ability to transform (if senior management does not sponsor your outsourcing strategy, don't do it), align business strategy with your outsourcing strategy (answer the question, "Why would you even consider doing this?"), follow a rigorous process, and assign your "A Team" to run the offshore outsourcing program, including ongoing evaluation."

Get realistic about costs: Companies sometimes fail to factor in hidden costs, including monitoring, unanticipated technology, and performance management system costs. "Make sure you understand your outsource partner and take time to crunch the numbers so hidden costs don't crop up," says Bitner. Adds Mitchell, "transaction costs for shifting work offshore can be very expensive, especially when it involves travel time, contract negotiation time, and due diligence efforts." On the other side, be aware of the tendency to overspend. "Companies tend to overpay for managing risk," Ellram said. "These companies also admit that they go overboard in setting up redundant systems and strict security systems, because they're saving so much in labor they believe they can afford it."

Start small: Says Mitchell, "The major mistake in outsourcing is attempting to scale up too fast." Organizations that launch with a large offshore staff find that after three to four months they will be back to smaller numbers. "U.S. clients will often say that they understand the need to scale up from a small volume level," says Mitchell, who recommends five or six agents at the beginning. "When the time comes for implementation they make the mistake of expecting instantly perfect performance with large numbers of agents." He adds that the big-name outsourcing firms in India have 50 or 60 people who can serve as initial agents on new customer service programs. "These personnel are brilliant, top performers. They present the illusion of a successful process migration effort," Mitchell said. "Then after two or three weeks they are shifted over to the next new program coming into their facility. The original program is taken over by people who did not participate in the original training provided by the client, and who have no emotional ownership in the program. Failure ensues."

Stay close to your provider: Ellram reports that her research participants that are successful at outsourcing run reference checks on outsourcing contractors, conduct on-site visits and assess the technology and management culture when selecting a third-party provider. "You'll also find companies writing very lengthy and explicit  contracts and employing rigorous, ongoing oversight with a good performance management system in place." Mitchell describes a dynamic relationship. Service providers need to call the client every morning, even if there is nothing new to report. Reports should be detailed, down to individual agent performance. And companies should require service providers to develop and implement an action plan when things go awry.

Accept responsibility: Ray Jensen, associate vice president for business services at Arizona State University, puts the issue in context. "Outsource the function that makes sense to outsource, but don't abdicate the responsibility for that function," he said. "At the end of the day, you must be confident that what you're about to outsource will not only save money but improve the quality of service."

So: if offshore outsourcing your customer services offerings makes good strategy sense, what is important is whether you're taking a long-term view of success and responsibility. With customer service outsourcing in the mix, it demands careful attention. And for service organizations it means brand success and company survival.