The Hidden Cost of Outsourcing

August 7, 2011

In the new global economy, one of the more tempting techniques for gaining competitive advantage is to outsource non-strategic functions to lower-cost labor areas. The practice has become ubiquitous for most US-based organizations.

Unfortunately, there is a kind of false economy in outsourcing, because the dollar savings are easy to calculate and the eventual hidden costs are not evident until the damage has been done. Several organizations have elected to tuck their tail between their legs and “insource” the jobs back to the home base because the damage being done is far greater than the savings enjoyed by paying for lower cost labor. For brevity, this article will deal with only one classic example.

I had a graduate-level class that was studying the impact of outsourcing, and I gave them a discussion question to recall an incident with outsourcing that caused problems for them. Amazingly, more than 25% of the class came up with examples from a single company with remarkably similar stories. The company is Dell.

Each person recalled having some piece of Dell equipment that needed customer service. The frustrations described were so similar it was astounding. The students described having a hard time getting through to customer support in a timely manner because the function had been outsourced to India. Once the wait was over (sometimes after more than one hour), and they had a human being on the phone, the frustrations only grew. The students all complained of the inability to understand the customer service person due to a heavy accent.

They described having to ask the service person to repeat a sentence multiple times, then still needing to guess at some of the words. These customer service reps were speaking English, but the students could not understand them. In some cases, the students escalated the call to a supervisor but had the same problem with the replacement. Those students who fought through the heavy accent to get the needed support found that the reps were not very helpful technically. It became obvious that the service person was reading from a decision tree or script and did not have the in-depth knowledge of the equipment and software to resolve the problem. If the students were talking to a hardware guy, the problem was eventually blamed on the software and vice versa.

In each case, the students expressed that they were totally disgusted with the service and had no intention of purchasing any Dell equipment in the future. Here is how one person described his frustration:

“Dell is a classic example. The lost reputation of Dell is a number that cannot be calculated, but it is huge, hundreds of times larger than the money they saved by outsourcing customer service to India. For example, in our family, we will never again buy a product made by Dell, yet we have done so in the past. We have lost trust in the company, and they simply cannot get it back. From our perspective, their products are not even on the market at any price. They can say they have “learned their lesson,” but that will not bring us back as customers. A damaged reputation spreads out over a company like a kind of cancer. You cannot see it working unless you have some very sensitive instruments, but it is really there doing damage every day.”

I am trying to think of an analogy to use here. Try this one…

For a CEO to consider outsourcing customer service to save money due to lower labor costs, it is like taking a bath every day in the warm waste water from a nuclear plant. “What is the problem? The water is nice and warm, and it seems perfectly clean. I’ll just take a nice hot bath every day because this water is less costly than what I have at home, and I do not have to pay to heat it up.” Hello? Anybody home? Nope…I guess not!


Trust Keeps Leaders off the Slippery Slope

August 29, 2010

Great leaders have the ability to build a culture of high trust. They consistently work to nurture an environment where people know it is safe to bring up difficult topics because they will be rewarded for doing so. This atmosphere is hard to find in most organizations, but where it does exist, the entity has numerous sustainable competitive advantages. Let’s examine ten of the more obvious ones:

1. Lower risk of ethical debacles – When people know they will be rewarded for speaking their truth, a remarkable thing occurs. They will tell you if an action is not the right thing to be doing. You may be saying “we would never be guilty of doing anything unethical.” Well, most likely you would be wrong. Reason: The number of potentially unethical activities that are on the margin are legion. Any leader will unintentionally step over the ethical line from time to time and not even realize he or she is doing it. That is how most ethical messes, like Enron, get started. At first, it might be just a cosmetic, and perfectly legal, change in reporting transactions to improve clarity. Then, if it is OK to do that today, tomorrow we can do a little more. The day after that someone else is involved, and we slowly but surely head in a direction where everyone would agree we are in an ethical quagmire. It may have started out innocently, but in the end it was clearly illegal. In a culture of high trust, all employees are the watchdogs who let leaders know if they are in danger of heading toward eventual problems, long before anything illegal or dumb has transpired. In high trust organizations, whistleblowers are a blessing rather than a problem.

2. Higher productivity – It is pretty simple, really; turned-on people produce more. Because there is less bickering and selfishness in high trust groups, people tend to pay attention to the true mission and goals. They motivate themselves to do excellent quality work rather than what we see in most organizations where management is constantly trying to figure out more attractive carrots to dangle before workers in a desperate, often pathetic, attempt to “motivate them.”

