The Real Cost of Location Changes
1 Sep, 2007
By: Jane Mather, Ph.DSite selection experts have amassed so much data on alternative locations, it might seem that site selection has become a science. But in fact, we are not there yet. Several key site selection considerations can’t always be summarized by the basic statistics.
Most statistics capture current conditions, but site selection decisions must also consider the future. For example, saturated markets and increasing skill requirements will increase labor costs. At the same time, better long-term planning can reduce relocation costs.
Evaluating the trade-offs between labor costs, agent skills and customer satisfaction continues to be a challenge. In an extensive study, the largest number of call center managers, 46 percent, cited the skills of the local workforce as the most important reason for choosing their current location. Only 26 percent cited low labor or real estate costs, according to Cornell University’s U.S. Call Center Industry Report. But in the end, for many site selection decisions, it seems the bottom line is labor cost. Current trends suggest call center managers need to reconsider this trade-off.
Considering the Future
"A good forecaster is not smarter than everyone else, he merely has his ignorance better organized. “ Anonymous.
It is notoriously difficult to make predictions about the future, but that doesn’t mean future trends can be ignored. With compensation and benefits the largest contact center cost, decision makers must consider both current and future wages and related employee costs.
As organizations have shifted operations to new locations, many cities have become saturated with call center and back-office operations, resulting in higher costs than expected. A market is saturated when the share of employment in contact center activities reaches 2 percent, according to Rob Marsh, a member of CBRE’s Labor Analytics Group. Many traditional locations are significantly above this level. For example, in Sioux Falls, 4.2 percent of workers are customer service representatives, in San Antonio, it’s 3.3 percent, according to Bureau of Labor Market statistics.
Once a market is saturated, employers must compete to become the “employer of choice.” Competition leads to higher wage rates and higher turnover as employees leave in hopes of finding a better situation with another employer. It also increases costs through competition to provide the best working conditions and amenities, such as on-site day care and fitness facilities. Many employers already provide these benefits, but for others, these potential costs need to be considered.
The current trend of locating contact centers in small towns is one response to taking a long-term perspective. In smaller towns, it’s much easier to recognize when one more call center will lead to a saturated market notes Dennis Donovan of WDG Consulting. With fewer competitors, turnover rates are also lower.
Long-term Planning to Reduce Relocation Costs
Long-term planning can also reduce costs by coordinating relocations with natural attrition. For a financial services client, we reviewed its locations and found one division had all of its call center operations in high-wage locations. We recommended diversifying operations to a lower-wage location and collocating them with call center activities for other divisions.
The business leaders rejected our proposal. Its current competitive advantage provided sufficient revenues to cover higher labor costs. But what would happen as competition eroded its competitive advantage. By transitioning activities to a lower-cost location with natural attrition, they could avoid laying off hundreds of employees and the resulting severance costs. They could also pay relocation costs when they had sufficient funds rather than in the future, most likely during a recession, when resources would be tight.
This approach would also mitigate the impact on community goodwill. As labor markets tighten and consumers become more sensitive to a company’s social responsibilities, maintaining a positive relationship with the community is becoming more important. Planning ahead so that activities can be relocated through attrition rather than lay-offs can reduce the loss of community goodwill.
Increasing skill requirements
Another trend that needs to be considered is the increasing need for agents with better skills. Many contact centers recruit workers with only basic skills. While this skill level may be sufficient for the current market, it may not be sufficient in the future.
Many call centers are already seeing a need for more skilled workers. In its Global Contact Centre Benchmarking Report, Dimension Data found that 60 percent of its sample had upskilled staff to work across multiple query types and 53 percent are upskilling to work across multiple channels.
Customers are completing more tasks and finding answers through “self-service” solutions. With the easy questions and tasks completed at the Web site or through automated systems, customer service representatives will face the remaining complex questions and tasks.
To increase agents’ skill level, companies will need to pay for additional training, pay higher wages for more skilled workers and possibly relocate to another location to find the right labor force. Alternatively, these changes will reduce profits through increasing customer defections when customer service agents aren’t able to answer questions.
The Cost-Quality Trade-off
The trade-off between lower labor costs and customer satisfaction is difficult to capture with the basic statistics. The relocation of many call center activities back from India provides one indication that companies don’t always understand the cost-quality trade-off. The lower costs in these locations are certainly tempting, but decision makers must also consider the increased costs from disappointing customer service and customer defection.
According to a recent study by the CFI Group, whose chairman, Claes Fornell, also coordinates University of Michigan’s American Customer Satisfaction Index (ACSI), “Across all callers, one out of eight contact center callers (12 percent) will no longer do business with the company based on their experience with the call center and another 12 percent are in jeopardy, as they indicate they don’t know whether they will continue to doing business with the company.”
Issue resolution provides another indication of the importance of call center satisfaction. In CFI’s survey, of the 18 percent of customers whose issues were not resolved, 43 percent were likely to defect. As questions and tasks become more difficult, the number of customers with unresolved issues will only increase.
The impact of poor customer satisfaction is not limited to the original customer. Seventy-six percent of those with a negative experience share that negative experience with others, according to the CFI Group study.
Estimating the Trade-off
One way to quantify the trade-off between costs and skills is to estimate the impact of customer defections on lost profits and then translate those lost profits into labor costs. Consider a company with average profits of $50 per customer, a typical amount for a company serving consumers, and call center customer contacts averaging 80 contacts per agent per day, typical for many call centers.
An increase in annual customer defections by just one percentage point for a full-time agent (less than 0.1 percent as a monthly churn rate) would cost the company $10,000 in annual profits. Translated into hourly wages, that’s $5.00 per hour. In other words, the labor cost savings from a relocation would have to be more than $5.00 per hour to offset a one percentage point increase in the customer defection rate. Increasing profits per customer to $100 and offsetting a one percentage point increase in customer defections requires labor cost savings of $10 per hour.
These numbers reflect just the direct impact on current customers. The reputation impact would be even greater.
At the same time, these calculations suggest that many companies might benefit by paying higher wages and providing a better work environment to attract a more skilled labor force that could reduce customer defections.
Another Step Toward Science
Better data have improved the site selection process. Better analysis techniques could also improve site selection decisions. Leading call centers apply sophisticated analytical techniques for workforce and call management. Similar analysis techniques can also be applied to location decisions.
A large financial services company, recognized that it could save millions by consolidating its back-office activities located in over 20 cities. It found several solutions using the traditional jigsaw puzzle approach in which planners pick possible locations using intuition and then calculate labor and real estate costs in a spreadsheet. Then the company asked us to evaluate the portfolio. The solutions found improved cost savings by $20 million to $70 million over the analysis period. In addition, these savings could be achieved with one-third fewer layoffs because the solution found more ways to retrain current workers for new activities.
Conclusion
Indeed, better data have led to better site selection decisions. Yet, decision makers need to go beyond the basic statistics. They need to make sure they are considering future trends and they are paying sufficient attention to the trade-off between labor quality, customer satisfaction and costs. In addition, they can make better use of the data they have by extending the use of sophisticated analysis techniques to location decisions. Location decisions may never be science, but each improvement in the analysis process can bring us closer, increasing profits as a result.
