New research shows that customers perceive little value in outsourcing.
ANN ARBOR, Mich.—U.S. companies that outsource business functions overseas may save money in labor costs but they also pay a price for unhappy customers, say University of Michigan researchers.
Firms are increasingly offshoring front-office functions such as customer service call centers and back-office functions like information technology to manage their operations and achieve strategic objectives, says M.S. Krishnan, professor of business information technology at Michigan's Ross School of Business.
"However, neither front- nor back-office offshoring are associated with an increase in perceived value," he said. "This suggests that firms may be reducing their costs by offshoring, but are either not passing on these savings to customers or not re-investing these savings to create a perceptible increase in value for customers." 
Krishnan and colleagues Claes Fornell of the Ross School and Jonathan Whitaker of the University of Richmond examined 154 North American firms and business units that engaged in offshoring from 1998 to 2005. They used Fornell's American Customer Satisfaction Index to measure customer satisfaction and gleaned more than 50,000 news reports for information on the offshoring activities of companies.
The researchers found that front-office offshoring (sales and customer service call centers) results in lower customer satisfaction and a decrease in each of its primary determinants---perceived value, perceived quality and customer expectations.
Previous research has shown that nearly nine in 10 American customers have experienced some kind of problem when contacting overseas call centers, including lack of responsiveness, reliability and other variables of service quality.
"With the cultural, language, distance and time-zone differences inherent in offshore services, one or more of the (service quality variables) may not translate properly in the offshore service setting," said Fornell, professor of marketing at Michigan's Ross School of Business.
However, when it comes to offshoring back-office functions (those that support front-office functions, such as IT, human resources, finance and accounting, and research and development), customer expectations and perceived quality improves---despite a drop in perceived value.
Overall, the researchers suggest three primary implications of their study:
—Firms must carefully consider which functions are suitable for offshoring.
—Companies must ensure that their vendors overseas are properly equipped to provide high-quality service to customers.
—In addition to using offshoring as an opportunity to save on internal costs, firms must also use it as an opportunity to create additional value for customers.
The researchers say that offshoring activities of American companies can be successful if they manage the process properly.
"Companies often have a knee-jerk reaction," Krishnan said. "Why are we spending so much money? Let's cut costs and go to India or the Philippines or someplace. Most companies have a myopic view to blindly go out and outsource.
"But it's the process that matters. It's not about exporting jobs. It's about importing competitiveness."
For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu
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