Call Center Outsourcing: Coordinating Staffing Level and Service Quality

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Electronic copy available at: Call Center Outsourcing: Coordinating Staffing Level and Service Quality
Z. Justin Ren Yong-Pin Zhou†
July 7, 2006
In this paper, we study the contracting issues in an outsourcing supply chain consisting of a user company and a call center that does outsourcing work for the user company. We model the call center as a G/G/s queue with customer abandonment. Each call has a revenue potential, and we model the call center's service quality by the percentage of calls resolved (revenue realized). The call center makes two strategic decisions: how many agents to have and how much effort to exert to achieve service quality.

We are interested in the contracts the user company can use to induce the call center to both staff and exert effort at levels that are optimal for the outsourcing supply chain (i.e., chain coordination). Two commonly used contracts are analyzed first: piece-meal and payper- call-resolved contracts. We show that although they can coordinate the staffing level, the resulting service quality is below system optimum. Then, depending on the observability and contractibility of the call center's effort, we propose two contracts that can coordinate both staffing and effort. These contracts suggest that managers pay close attention to service quality and its contractibility in seeking call center outsourcing.

Operations and Technology Management Department, Boston University School of Management. †Department of Management Science, University of Washington Business School 1
Electronic copy available at: 1 Introduction
An increasing number of companies are moving their call center operations offshore. According to market researcher Datamonitor, the total value for the U.S. outsourcing market will be worth almost $24 billion by 2008, compared with the current $19 billion. According to Datamonitor, "By 2008, 1 in 15 agent positions (workstations) will be outsourced to a foreign market, from 1 in 24 currently. By year-end 2003, offshore outsourcers, climbing to 201,000 by 2008, will staff 121,000 agent positions.”1

Despite lower labor cost, companies in practice have experienced mixed results from outsourcing their call centers. In fact, some companies' outsourcing strategies have backfired, causing them to re-evaluate or abort their outsourcing mission. In November 2003, DELL was forced to move its call center operations for OptiPlex desktops and Latitude laptops from India back to the U.S., after customers complained about language difficulties and delays in reaching senior technicians (Financial Times, November 26, 2003). During the same time period, Lehman Brothers, a leading financial services company, had to shift some call center operations from India back to the U.S. after its customers complained about the quality of service (Financial Times, December 17, 2003). One important reason not all companies benefit from outsourcing is the lack of understanding of the economics of outsourcing, and how to coordinate the outsourcer to better serve the company that initiates the outsourcing (we call this the user company, or user). Indeed, it has been noted that, "Expectations in cost reduction are not always met because outsourcing contracts can be developed with a poor understanding of current costs . . . ” (United States Government Accountability Office, 2004)

This lack of understanding of the call center outsourcing contracts may be attributed to the fact that there has been little academic research on the call center outsourcing supply chain and its coordination. The call center outsourcing supply chain differs from the physical goods or inventory supply chain in that when a unit of physical goods is sold to the customer, the retailer, who 1 2

owns the inventory, reaps a revenue; however, in a call center outsourcing...
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