3. Lower costs – This occurs because people are engaged in the business rather than in outdoing each other. Stephen M.R. Covey, in his book The Speed of Trust, highlights that when trust is high costs go down because speed goes up. It is axiomatic. If something can be accomplished faster, it will take fewer resources of all kinds, so it will be provided at lower cost.

4. Less conflict – The most significant sources of conflict in any workplace are the little things that people do which annoy one another. One of my favorite behavioral rules for teams is “We will remember that we are all adults and try to act that way most of the time.” Low trust encourages people to squabble with each other, often acting like children. In high trust environments, there are still petty differences, but they are usually resolved by open dialog long before a public food fight begins.

5. Focus on the vision – Trust lets groups work side by side in harmony, free to focus on the critical vision rather than build fences of doubt or fear. When trust is low, people focus on the negative side of everything and spend much time trying to protect their parochial interests. Silo thinking is the result. Actually, this is a good test for the level of trust in an organization. Just keep track of the ratio of negative to positive statements you hear in an average day. If the ratio is over 50% negative ( for whatever reason) you can be sure the environment is one of low trust.

6. Trust is evident to customers – When people walk into a business where there is low trust, they get a creepy feeling almost instantly. Human beings are quick to pick up small clues in the body language or tone of voice of the people serving them. People instinctively seek to do more business with an outfit that has high trust.

7. Focus on development of people – High trust organizations spend more energy developing people because it breeds satisfaction and is just smart business. Learning organizations with great bench strength have lower turnover and more dedicated employees. Low trust groups are so consumed with stamping out problems of their own making there is little time or energy to put into developing people.

8. Improved communication – In employee satisfaction surveys, the issue of communication is habitually mentioned as the most significant problem. Reason: In low trust environments, communication is often viewed as manipulative. People sense a degree of spin or even lies, and the leaders lose credibility. There is communication in low trust groups, but most of it is from the “back channel” of rumors and gossip. In high trust groups, communication is credible and believable. The news may not always be good, but people respect their leaders for telling them the truth.

9. Better reinforcement – When leaders in high trust groups reinforce the workers, it feels good to them. Whatever form it takes, (verbal praise, special recognition awards, small bonuses, theater tickets, parties, etc.) people appreciate the sincere effort to recognize great performance. When trust is low, efforts to reinforce workers are often met with skepticism. Reason: People are used to being manipulated, so the reinforcement appears to be part of a ploy to squeeze the last drop of productivity out of an overworked group of people.

10. More efficient problem solving – When trust is low, solving a problem is like wrestling an octopus. As you work on one part of the problem, another tentacle having to do with personal interaction starts winding around your neck. In high trust groups, solving problems is efficient because the only thing to resolve is the problem itself, not a myriad of other gremlins hiding under the surface.

These are just ten ways a high trust organization has a huge advantage over a group with low trust. There are probably dozens of other advantages one could name. The point is that if you are running or involved with an organization of low trust, you cannot possibly hope to compete long term. Seek to build trust and maintain it in every action every day. The payoff is huge.


13 Keys to Reduce Turnover

April 4, 2010

The problem of employee turnover is a conundrum for any organization. One would think that during times of high unemployment, the turnover rate in most organizations would be at an all-time low. The reality is far from that. While there is a lot of variability from one industry to another, if you take all industries together, the total turnover rate in 2009 was a whopping 15%.

We know the cost of employee turnover is more than the annual salary of the individual lost. In fact, most estimates place the total replacement cost at roughly 150% of the employee’s salary. A quick calculation shows that for a company with 1000 people who have an average annual salary of $50,000, the annual cost for employee turnover adds up to over $10 million. These costs go directly to the bottom line.

Reducing employee turnover is not rocket science; however, many companies struggle with very high turnover year after year. The common denominator of high turnover in organizations is poor leadership. Therefore, organizations that stress leadership development have an inherent advantage that can mean the difference between survival and extinction.

Let’s examine several ways an organization can drastically reduce the level of turnover at very low cost.

1. Develop People – Organizations that focus on employee development enjoy higher employee satisfaction, which leads to lower turnover. If each employee has a concrete development plan that is reviewed at least annually and contains a variety of growth opportunities, the employee will have little reason to look for greener pastures elsewhere.

2. Recognize Good Performance – Reinforcing people for doing good work lets them know they are appreciated. Tangible and intangible rewards are a great way to show management appreciation for workers who excel. This improves morale if done well. However, understand that reinforcement can be a minefield if it is not handled properly. Make sure employees receive sincere appreciation by management on a continuing basis.

3. Build Trust – By extending trust to employees, leaders demonstrate their willingness to support them. This pays off in terms of higher trust on the part of employees toward the organization. There is a whole science on how to build trust. By creating a real environment, more trust in an organization will lead to lower turnover.

4. Reduce Boredom – Employees who are underutilized, tend to get bored and restless. If there is a vacuum of activity, people often get into mischief. It is important for managers to craft job duties and responsibilities such that people are actively engaged in the work every day.

5. Communicate More – In nearly every corporate survey on employee satisfaction, the issue of communication surfaces as either the number one or number two complaint. Communication needs to be ubiquitous and consistent. It is not enough to have a monthly corporate news letter or an occasional town hall meeting. Communication needs to take many different forms and be a constant priority for all levels of management.

6. Cross Train – Employees, who have been trained on several different jobs recognize they are of higher value to the organization and tend to be less inclined to leave. Along with the pleasure of having more variety of work, employees appreciate the ability to take on additional skills. Having good bench strength allows the organization to function well, even during times of high vacation or illness.

7. Don’t Overtax – During lean economic times, companies have a need to stretch resources as much as possible. Many organizations exceed the elastic limit of what employees can be expected to maintain long term. This leads to burnout and people leaving for health reasons or just plain quitting in disgust over the abuse. It is important for management to assess carefully how far resources can be stretched, because going beyond the elastic limit guarantees a high level of employee turnover. I believe this rule is habitually violated in many organizations, and they pay for it big time. Stretching people too far is a false economy. If you organization is guilty of this, print out this article and put it on the bulletin board.

8. Keep It Light – When managers apply constant pressure to squeeze out the last drop of productivity, they often go over the line, and it becomes counter productive. If leaders grind people down to a stump with constant pressure for perfection and ever higher productivity, the quality of work life suffers. Employees can tolerate a certain amount of this for some time, but eventually they will break down. It is smart to set very high goals, but very important to have employees believe the stretch goals are attainable. One good way to provide this assurance is to have the employees themselves participate in setting the goals. The best companies find ways to work in a little fun somewhere, even (and especially) in high pressure situations.

9. Feedback Performance – there needs to be a constant flow of information on how all employees are doing in each area of the organization. People who are kept in the dark about their performance become disillusioned and cranky. The simple kindness of letting people know how they are doing on a daily or weekly basis pays off in terms of lower turnover.

10. Train Leaders – All levels of management and supervision need to be highly proficient at creating an environment where the culture is upbeat, positive, and has high trust. This does not happen by accident, or simply by desire. It takes work and lots of emphasis by senior leadership to make sure that there are no weak links in the management chain. In most organizations there is a dud of a manager somewhere between the well intentioned and talented top brass and the worker bees. The result is that great objectives, ideals, and processes are morphed into oblivion by the time they reach the shop floor. The antidote is to improve leadership effectiveness at all levels and remove any dud who is incapable of changing.

11. Hire Right – Putting the right people into the organization at all times is extremely important. One bad apple can really do a lot of damage. Focus on the selection process with some behavioral attitude surveys and make sure you do your homework with previous references.

12. Create Ownership – When people are actually part owners of the enterprise, they have a lot more stake in sticking around. This can be done in hundreds of ways from stock options to including employees in strategy sessions.  Always seek to let people have a real stake in the action. It pays off.

13. Empower People – Actually the correct way to word this is create an environment where people are happy to engage their power for the benefit of the organization.

These are 13 ways in which leaders can lower the level of turnover in any organization. The magic here is not any new discovery; but the consistent application of these principles will make a huge difference in any organization. The good news is that the items mentioned above are not very expensive. They are all common sense – too bad they are often not common practice.

If you study the best companies to work for worldwide, you will discover they have a much lower turnover rate than the average numbers. I believe having the kind of culture where employees are locked in with no desire to leave for any reason is a sustainable competitive advantage. It is easy to achieve if you follow the 10 rules listed above.